This CEO was hop­ing for a Trump tax cut

But Scotts Mir­a­cle-Gro might be get­ting more than it bar­gained for

The Washington Post Sunday - - BUSINESS - BY MAX EHREN­FRE­UND

When Pres­i­dent Trump won the elec­tion, James Hage­dorn was ready to take it to the bank. The chief ex­ec­u­tive of Scotts Mir­a­cleGro ex­pected that Repub­li­cans would re­duce his firm’s tax rate from about 36 per­cent to 20 per­cent or less.

He did not ex­pect that Repub­li­cans would take such a broad ap­proach to ful­fill­ing Trump’s prom­ises on trade, with stiff new taxes on im­ports. The dirt sold by Scotts is largely raw ma­te­ri­als im­ported from abroad, such as Cana­dian peat and pro­cessed co­conut shells from Sri Lanka.

Un­der a cor­po­rate tax plan that Repub­li­cans in the House are push­ing, Scotts does not ex­pect any tax re­lief. In fact, the com­pany projects that its rate could tick up to about 37 per­cent.

“My wife, who’s a rad­i­cal Demo­crat, is laugh­ing at me on this one,” said Hage­dorn, who voted for Trump and con­tin­ues to sup­port the pres­i­dent. “It never oc­curred to me it would ac­tu­ally get worse for us, not bet­ter.”

House Repub­li­cans would sim­plify the cor­po­rate tax code with a 20 per­cent flat tax. But the pro-

posal also would add a “bor­der-ad­just­ment tax” that some econ­o­mists worry would in­crease costs for com­pa­nies that rely heav­ily on im­ported goods.

The GOP pro­posal would ex­empt U.S. firms that ex­port goods and ser­vices to cus­tomers over­seas from pay­ing taxes on those ex­ports. At the same time, the plan would pre­vent firms from de­duct­ing pur­chases from abroad from their over­all in­come, es­sen­tially levy­ing a new tax on im­ports.

Rep. Kevin Brady (R-Tex.), the chair­man of the Ways and Means Com­mit­tee in the House, has ar­gued that cur­rently, U.S. prod­ucts are at a dis­ad­van­tage in the in­ter­na­tional sys­tem. “This means to­day, Chi­nese steel is cheaper here in the U.S. than Amer­i­can steel. Mex­i­can beef and au­tos are cheaper than Amer­i­can beef and au­tos. For­eign oil is cheaper than Amer­i­can oil,” Brady said last week.

If that new tax in­creases the prices of for­eign im­ports as Brady promised, that would be bad news for com­pa­nies that rely on raw ma­te­ri­als from over­seas — whether steel, oil or co­conuts.

Over­all, Mir­a­cle-Gro spends about $240 mil­lion an­nu­ally on for­eign raw ma­te­ri­als, mostly for peat. That is about 8.5 per­cent of the com­pany’s $2.8 bil­lion in sales.

Hage­dorn, a vet­eran of the Air Force who was for­mally rep­ri­manded by the com­pany’s board in 2013 for us­ing col­or­ful lan­guage, said the com­pany would not be able to buy what the com­pany needs do­mes­ti­cally. “Ef­fec­tively, at that qual­ity level, it’s not avail­able in the United States,” he said.

For in­stance, a bag of Mir­a­cleGro Mois­ture Con­trol Pot­ting Mix is about 60 per­cent Cana­dian peat by vol­ume, ac­cord­ing to the com­pany. The com­pany also re- lies heav­ily on im­ported urea, an in­gre­di­ent in fer­til­izer de­rived from nat­u­ral gas.

The pro­cessed co­conut shells are known as coir, a fi­brous, spongy ma­te­rial ideal for plant­ing lawns. Not just any co­conuts will do, though. The husks of those that grow in the Amer­i­cas are too salty for hor­ti­cul­ture.

The U.S. mar­ket re­lies in­stead on Sri Lankan coir. Im­ported coir makes up about 80 per­cent of the vol­ume in the grass seed the com­pany pack­ages as Scotts EZ Seed.

Sri Lankan co­conut grow­ers get paid for husks that might oth­er­wise go to waste. Half a world away, home­own­ers in the United States en­joy more at­trac­tive lawns.

It is ex­actly the kind of global eco­nomic in­ter­de­pen­dence that Trump has pledged to dis­rupt, and Scotts, based in Marysville, Ohio, is one of many U.S. firms that could have to pay new taxes on im­ports.

The plan from Repub­li­can law­mak­ers has re­ceived some fa­vor­able com­ments from White House staff, in­clud­ing press sec­re­tary Sean Spicer, but it re­mains to be seen whether Trump will en­dorse it. Broadly speak­ing, the pres­i­dent has said that he would like to tax im­ports.

If he does en­dorse the Repub­li­can plan, there is dis­agree­ment about how it would af­fect im­porters such as Scotts Mir­a­cle-Gro. Even the plan’s pro­po­nents have some­times put for­ward ap­par­ently con­flict­ing pre­dic­tions about the con­se­quences.

Some econ­o­mists say that the Repub­li­can plan will not ul­ti­mately af­fect im­porters’ bot­tom lines be­cause of how the new sys­tem would af­fect ex­change rates.

Based on this rea­son­ing, the dol­lar would be­come more valu­able in real terms be­cause any for­eigner hop­ing to buy U.S. goods and ser­vices in dol­lars would be able to avoid U.S. taxes. Like­wise, be­cause Amer­i­cans hop­ing to use for­eign cur­rency to buy prod­ucts from over­seas would have to pay taxes, that for­eign cur­rency would re­ally be less valu­able.

In com­bi­na­tion, econ­o­mists say these shifts should re­sult in a stronger dol­lar on global cur­rency mar­kets, ex­actly can­cel­ing out any ef­fects of the new sys­tem on U.S. com­pa­nies such as Scotts Mir­a­cle-Gro.

When other coun­tries have im­ple­mented sim­i­lar poli­cies, ex­change rates typ­i­cally have ad­justed in re­sponse, ac­cord­ing to forth­com­ing re­search by econ­o­mists Caro­line Fre­und and Joseph Gagnon of the Peter­son In­sti­tute for In­ter­na­tional Eco­nomics in Wash­ing­ton. The cur­rency mar­kets have ab­sorbed any real ef­fect on com­pa­nies.

A cor­po­rate rate of 20 per­cent un­der the House Repub­li­cans’ plan im­plies that the dol­lar should in­crease in price by ex­actly 20 per­cent in re­sponse. Given that Scotts Mir­a­cle-Gro to­day spends $240 mil­lion on for­eign ma­te­ri­als, the com­pany would be able to get the same prod­ucts for just $200 mil­lion if the dol­lar ap­pre­ci­ated by 20 per­cent.

Un­der the Repub­li­can plan, the com­pany would then pay 20 per­cent in taxes on those im­ports, bring­ing the to­tal cost to the com­pany back up to $240 mil­lion.

Fre­und and Gagnon’s study pro­vides only small com­fort for U.S. im­porters, though. Fre­und noted that his­tor­i­cal ex­am­ples from abroad might not be com­pa­ra­ble to the U.S. case be­cause of sub­tle dif­fer­ences in ex­actly what would be taxed un­der the GOP plan.

Also, sim­i­lar poli­cies in other coun­tries have of­ten brought rapid in­fla­tion, the study shows. The Fed­eral Re­serve might try to slow the process, in which case im­porters would be left hold­ing the bag in the mean­time.

“I’m rea­son­ably con­fi­dent that real ex­change rates will even­tu­ally ad­just,” Fre­und said. “‘Even­tu­ally’ is the key word here, be­cause we don’t know when.”

Repub­li­cans are plan­ning on cut­ting taxes over­all, so if ex­change rates ad­justed to re­lieve the bur­den on im­ports, Scotts Mir­a­cle-Gro would some­day en­joy sub­stan­tially re­duced costs un­der the GOP plan. On the other hand, that same math im­plies that the tax would not achieve Brady’s goal of help­ing U.S. sup­pli­ers com­pete by mak­ing im­ports more ex­pen­sive.

Hage­dorn said he had a “great” meet­ing with Brady last year, but the busi­ness­man is not re­as­sured by econ­o­mists’ pre­dic­tions about the dol­lar. Cur­rency mar­kets are no­to­ri­ously volatile, and he is not com­fort­able plan­ning the com­pany’s op­er­a­tions around pos­si­ble fluc­tu­a­tions in the ex­change rate.

Trump has said re­peat­edly that he wants to pun­ish com­pa­nies that shift man­u­fac­tur­ing abroad, but even U.S. man­u­fac­tur­ers that sim­ply rely on com­po­nents and raw ma­te­ri­als from over­seas could pay more un­der the GOP plan. Hage­dorn notes that his com­pany em­ploys only a hand­ful of peo­ple out­side the United States and has been head­quar­tered in Marysville for 149 years.

“I would think Trump would look at us and say, ‘That’s ex­actly what I’m talk­ing about,’ ” Hage­dorn said, de­scrib­ing Scotts as a “true-blue Amer­i­can” com­pany.

Com­plaints from cor­po­rate lead­ers such as Hage­dorn, whose fam­ily’s 27 per­cent stake in Scotts Mir­a­cle-Gro is worth roughly $1.4 bil­lion, are why some on Wall Street doubt that the Repub­li­can plan will go for­ward.

“Trump wants to make busi­ness, in the­ory, eas­ier,” said Ivan Fein­seth, the di­rec­tor of re­search at Ti­gress Fi­nan­cial Part­ners in New York. “If he runs into a sit­u­a­tion that doesn’t meet that, he will be a lit­tle bit flex­i­ble.”


Jim Hage­dorn, chief ex­ec­u­tive of Scotts Mir­a­cle-Gro, doesn’t ex­pect any re­lief from the GOP’s cor­po­rate tax plan.

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