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Is that Middle Ground or Quicksand?

Yesterday the Center for American Progress released a report, “The Growing Consensus to Improve Our Tax Code” which “discusses some aspects of good tax policy that are endorsed on both sides and then identifies specific proposals for which consensus appears to be within reach.” While the NAM has long argued for comprehensive tax reform and is open to any and all efforts to find common-ground between both political parties as well as between the Congress and the Administration to achieve this critical goal, we take issue with the idea that the proposals included in this report is the common-ground that “could be implemented individually or as part of a package to advance other pressing economic priorities.”

This report, which simply identifies commonalities between the Administration budget proposals and base-broadening included in House Ways and Means Chairman Dave Camp’s “Tax Reform Act of 2014” discussion draft, ignores the underpinnings of both frameworks—lower tax rates in exchange for base-broadening. The report doesn’t however touch on the harm that would come from eliminating any or all of the “consensus” provisions absent a significant reduction in the corporate tax rate, or a shift to a competitive international tax system.

The reality is, comprehensive tax reform is essential to putting our still lagging economy on the fast-track to growth. There is broad agreement that our tax code is antiquated, uncompetitive and burdensome. However, there is not consensus on the the idea of using the revenues raised from base-broadening for any purpose other than reforming the tax code. Indeed, there are other points of consensus between the various tax reform proposals that have been floated in past years and that consensus should be used as the basis of a real effort to reform our tax code, not as a piggy bank for other ideas.

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Energy Tax Reform Part Deux

We were pleased to see the Senate Finance Committee on September 17th continuing to lay the foundation for comprehensive tax reform with a hearing entitled, “Reforming America’s Outdated Energy Tax Code.” Manufacturers are heartened by the focus on this critical part of the manufacturing –and national –economy since we consume more than 1/3 of the nation’s energy.  At the same time, as we outlined in our statement for the Committee Record, we remain concerned about the misplaced emphasis on changes that would move the tax code away from encouraging capital investment and towards penalizing the sources of production that are not only leading to an energy boom in our nation but also putting the U.S. on track towards being energy self-reliant. The recent jump in domestic energy production has been a boon to our economy and has helped drive down costs for domestic manufacturers and making us more competitive.

It is critical that policy makers keep in mind that the amount of capital investment required to make our domestic reserves into domestic production is enormous and cost-recovery provisions in the tax code matters. The NAM has long called for comprehensive tax reform to include a robust capital cost recovery system. Some dismiss the importance of these provisions as simply a matter of timing, however when access to capital is tight and capital is limited, the ability to quickly recover investment costs is critical and allows companies to engage in additional projects sooner. These are the very types of provisions that enacted as part of pro-growth, pro-manufacturing, pro-job, comprehensive tax reform will help unleash the growth that our economy needs and help achieve the NAM’s goal of making the U.S. the best place in the world in which to manufacture.

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Keeping Our Eye on the Prize: Comprehensive Tax Reform

While many press stories today focused on what U.S. Treasury Secretary Lew said – and did not say – on business tax reform and the so-called “inversions”  this morning at the Urban institute, the media missed the boat by not focusing more attention on a panel discussion after Secretary’s Lew speech .

Indeed, John Samuels, Vice President and Senior Counsel of Tax Policy and Planning at the General Electric Company, raised perhaps the most important and most often missed point in this whole discussion when he asked why policy makers are discussing how to raise the bar and make it harder for companies to leave the United States when they should be focusing on what we need to do to make it more attractive for companies (aka employers) to be located in the United States.

This is exactly the question that manufacturers have been asking themselves for quite some time. One of the NAM’s top goals is to make the United States the best place in the world to manufacture and attract foreign direct investment—a goal on which almost everyone should be able to agree but one that policymakers have done so little to advance. We have known that our tax code was antiquated, non-competitive and perhaps worst of all, unpredictable, for decades. Our tax system is out of sync with the rest of the industrialized world and, as Mr. Samuels pointed out, other nations have been competing to attract additional business investment knowing that such investment will help improve their own economies.

Meanwhile, the United States continues to lag behind and the situation would only get worse with some of the proposals being discussed that would penalize companies looking abroad to expand their business. So to paraphrase Mr. Samuels’ question this morning, why are we focused on how to build higher walls and instead figure out better incentives to drive the investment that everyone agrees is needed to get our economy back up to speed and competitive into the future. The only sure way to do this is to undertake a serious effort to enact comprehensive tax reform. To accomplish this goal everyone is going to need to keep their eye on the prize.

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A Glimmer of Hope

Yesterday morning, the Federal Reserve Board released a re-proposed rulemaking regarding “Margin Requirements for Non-cleared Swaps.” At first glance, this long awaited re-proposal seems to acknowledge what end-users like manufacturers have long held, that when derivatives are used by non-financial end-users to hedge commercial risk, manufacturers should not face the same margin or capital requirements as financial entities engaging in swaps for other purposes. However, it appears as though the Fed in the new proposal has chosen to allow the decision as to whether margin is required to remain between the manufacturer and their financial counterparty, rather than be imposed by a third-party regulator.

As a leader of the Coalition for Derivatives End-Users, the NAM has worked over the past several years to share manufacturers concerns about the potential costly burden that such margin requirements. So we are pleased that at least at first blush the Fed appears to acknowledge manufacturers’ concerns. As we dig through the full 200 page re-proposed rule we are hopeful that this rule, if finalized, could provide manufacturers the reassurance that they will not face this significant cost burden. The NAM and the Coalition will be working in the coming weeks to determine if the re-proposal addresses all of the concerns of manufacturers who use derivatives to hedge commercial risk and if additional changes to the re-proposed rule are necessary.

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Leading

Later this week, the House of Representatives is scheduled to take up the a bill that is exactly the kind of legislation we need to see more of if Congress truly wants to set policies to help American manufacturers grow, compete, create jobs and strengthen communities.

One may ask how a single bill can do all of this?

The bill I’m speaking of is, H.R. 4718, authored by Rep. Pat Tiberi (R-OH) and would make 50 percent first year expensing (aka “bonus depreciation”) permanent. This bill is one of the handful of bills moving through the House this spring and summer that seek to make various provisions of the “extenders” package permanent. And, and it’s a very important bill for manufacturers. This bill would extend retroactively to the beginning of 2014 provisions which were in place and working up until they expired at the end of 2013.

Why is this bill so important for manufacturers? Manufacturing is a capital intensive industry and those costs have three significant factors: the price of equipment, the cost of financing and the tax treatment of the investment. Bonus depreciation lowers the after-tax cost of capital, increasing the number of profitable projects a firm can undertake and helping spur the growth in business investment. And so in the 7 months since it expired uncertainty has settled in. And uncertainty slows investment. Our March 2014IndustryWeek/NAM Survey of Manufacturers confirms that the expiration of the on-again and off-again investment tax incentives have companies holding off on making key purchases and thus delays the robust economic growth we need.

What does this really mean for Main Street? With pro-investment tax policies, companies like Marlin Steel Wire Products can invest in new cutting edge technologies like the IDEAL welding system. As Drew Greenblatt, the President of Marlin Steel put it, “policies like these allow companies like us to take a risk, put our necks out there and invest.” There are only five of these automated welding machines in the world and Marlin Steel, located in Baltimore, Maryland, is now the only company outside of Germany that owns one. According to Greenblatt, the investment in this new technology means that, “now our employees have the greatest technology at their disposal and now they can compete even better with foreign competitors. This machine will help us make a faster, more precise part and clients will be happier and order more products. This will help protect our employees’ jobs and help us to grow and hire even more employees.”

As we at the NAM have heard time and time again, policies that incentivize investment – especially when those policies are permanent – will help the economy take off because companies large and small will be able to take risks and invest and grow.

So yes, bills like H.R. 4718 will help Marlin Steel make a better material handling basket and so much more. The NAM urges all members of the House of Representatives to vote for this important pro-growth, pro-manufacturing legislation.

 

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Insanity… according to Albert Einstein

“Insanity: doing the same thing over and over again and expecting different results”… Albert Einstein

Well the Senate is once again trying to disprove this wisdom with yet another vote on the so-called “Buffett Tax.” According to our count this will be the 9th time that Senate Democrats have tried to use this tax increase to pay for something. This time around it’s attached to S. 2432 and while the NAM doesn’t have a position on the underlying bill, we do however oppose raising taxes on America’s small and medium sized manufacturers. That’s why, just this morning, the NAM’s Vice President for Tax and Domestic Economic Policy Dorothy Coleman sent a letter to all Senate offices urging Senators to oppose this tax increase.

As we’ve said before, nearly two thirds of manufacturers are organized as a pass-through entity and pay taxes through the individual side of the tax code. Thus, this permanent tax increase would hit those very manufacturers that are the back-bone of the nation’s manufacturing supply chain and reduce the amount of capital available to these business owners to reinvest in their company and their workforce.

This is a bad idea today, just as it’s been a bad idea since it was first conceived a few years ago. Raising taxes on small businesses to pay for new spending is not the way to get our economy back on track and growing the way it needs to. Speaking to the aim of the student loan bill specifically, raising taxes on job creators isn’t the way to ensure that jobs exist for those who are graduating from higher education.

Instead what manufacturers of all sizes need is comprehensive tax reform to ensure that we have a modern, competitive, permanent, pro-growth, pro-manufacturing tax code that allows them to compete and invest and grow and that will remove the constant uncertainty surrounding what policies will be in place in 6 months as well as in 6 years. That’s what manufacturers need and that is what will make the United States once again the best country in the world to manufacture.

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Exactly the Point

Manufacturers applaud the upcoming action in the House of Representatives to consider “America’s Small Business Tax Relief Act of 2014,” H.R. 4457, to make Section 179 permanent. We hope that this common-sense bill will pass with broad bipartisan support.

As we’ve often talked about in this space, making this provision permanent is a priority for small and medium-sized manufacturers. In order to compete in a worldwide economy, manufacturers need to plan and invest and meet emerging needs. Having certainty over the tax treatment of critical investments will make planning for future investment significantly easier. Capital investment is key to economic growth, job creation and competitiveness. Consequently, enactment of this policy would amount to a major step towards a tax code that will promote investment.

Take for example SASCO Chemical Group, Inc. (SASCO), a Georgia-based third generation family-owned chemical manufacturer with worldwide distribution. According to SASCO’s President Marc Skalla, “Innovation has made us who we are today; reinventing ourselves through innovation will secure our future and make us who we will be tomorrow.” To continue this forward-thinking progression, SASCO opened a state-of-the-art Innovation and Technology Center that houses their R&D, Technical, and Process-Pilot plant team. Over the past few years, SASCO has relied heavily on both Section 179 and bonus depreciation provisions in the Tax Code to enhance cash flows on scale up projects originating mainly from their Innovation and Technology Center. According to Marc, “without such provisions, our ability to transition innovations from a small-scale lab environment to full production lines would be severely hampered.  Capital projects such as those our Company launches are exactly the type of projects that these tax provisions are intended to support.”

Companies like SASCO who are innovating, growing and competing are at the heart of the ongoing manufacturing renaissance currently taking place in the United States.  These deductions have allowed SASCO to triple their facility’s capacity over the past four years to keep up with the double digit growth they have experienced annually since 2008. This growth has earned SASCO many accolades including a recent recognition from President Obama’s E-Awards for significant contributions to increasing American exports.

Manufacturers like SASCO need stable, pro-growth, pro-investment tax policy to allow them to face the challenges of competing in a global marketplace. Manufacturers face enough uncertainty and the tax code should not be adding more. We urge every member of the U.S. House of Representatives to support H.R. 4457. Until we can get the full panoply of pro-growth pro-manufacturing tax policies enacted via comprehensive tax reform this is a critical step forward.

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Survey Says… Section 179 and Bonus Depreciation Are Critical

In the latest NAM/IndustryWeek Survey of Manufacturers that was released earlier this morning survey respondents once again underscore the importance of investment incentives like enhanced Section 179 expensing and bonus depreciation and the role that these common-sense provisions play in their firms’ investment decisions. According to the survey, nearly a quarter of respondents said that “they were holding off on making investments until Congress extends Section 179 expensing or first-year bonus depreciation.”

If these provisions were not expensed, over a third of respondents “said that they would not make any investments this year without these provisions.” That would be on top of the 5 percent of respondents that said that they were not planning on making any investment this year at all. As NAM’s Chief Economist Chad Moutray puts it in the survey analysis, “that is a significant portion of businesses that would be negatively impacted by the loss of these investment incentives.

And in a pre-emptive response to those who say that the economy can still benefit when Congress gets around to passing the extenders in the 11th hour during the likely lame duck session later this year, this survey also underscores that the sooner Congress acts to restore these provisions the better. In fact according to our survey, “more than half of those surveyed said there would not be enough time to make capital spending purchases and put these capital expenditures into place if these incentives are not extended until mid-November.”

This survey makes it all the more clear that the House of Representatives should overwhelmingly support the passage of H.R. 4457, America’s Small Business Tax Relief Act later this week. Manufacturers of all sizes need this action and they need it now!

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Who Really Benefits from Bonus Depreciation?

According to a recent paper from the Tax Foundation, the whole economy. Will McBride, the paper’s author, concludes that “extending 50 percent bonus expensing on a permanent basis would boost GDP by over 1 percent, the capital stock by over 3 percent, wages by about 1 percent, and would create 212,000 jobs.”

Here are the NAM, we’re not surprised. Manufacturers know first-hand that capital investment is key to economic growth, U.S. job creation and competitiveness. Promoting investment should be an integral part of U.S. tax policy. And, an effective way to spur business investment and make U.S. manufacturing more competitive is through a strong capital-cost recovery system. An ideal system would allow companies to expense capital equipment in the tax year purchased. First-year expensing lowers the cost of capital, increases the number of profitable projects a firm can undertake and promotes job creation and retention.

This is why we applauded and strongly support Rep. Patrick Tiberi’s recent bill to make 50 percent bonus depreciation permanent, H.R. 4718. We are pleased that it was recently reported out of the Ways and Means Committee and hope that this common-sense bill can come to the floor sometime soon. In the absence of comprehensive tax reform, manufacturers need critical pro-investment tax policies enacted permanently to allow them to plan for future investments. Expensing is not just a matter of timing, by reducing the after-tax cost of investment, policies like permanent Section 179 and permanent 50 percent bonus depreciation allow manufacturers to stretch critical resources and make the investments they need to compete in today’s competitive marketplace. We applaud Rep. Tiberi for his leadership on these efforts and urge swift adoption of both of these provisions and allow U.S. manufacturers to grow and lead way to a full economic recovery.

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NAM Applauds Introduction of Permanent, Pro-Growth Investment Tax Policy

Kudos to Congressman Pat Tiberi (R-OH) for introducing today a bill to allow companies to write off 50 percent of their capital investment in the year they make the investment. Permanent 50 percent first year expensing (also known as “bonus depreciation”) will go a long way to ensure that companies large and small can make investment decisions based on what’s best for their business’s future and not be paralyzed by the constant on-again and off-again pro-investment tax policies.

The bill also will allow companies that have AMT credits (generally companies in a downturn) to use these credits in lieu of taking bonus depreciation. A recent NAM/IndustryWeek Survey of Manufacturers confirms   that, since the start of 2014, the expiration the “enhanced” Section 179 expensing and “bonus depreciation,” has forced many manufacturers and businesses to the sidelines holding off on investment plans. Capital investment is key to economic growth, job creation and competitiveness. Consequently, promoting investment should be a focus of any tax reform effort and an integral part of U.S. tax policy. The most effective way to spur business investment and make manufacturing in the United States more competitive is through a strong capital cost-recovery system.

The introduction of this bill is a significant step toward making this pro-investment culture a reality in the U.S. and creates a critical bridge to pro-growth tax reform. We applaud Rep. Tiberi for his leadership in this area on behalf of manufacturers and urge the Committee and full House to act on it in the near-term. As our economy continues to struggle to fully recover from the recession we need this type of solid, permanent pro-growth policies in place to unleash our economic potential.

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