Another Potential Tax Increase

By June 30, 2011Economy, Taxation

In his press conference yesterday, President Obama turned up the heat on congressional Republicans who are resisting efforts to raise taxes.  Calling for a “balanced approach,” the President said, “The tax cuts I’m proposing we get rid of are tax breaks for millionaires and billionaires; tax breaks for oil companies and hedge fund managers and corporate jet owners.”

The President forgot to mention one tax increase that is on the table, namely a proposal to end the last-in first-out accounting method that many manufacturers use (LIFO).  It’s a big tax hike too—$72 billion.  But it’s all “just part of simplifying the tax code,” says the Administration.

Manufacturers have been using the LIFO accounting method for nearly 70 years.  The gist of the method is the following: manufacturers can match their current sales revenues with current inventory replacement costs. By taking into account the cost of replacing inventory, LIFO results in a more accurate measure of the financial condition of a business and the amount of income that can be taxed.

Requiring manufacturers to stop using LIFO could have an immediate and negative impact.  Not only would they be subject to higher taxes in future years, they would also be hit with a big one-time tax bill because they would have to pay tax on the so-called LIFO reserves they’ve built up over the years.  So it’s not just a tax increase on future income—it’s a retroactive one as well.  Such a tax increase would strain manufacturers of all sizes.

The LIFO proposal is meeting strong resistance on Capitol Hill and off it as well.  For more from the NAM, see here.

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