Earlier today, the National Association of Manufacturers (NAM) released the results of its second quarter 2016 Manufacturers’ Outlook Survey, showing an uptick in overall sentiment. In this survey, 61.7 percent of manufacturers expressed positivity about their own company’s outlook, up from 56.6 percent in March. This marks the most optimistic manufacturers have been since December 2015.
However, NAM Chief Economist Chad Moutray said, “While this survey offers a bit of optimism for manufacturers, there is still a dramatic need for improvement before our sector can regain its footing. This survey, coupled with the latest jobs report, should serve as a stark reminder to Congress that policy priorities, including market-opening trade agreements and comprehensive tax reform as well as addressing regulatory barriers, are top of manufacturers’ minds. If lawmakers in Washington take action on these and other items, they could help reverse the pain manufacturers are experiencing, expanding job opportunities and strengthening the broader economy as a result.”
Ranking at the top of manufacturers’ concerns were the overall regulatory burden and the continued need for comprehensive tax reform—two issues that are squarely within the federal government’s ability to address. Indeed, three-quarters of manufacturers surveyed consider regulatory burdens to be one of the sector’s top issues. From the tax and corporate finance perspective, a recently released proposed regulation on Section 385 rules by the Treasury Department would add significantly to the cost of doing business in the United States for companies of all sizes and across all sectors. Manufacturers, already overburdened by labor and environmental regulations to name a few, will now be subject to IRS review of their intercompany debt and equity transactions going forward, and despite the downplaying by Treasury officials, the cascading impacts of recasting debt to equity are significant. These include significant compliance costs, potential increased cost of borrowing if companies decide to move toward third-party lending and reduced competitiveness for companies making investments in America.
On the topic of comprehensive tax reform, there is growing interest in comprehensive business tax reform that includes lower tax rates for corporations and for business income earned by “pass-through” entities. The individual tax code would remain essentially the same. With this in mind, we asked a series of questions to gauge interest in comprehensive business tax reform. The survey found that nearly 77 percent of “pass-through” entities respondents would support comprehensive business tax reform along those lines, with just 4.7 percent suggesting they do not support it. In addition, 18.5 percent are uncertain.
Finally, we also asked all respondents whether specific proposals discussed as part of comprehensive business tax reform, if enacted, would make them more competitive. Almost three-fourths of respondents said a corporate tax rate of 25 percent or less would make them more competitive, with a permanent and enhanced R&D incentive cited by more than 60 percent, robust capital cost-recovery provisions were supported by just more than half of respondents, permanent lower rates for “pass-through” business income by 48.5 percent and a competitive international tax system by 40.1 percent.
What continues to be clear in survey after survey is that it’s past time for policymakers to move toward comprehensive business tax reform and undo the harmful damage wrought by overly broad and costly regulations.
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