Tax Hike Is Bad, Bad News for Custom Industry
Although the perception about the tax increase might be greater than reality for your affluent clients, it still will negatively affect most integrators who rely heavily on wealthy clients.
Now that the dust has settled on the so-called Fiscal Cliff fiasco, integrators must analytically sit back and look at what effect the compromise law will have on their businesses. From a non-partisan point of view, the conclusion is irrefutable: It’s bad news for the custom industry, at least in the short-term for sure.
I am not even taking into account the potential increased tax burden on CE pros themselves. The real damage is on your client base. Let’s be honest, the custom installation industry is one that is primarily dependent on wealthy people purchasing their services. Yes, the housing market is coming back nicely, and yes, there are dedicated audiophiles who spend their last nickel on equipment, and yes, there are entry-level solutions that are attracting new, less affluent buyers.
But by and large, the people who can afford the equipment and systems that make up a huge chunk of your revenue are rich people… those households making more than $450,000 that just got hit with a 3.6 percent tax increase. But they also now have a 2 percent tax hike from the elimination of the temporary Social Security tax holiday (which affects 77 percent of all U.S. households, by the way), and as part of the 2010 health care law, there is a new 3.8 percent tax being imposed on investment income for individuals making more than $200,000 a year and couples making more than $250,000.
How much is it exactly? For 2013, households making between $500,000 and $1 million,it’s an average tax increase of $14,812, according to the Tax Policy Center. Households making more than $1 million would get an average tax increase of $170,341. Oh yes, don’t forget about places like California that just instituted an additional 1 percent state income tax hike. For those making $1 million or more in the Golden State, they will now pay 13.3 percent of their income in state income tax.
Yeh, I know what you are thinking. Somebody who is rich is rich; they can afford to pay more. You are correct, they can afford it. But this is a case of where perception is greater than reality. Can affluent clients still afford home theaters, home controls and superb audio systems? Of course they can. But do they now perceive that they have been dealt a horrible blow to their incomes? Yes, they do.
And it is already happening. I spoke today with an integrator in the Northeast who has 30 jobs in the pipeline. All wealthy clients. Many are high-end jobs. Nine of those prospective clients had pushed off their decision to finalize the deal and sign the contract until after the Fiscal Cliff decision.
Guess what?... All nine of those clients decided to delay at least until after the first quarter of 2013. That’s 0 for nine. He’s batting .000. Luckily, this integrator has diversified into electrical, security and other “buckets” of revenue that will continue to grow. Despite that diversification, he told me he is preparing for the worst first quarter in the history of his business. Sounds dramatic, but I can assure you he was not acting.
My brother is a college professor. He’s a pretty smart dude but he’s very far removed from any luxury industry that is dependent on well-heeled buyers like the custom electronics industry is. When we were talking last fall, he didn’t have a clue that there are entire industries that depend greatly (not fully) on rich buyers. He, like I am sure many people, doesn’t have sympathy for affluent households that just took big tax hikes, but he should have empathy for the thousands of custom electronics integrators, jewelry stores, limousine operators, luxury car dealers, etc., who will be facing an uncertain next few months.
Of course, the lesson is that integrators need to be diversified in their businesses so they are not reliant too heavily on one particular niche market.
Am I wrong about all this? I sure hope so. Don’t jump all over me that I am making some sort of partisan argument. Republican, Democrat or Independent… the result is the same. It’s money out of your pocket, at least in the short term. Let me know what you think.
Jason has covered low-voltage electronics as an editor since 1990. He joined EH Publishing in 2000, and before that served as publisher and editor of Security Sales, a leading magazine for the security industry. He served as chairman of the Security Industry Association’s Education Committee from 2000-2004 and sat on the board of that association from 1998-2002. He is also a former board member of the Alarm Industry Research and Educational Foundation. He is currently a member of the CEDIA Education Action Team for Electronic Systems Business. Jason graduated from the University of Southern California. Have a suggestion or a topic you want to read more about? Email Jason at [email protected]
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