Something Else We May Have to Pass Through

By Andrew Paparozzi
In June 9, 2010

Printers are familiar with cost pass-through, especially for paper and other materials. Sometimes they may come across more resistance than at other times, but the concept is not alien to their business model. As discussed in the NAPL Printing Business Conditions: May 2010, printers are beginning to see the return of some cost inflation. According to a recent NAPL survey:

• 65.7% of participants report that paper prices have increased so far this year and 43.3% report energy prices have increased, with average increases of 5.0% and 6.7%, respectively.

• Almost 82.0% of participants are concerned that cost inflation will squeeze already-thin margins in an environment of limited pricing power. Costs of a broad range of materials and consumables will be rising, and eventually so will employee compensation and interest rates.

• 56.4% have passed at least some of the cost increase to date along as higher prices, while 38.7% either tried but couldn’t (16.9%) or haven’t tried (21.8%).

In addition to higher costs, printers, and all other companies for that matter, may have to start thinking about passing something else along— a percentage of their value added. We’ll be hearing more and more about value added as the year progresses, unfortunately not from the standpoint of tracking business performance, but instead because of the government’s burgeoning need for revenue. A value-added tax is one of the options that will be discussed by the President’s commission on deficits and debt. While there is still uncertainty surrounding the commission’s eventual recommendations, here’s something we can be relatively certain about: The federal government needs to raise a boatload of revenue, and just increasing marginal income tax rates will not do the trick. In all likelihood, some alternative form of taxation will be suggested, and that will be the case even if they recommend some tinkering on the spending side. If you haven’t been tracking value added closely, you may want to start seriously considering it. Not only does it make sense as a critical measure for tracking business performance, you’ll be ahead of the game if and when the government decides to go down this path.

Without getting into all the particulars—there are several variations—a value-added tax is similar to a sales or consumption tax, as it is passed along the production chain to the final consumer. Unlike a retail sales tax, it is collected at every stage of production, with businesses able to recover the VAT on the products or services they buy and use as inputs, sending to the government only the tax collected on their value added. We will not discuss the advantages or disadvantages of such a tax here, but keep this in mind: Although theoretically a VAT shouldn’t make a difference among similar competitors, the operative word being “similar,“ the tax can influence relative prices, e.g. the price of print relative to other communication alternatives. Just what we need, inserting another variable into the equation. Now, we all know how simple government makes its regulations, especially when it comes to taxation; so the more up to speed we are on the ins and outs of our value added, the better. And even if the government decides not to go down this path, think how much ahead of the game you’ll be having become more keenly aware of a critical indicator for measuring business performance. For further discussion on the importance of tracking value added go to NAPL Performance Indicators.

Andrew Paparozzi        Joseph Vincenzino        Kong Lue Wang

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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