Business, Finance & Economics

The Sleeping Bag Tax

We've been hearing a lot about Congressional gridlock in recent weeks. Here's one impact of Congress' dysfunction you may not have heard about though: tens of thousands of small American businesses are paying an unexpected tax on imports this year.

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The reason? Sleeping bags made in Bangladesh were competing with a manufacturer in Alabama, and one senator from Alabama wanted that to stop. More on that in a bit. Here's some background first.

Since the mid 1970's, the US government has run a program that helps poor countries sell goods to American companies duty free. That's everything from rubber gloves made in Sri Lanka, to wooden doors in Bolivia, to silver earrings from Nepal.

That's what Mac McCoy imports to western Massachusetts. He's the CEO of the seven-person company, dZi, a Tibetan transliteration of a word describing a charm that protects the wearer. McCoy has been importing handcrafted products from Nepal and India for 20 years, duty free. This year, the US government is making him pay a tax.

"It ranges from 3 up to 17 percent of the product cost," said McCoy. "And for a small business that's quite a bit of unanticipated expense that we didn't otherwise have."

In the past, McCoy was able to import goods duty free under a program called the Generalized System of Preferences, or GSP. It only helps foreign products that don't compete with those manufactured by American Industry. The GSP expired on December 31st, 2010.

Call the GSP a tax break or call it a subsidy, McCoy argues that if oil companies and corporate farms get a little government help, why shouldn't small businesses like his? McCoy says the extra tax this year is having an impact.

"We would not be allowing an increase in salaries or pay for employees or taking on an additional employee. It means that we might be a little slower in our payment to the artisans," said McCoy.

That last part, delaying payments to the artisans, violates the spirit of the GSP. The program was originally designed to promote economic growth in the developing world.

"It's interesting, US imports overall are up about 24 percent in the first five months of this year. But imports that are eligible for GSP… are down by nearly 20 percent," said Marideth Sandler, who directed the GSP program from 2005 to 2010 and now runs her own trade advisory firm.

Now, getting back to the sleeping bag company that started all of these problems… Exxel Outdoors employs about 90 people at its manufacturing plant in Haleyville, Alabama. Among other products, the company makes sleeping bags for kids, the ones with Disney characters and Marvel comics on them. Harry Kazazian, company founder and CEO, said he's not the bad guy for getting the GSP suspended.

"Now I know that everybody vilifies us as like, 'Well, oh it's this one company and its special interests.' No it's not one company's special interests, if you look at any of the facts, nobody ever argues the facts," said Kazazian.

Here's a fact Kazazian wants you to know. He imports fabric from China and pays a 9 percent tax on that. His competition in Bangladesh also uses Chinese fabric, but doesn't have to pay an import tax. And that Bangladeshi company could then export to the US duty free, under the GSP program. Kazazian said that violates the intent of the GSP.

"Is it fair for an American industry to be taxed, like we are, and a foreign company manufacturing a sleeping bag overseas, is not subject to the same taxes and costs that an American manufacturer is subject to?" said Kazazian. "That's simple as that. I mean, let anybody tell me: Is that fair or not fair?"

Not fair, said Republican Senator Jeff Sessions from Alabama. He put a hold on legislation last year to renew the GSP program. Sessions got a lot of flack for putting the interests of one company in his state ahead of tens of thousands of others, companies like Swing Design in Concord, Mass. The company manufactures things like picture frames, wine racks and hand-crafted jewelry boxes. They're designed in Massachusetts and assembled mainly in Thailand.

Swing Design CEO William Haley showed me around the company offices. The backroom was a cavernous empty space. He said two years ago the room was filled with 25 or 30 people, but Haley has had to lay off about 80 percent of his staff. He blamed the overall economy for most of that, but said the expiration of the GSP has added another 5 to 10 percent to his costs. And he said that comes out of his pockets.

"Because of the US market and low demand, especially in the retail world, we really feel that we can't pass that cost on to the retailer," said Haley.

Two bills were introduced in Congress last winter to restore the GSP AND exempt sleeping bags. Senator Sessions of Alabama sponsored one of the bills and it has bipartisan support. (A bill could also reimburse American companies for the duties paid while the GSP lapsed.) But renewal of the GSP got swallowed up by a larger Congressional debate about trade issues. And so, GSP renewal has been languishing for close to nine months.

That might not offer much solace for small American companies, and exporters overseas, who are waiting for Congress to act.

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