Manufacturers are very concerned about the impact on the economy and jobs of the across-the board cuts in federal spending now set to kick-in on March 1st. But replacing these job-killing cuts with job-killing tax increases on the energy industry, as suggested by the White House and Senate Majority Leader Harry Reid (D-NV), is not an acceptable solution to the problem.

The manufacturing sector is the largest energy consumer in the United States, using one-third of the nation’s energy. Imposing new energy taxes will result in higher energy costs for manufacturers, driving up the cost of domestic production. And it doesn’t stop there. Raising taxes on domestic energy producing companies will make it more expensive to produce everything in this country. Increased fuel costs will affect all Americans, both manufacturers and consumers, by increasing the cost of products made and the cost of products purchased. As with the sequester, jobs will be lost.

Millions of current jobs will be at risk and future job creation thwarted if new energy taxes were enacted. Given our nation’s persistent, high unemployment rate and anemic economic growth, both the sequester and new energy taxes are bad ideas. It’s time to find new ideas to jumpstart our economy and stop trying to pick winners and losers based on a partisan agenda.

President Obama’s assertion last night that the sequester “will not happen,” was encouraging news to manufacturers who are extremely concerned about the impact on jobs and the economy of the $1.2 trillion in federal spending set to begin January 1^st. Although the administration walked back the comments a bit following the debate, it is still an important commitment that we hope the President will uphold.

Earlier this year, we released a report showing that the defense cuts will reduce U.S. employment by more than 1 million jobs in 2014 alone. Similarly, the Information Technology and Innovation Foundation (ITIF), a non-partisan think tank, in September released a study called Eroding Our Foundation: Sequestration, R&D, Innovation and U.S. Economic Growth concluded that close to 200,000 jobs per year could be in jeopardy if across the board cuts to federal R&D investment are implemented. But avoiding the sequester addresses only part of the problem. Pending tax increases for a wide range of individual taxpayers and small businesses along with the spending cuts under sequestration will hit the U.S. economy with a $500 billion fiscal shock on January 1^st, a shock that likely will send our already weakened economy into a tailspin.

So, while manufacturers appreciate the President’s commitment to avoiding the sequester, we also believe it is critically important to maintain the status quo on current tax policy for all Americans. Almost 70 percent of all manufacturers (about 200,000 nationwide) pay income taxes at the individual rate. The average taxable income for these small manufacturers is $570,000 – so unless Congress extends current tax rates, these employers will be subject to new tax rates of almost 40 percent and subject to new restrictions on itemized deductions and exemptions. Not exactly good news for job creation and investment.

It’s not just manufacturers who are apprehensive about the “fiscal cliff” looming at the at the end of the year.  According to an October 16^th news story in The Street, the financial services sector is scared as well. According to a survey of fund managers by the Bank of America Merrill Lynch taken earlier this month, 72 percent of respondent said that the impact of the pending expiration of tax rate cuts and new spending cuts has not be “substantially priced into global equities and macroeconomic data,” i.e., people don’t believe it’s going to happen.

Moreover, an increased number of fund managers (42 Percent, up from 35 percent in September and 26 percent in August) said that the impending fiscal cliff is the no. 1 tail risk for the market. Washington—it’s up to you.  We have a fiscal crisis heading our way and it is imperative that Washington act as soon as possible to derail the $500 billion hit to our already weak economy set for January 1.

Manufacturers were pleased to see a Congressman with first-hand experience actually running a company  weigh in on the critical need for progrowth tax reform and the certainty that goes with it. In an op-ed in The Hill, Rep. Reid Ribble from Wisconsin drew on his experience owning a roofing company to make a strong argument for a simpler, fairer tax code, particularly for the many small businesses that pay taxes at individual rates.

Rep. Ribble fully recognizes the importance businesses place on certainty in moving ahead on investment and hiring plans.  Manufacturers couldn’t agree more with Rep. Ribble that “the more important and necessary outcome of comprehensive tax reform is certainty. When businesses have certainty they have confidence, which will boost economic activity and spur job creation.  Let’s hope that after November there are more Rep. Ribbles in Congress.

The good news today coming out of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations is that Sen. Carl Levin (D-MI) recognizes that something is wrong with our international tax system. The problem though is that his focus is on companies that actually pay taxes and not the tax code itself, which is in desperate need of reform.

The basic problem is fairly simple: U.S. tax laws make it difficult for U.S. companies with worldwide operations to compete. Our “worldwide” system taxes income regardless of where it is earned, unlike most other developed nations that only tax income earned within their borders. As a result, U.S. multinationals generally have a higher tax burden than non-U.S. multinationals — a significant disadvantage when U.S. companies are competing against non-U.S. multinationals and local firms for business in a global marketplace. And, if U.S. companies cannot compete abroad, where 95 percent of the world’s consumers are located, the U.S. economy suffers from the loss of both foreign markets and domestic jobs that support foreign operations.

That’s why the NAM strongly supports moving from the current worldwide tax system to a territorial tax system structured to enhance U.S. competitiveness, not raise revenue. The current focus on tax reform presents a great opportunity to advance a permanent territorial system that would go a long way to improving the global competitiveness of U.S. manufacturers.

Let’s face it, territorial systems are now the international norm. The vast majority of our trading partners have a territorial system of taxing foreign income. Japan and the United Kingdom—two of the largest economies—recently abandoned worldwide taxation systems in favor of a territorial approach. Adopting a tax system that is not more burdensome than the tax systems applying to foreign manufacturing companies is critical to the ability of U.S. manufacturers to compete in the global marketplace. A competitive tax system will impact jobs at U.S. headquarters, increase exports from U.S. manufacturers and improve the efficiency of their supply chains.

With Washington metropolitan area businesses bracing today for yet another round of serious wind and rain storms, we’re pleased to see that the House tomorrow will take up the Disaster Loan Fairness Act of 2012 ( HR 6296) introduced by Rep. Lou Barletta(R-PA). The legislation would lower the interest rates on Small Business Administration disaster loans and make the program simpler and more transparent.

This measure is welcomed news to the thousands of small businesses that have—or will—sustain losses because of natural disasters. And there have been many.  According to Rep. Barletta, since January 2011, over 200 congressional districts have been impacted by a major disaster declared by the president. Communities in almost every state in this country have been flooded by a tropical storm or a hurricane, burned by a wildfire, crippled by a snowstorm, or destroyed by a tornado. Let’s hope no one suffers damage from today’s series of storms and rest assured that, if disaster does strike, businesses will be able to obtain the financial resources to rebuild.

Yesterday the New York Times printed an perceptive, insightful article explaining that, while the fiscal cliff is a distant problem in Washington, manufacturers are struggling with the impact today. Unfortunately, the editorial board missed the fundamental point of what manufacturers need to compete and succeed in today’s global economy. In an editorial titled “Business Fears the Fiscal Cliff,” the Times gets it half right. The editorial argues that the best way to stave off the fiscal cliff is to delay defense spending cuts and temporarily extend the current tax rates while allowing rates to increase on business owners with income over $250,000 per year.

They are correct – the defense cuts are going to cost over 1 million jobs across the country[]  by 2014 and will deal a devastating blow to innovation up and down the supply chain. It is essential that policymakers in Washington halt the defense cuts and do it as soon as possible.

But what the editorial fails to recognize is that allowing a tax increase on those making over $250,000 per year is a tax increase on manufacturers. Nearly two-thirds of manufacturers pay taxes at the individual rate and they need those resources to invest in their companies and hire workers. In fact, according to a recent NAM/IndustryWeek survey, 56 percent of these manufacturers indicated that higher taxes will negatively impact business investment or job creation and retention. President Obama has said himself that it’s a terrible idea to raise taxes in a struggling economy and he was right when he said that.

S-corporations and other flow through entities employ 54 percent of the private sector workforce. Increasing the tax burden on these job creators is a fundamentally bad move and will hurt our fledgling economic recovery. Washington remains bogged down in its usual quagmire of partisanship, but despite what was stated in the editorial, at least the House has attempted action to prevent the United States from falling off the fiscal cliff with legislation to halt the defense cuts and to prevent billions of dollars in tax increases.

This is the kind of action we need and the National Association of Manufacturers respectfully disagrees with the New York Times’ assertion that a tax increase on small business is the recipe for getting our debt under control. These tax hikes – amounting to enough revenue for approximately 3 days of federal spending - are a drop in the bucket compared to the $15 trillion debt and the defense cuts don’t begin to address the problem either. Until we account for the entire budget, particularly the mandatory spending on entitlements that makes up the lion’s share of the federal budget, all the tax hikes in the world won’t put us in the black. They’re only going to hurt the 12 million men and women who make things in America.

Energy is an important issue for American manufacturers—we consume one-third of our nation’s energy, both as fuel and as a feedstock and NAM has been in the forefront of encouraging the development of new and affordable sources of energy. It’s an important issue for American families, too who share our interest in dependable—and affordable—energy sources. 

So we’re concerned about proposals to raise taxes on the energy industry that will take us even further from our goal.  Quite simply, increased taxes for energy companies will increase the costs of fuel to American energy consumers and manufacturers. The debate over energy policy should not be about imposing new taxes or new costs on the U.S. energy industry.

There are those that seek to distract from our need to create more energy by demonizing the very industry that can provide it. This type of demagoguery isn’t right and it certainly isn’t productive. Rather, the debate should focus on enhancing America’s energy security through increased production of all types of energy, improved conservation and energy efficiency, more research on technology and alternative energy, increased access to domestic sources with continued environmental protections, and improved distribution.

The U.S. Senate this afternoon passed up an excellent opportunity help kick-start our struggling economy by providing much-needed certainty and tax relief to a wide range of taxpayers including many smaller manufacturers. Unfortunately, 54 Senators voted against the  Tax Hike Prevention Act of 2012, legislation introduced by Sen. Orrin Hatch (R-UT) that would prevent some $200 billion in tax increases hitting the U.S. economy on January 1, 2013.

About two-thirds of manufacturers in the United States operate as S-corporations or other pass-through entities and pay taxes at individual rates. The lower rates enacted in 2001 and 2003 have played a key role in helping these companies—most of which are small and medium-sized companies—survive challenging economic times and retain and create high-paying manufacturing jobs.

The average income for S corp manufacturing companies is $384,000 so limiting the tax relief to taxpayers making up to $250,000 (as proposed by Sen. Reid), isn’t going to help these manufacturers who are working to stay afloat and compete in a capital intensive industry. In fact, raising taxes on these smaller companies is counterproductive, particularly as we face persistently high unemployment rates and stagnant economic growth. 

Our advice to these 54 Senators is to reconsider their vote. Without action before the end of the year to extend all of today’s lower individual tax rates, the vast majority of manufacturers in the United States will face higher taxes, threatening their ability to create jobs. At a time when we should be working on ways to reinvigorate our struggling economy, the last thing we should do is increase taxes for job creators.

To manufacturers’ dismay, yesterday the President used a campaign speech to lambast an idea supported overwhelmingly by the nation’s business community and one which has been adopted by the overwhelming majority of industrialized countries – a territorial system of taxation.

Today the U.S. is one of only 6 OECD countries to tax domestically headquartered companies on their worldwide income. Along with Chile, Ireland, Korea, Mexico and Poland, the U.S. taxes the foreign earnings of companies when they bring their foreign income home. This double taxation acts as a disincentive for companies to return the income to the U.S. for investment because after paying corporate taxes in the country where the income is earned, they have to pay a second layer of tax once they return the income to the U.S.

This results in companies – seeking to get the best bang for their buck – keeping their income abroad in order to get more out of the funds they have to invest. And critical to this whole discussion is that the U.S. holds the dubious distinction of having the world’s highest corporate tax rate at 35 percent unlike the other 5 OECD countries that continue to use the worldwide system of taxation which have lower corporate tax rates.

Yet somehow, despite criticism our antiquated worldwide system of taxation from much of the academic community and a number of the President’s own advisors including the majority of President’s Export Council and his Council on Jobs and Competitiveness, the President continues ignore to today’s competitive worldwide economic environment in which global companies compete. Today 95 percent of the world’s consumers live outside of the US and in order for US companies to reach many of those consumers, or to feed into supply chains for these consumers, companies need to have a local presence to manufacture their products for these foreign markets. And these foreign operations are linked to U.S. investment as well. The President’s Export Council Chairman, Boeing CEO Jim McNerny in a letter to the President in December 2010 said, “expansion abroad by US companies is vital for establishing export platforms for US-produced goods and expanding the scope of domestic investments in research and other high-paying headquarters’ operations.”

The Congress needs to move past the rhetoric and the distorting claims on the campaign trail and take up comprehensive tax reform which includes a move to a territorial system of taxation for our nation’s multinational corporations. Manufacturers were pleased last fall when House Ways and Means Chairman Camp released a draft proposal for moving toward such a system. While we had some questions, concerns and input for the Committee’s consideration, we applaud the Chairman’s process of putting out a draft and his commitment to moving the US tax code to a system that makes sense in today’s worldwide market and we hope to see more leadership on this critical issue from other key players.