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Tax Reformers Need to Focus on Growth, Not Targeting the Energy Industry

Manufacturers are totally frustrated with our outdated, anti-competitiveness, anti-growth tax system and appreciate the current focus in the White House and on Capitol Hill on improving our nation’s tax system. As we’ve said many times before, any effort to rewrite the federal tax code should result in a balanced, fiscally responsible plan that allows manufacturers in the United States to prosper, grow and create jobs and also enhances their global competitiveness.

Moreover, since manufacturing accounts for roughly one-third of the energy consumed in the United States, it also is critically important that any tax reform plan allows our nation’s energy producers to make the necessary investments to ensure our nation’s energy security and avoids increasing the tax burden on this vitally important industry sector. Maintaining diverse, reliable and affordable energy sources is crucial to jobs, competitiveness and overall economic growth.

With that in mind, we were shocked by Daniel Weiss’ assertion in a January 17th Real Clear Politics editorial that “one simple tax reform that Congress should pass right away that would make the federal tax code fairer and reduce the deficit with almost no impact on the economy: end special tax breaks for the five biggest oil companies.” Nothing could be farther from the truth.

Let’s start with a simple fact: providing the energy needed to support manufacturers and the broader U.S. economy requires large capital investments by the private sector. Promoting investment should be an integral part of comprehensive tax reform, particularly as it relates to investments in developing our nation’s energy supplies.

In particular, finding and producing domestic oil and natural gas requires large and continuing capital investments. Drilling oil and gas wells involves a number of costs, including labor, repairs, fuel, chemicals, supplies and other expenses that have no salvage value. Under longstanding tax policy rules, energy companies can deduct these costs—known as intangible drilling costs (IDCs)—as ordinary and necessary business expenses, reducing the cost of exploring for and producing oil and gas.

For manufacturers and other energy consumers, the development of shale natural gas in the United States has been a “game-changer” in terms of reduced energy costs, increased access to secure energy supplies and availability of a low-cost raw material. The chemistry industry alone has generated billions of dollars of new investment thanks to this innovation. IDCs cover about 70–80 percent of the cost of a shale gas well. It’s not hard to imagine the negative impact of eliminating the deduction of IDCs as Mr. Weiss suggests.

In the same vein, Mr. Weiss suggests eliminating the Section 199 deduction for U.S. oil and natural gas production, refining and processing. Sec. 199, which was included in the 2004 American Jobs Creation Act, is designed to reduce the tax burden on all domestic manufacturers and help spur investment and create jobs in the United States. Congress already took a swipe at the energy sector by limiting the deduction for oil and gas production. The total repeal of this deduction for the energy sector would further target these companies and, in the process, discourage new oil and gas investments in the United States by making them less competitive economically with foreign opportunities.

Also keep in mind that reserving U.S. energy companies’ access to global natural resources is critical to U.S. energy security. Unlike their competitors, U.S. energy companies with overseas exploration and production operations—so-called “dual-capacity” taxpayers—pay both U.S. and foreign taxes. Current tax rules for dual-capacity taxpayers—already stricter than rules for other taxpayers—reduce the potential of double taxation of income in the U.S. worldwide tax system and limit foreign tax credits to payments that are truly in the nature of income taxes. Existing rules specifically deny foreign tax credits for some payments, such as royalties paid to access a natural resource.

Mr. Weiss suggests that policymakers deny foreign tax credits even for income taxes paid by dual-capacity taxpayers. These proposals will unfairly and retroactively overturn well-established and longstanding rules, subjecting American energy companies to harmful double taxation on new and existing investments. 

NAM has a different message for policy makers on tax reform and the energy sector. In contrast to a tax system that encourages investment in new energy sources and energy efficiency, imposing discriminatory taxes on the energy sector will result in higher costs for all energy consumers in the United States. The increased cost for manufacturers will make it more expensive to produce in this country and make them less competitive in foreign markets, putting millions of current manufacturing jobs at risk.

New energy taxes also will set back current efforts to achieve energy independence. As noted above, the United States has made great advances recently in developing new sources of domestic energy. Unfortunately, imposing targeted tax increases on energy companies will discourage oil and gas investments in the United States, working against the goal of enhancing America’s energy security and boosting new, domestic investments in affordable energy sources.

The NAM remains adamantly opposed to targeted energy taxes, whether in the context of tax reform or as part of a separate effort. Manufacturers believe that tax and energy policy needs to focus on enhancing America’s energy security by encouraging new investments in affordable sources of energy, not imposing new taxes on the energy industry.

 

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Comprehensive Tax Reform: Good for Tennessee and Good for the U.S.

Following a stop in Memphis last month by Congress’ chief taxwriters Sen. Max Baucus (D-MT) and Rep. Dave Camp (R-MI) to talk taxes, John Faraci, Chairman and Chief Executive Officer of Memphis-based International Paper Co., penned an op ed promoting the benefits of a comprehensive rewrite of the tax code.  Manufacturers couldn’t agree more with Mr. Faraci’s assertion that “simplifying and modernizing the current tax code has the potential to ignite a virtuous circle of economic activity: businesses increase investments, consumers have more spending power and businesses grow even further.”

We also share his belief that “America’s current tax system is anything but virtuous” and know firsthand that the challenges faced by International Paper and other businesses in Tennessee are similar to challenges faced by manufacturers nationwide. We support efforts by Chairmen Baucus and Camp to advance pro-growth, pro-manufacturing tax reform. To quote Mr. Faraci, “ All of us can support reforms that will achieve a more modern, streamlined tax system that promotes jobs and growth for Tennessee and the entire nation.”

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Americans Look Askance At New Taxes Imposed By Healthcare Law

A recent bipartisan poll conducted by GOP pollster John McLaughlin and Democratic pollster Margie Omera  shows little support among American voters for new taxes included in the Affordable  Care Act.

Slightly more than one third of the respondents, which included Republicans, Democrats and Independents, approved of the new excise tax set to raise $8 billion next year from health insurance providers, while 50 percent of respondents stated flatly that they opposed the tax and 12 percent were neutral.

A similar percent of respondents felt the same way about the 2.3 percent tax on medical devices that went into effect at the beginning of this year. And as for the Affordable Care Act overall, 49 percent opposed it and additional 7 percent were neutral.  So it’s hardly surprising that 71 percent of the respondents of all political stripes said they supported changing, delaying, defunding or repealing the ACA.

 

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Manufacturers Look Forward to Continue Working with Furman As He Moves to the CEA

As the Principal Deputy Director of the President’s National Economic Council, Jason Furman has displayed an understanding of some of the issues that face Manufacturers, particularly as they relate to operating in a struggling economy.  Jason has earned the respect of economists and policymakers across the political spectrum, much as President Obama said yesterday.

In recent years, he’s been helpful in our efforts to advance both expanded net operating loss relief and bonus depreciation, two tax provisions that helped many manufacturers through slow economic times. From our perspective, Jason will be taking over as head of the Council of Economic Advisers at another critical time as the debate over reforming our nation’s tax code heats up.  While the NAM is firmly behind comprehensive tax reform, we are concerned about reform efforts that could increase the tax burden on American manufacturers.  As the tax debate moves forward, there’s a lot of important issues to consider and we look forward to working with Jason on pro-growth, pro-manufacturing tax policy.

Dorothy Coleman is vice president of tax and domestic economic policy and Chad Moutray is chief economist, National Association of Manufacturers.

 

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Some Advice for the President: Look Out for U.S. Competitiveness When You Get To Ireland

In advance of President Obama’s trip to Northern Ireland for the G-8 summit later this month, the NAM and several other business groups this week sent a letter asking the President to keep U.S. competitiveness front and center in the upcoming talks.  When the talks turn to taxes—and that’s likely to happen—the organizations urged him to support tax policies that would improve the worldwide competitiveness of American businesses and increase U.S. economic growth and job creation.

As the letter points out, this is an important and timely message to deliver.  Not only are other countries promoting the international competitiveness of their companies, but a number of foreign countries, including several of our G-8 partners, have advanced tax initiatives under the guise of tax avoidance that actually seem to be primarily targeting American global companies, a development that would harm both the competitive position of U.S. companies and the U.S. Treasury.

With 95 percent of the world’s customers outside the United States, it is critically important that American companies are able to compete effectively in the world’s markets.  As we’ve said many times before, overseas operations of American companies help stimulate the demand for U.S. exports and support jobs in the United States.

 

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Still Time to Do Something About Rising Healthcare Costs for Small Businesses

Healthcare costs are constantly on the minds of manufacturers. Almost three fourths of the companies responding to a recent NAM survey said rising healthcare insurance costs are a primary business challenge for them. So we’re glad to see that these concerns are resonating in Congress where House Small Business Health and Technology Subcommittee Chair Chris Collins (R-NY) today held a hearing to take a look at the impact on small businesses of the new fee on health insurance fee, set to kick in next year.

The fee, which was included in the healthcare reform law, will raise some $100 billion from health insurance providers over the next ten years. And since many small businesses obtain their employees’ health care coverage from these insurance companies, these additional fees are likely to be felt in premium costs. Indeed, the fee could raise the cost of employer-sponsored insurance by 2 to 3 percent in 2014, imposing a cost of nearly $5,000 per family by 2020 according to a study released earlier this year by the National Federation of Independent Business Research Foundation.

Fortunately, Congress still has an opportunity to avert this crisis before it starts. On the House side, Rep. Charles Boustany has introduced bipartisan legislation –H.R. 763 — to repeal this annual fee on health insurers and a similar bill — S.603—has been introduced in the Senate by  Sen. John Barrasso (R-WY). Manufacturers urge lawmakers to repeal this job killing tax ASAP.

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ACA Health Insurance Tax Raises Health Costs, Job Losses

Employers and consumers are set to face higher health costs due to the Affordable Care Act’s tax on health insurance plans, according a recent analysis by Milliman. Contrary to the stated goals of the law to reduce health care costs, the tax alone will cause premiums to increase by as much as 2.4 percent in 2014, reaching as high as 2.9% in later years. According to the study authors, the effective result is a tax on both consumers and employers.

Not only will the health insurance tax cause employers’ and consumers’ health care costs to rise, it will also stifle job creation. The National Federation of Independent Business projects that the increased cost of employer-sponsored health insurance from the will reduce private sector employment by as much as 249,000 jobs by 2021, and reduce real GDP by up to $36 billion. Small businesses are projected to incur nearly 59% of the job losses directly associated with the tax.

Manufacturers support efforts in Congress to repeal provisions of the Affordable Care Act, such as the health insurance tax, to help make health coverage more affordable. In this case, doing so would have the added benefit of preventing job losses in an already difficult economic environment.

Dorothy Coleman is vice president of tax and domestic economic policy, National Association of Manufacturers.

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The President’s Framework for Tax Reform Just Doesn’t Add Up

At first blush, Manufacturers were somewhat optimistic about the framework for business tax reform the President laid out today in the fiscal 2014 budget plan he sent to the Hill. While NAM is firmly behind comprehensive, that is business and individual, tax reform, we thought maybe the President’s plan for business tax reform could help jump start a broader debate.  And frankly, it’s hard for manufacturers to criticize most of the broad tax reform goals the President laid out: eliminate loopholes, broaden the base and cut the corporate tax rate; strengthen manufacturing and innovation; strengthen the international tax system; simplify and cut taxes for small businesses; and restore fiscal responsibility and not add to the deficit. And when we looked at more specifics of the budget, we were pleased to see that at least two provisions important to manufacturers—a strengthened and permanent R&D credit and permanent expensing for small businesses were part of the plan. Unfortunately, the good news ends here.

Let’s turn to the Administration’s goal to “strengthen international tax rules.”  We’re embarrassed that we thought “strengthen” meant improving our outdated worldwide system.  We were wrong. The President’s idea of strengthening means imposing some $157 billion in new taxes on American worldwide companies, actually making our uncompetitive, antiquated system worse than it is. That’s certainly not going to help U.S. manufacturers or any U.S. company struggling to compete in a global marketplace. Nor will manufacturing be strengthened by imposing some $44 billion in new taxes on energy companies. Manufacturers use about 1/3 of our nation’s energy.  New taxes on energy producers will increase energy costs for consumers and discourage the type of investments in new sources of energy in recent years that have been a “game changer” for manufacturers and other energy consumers.

We also were confused that cutting taxes for small businesses is an element of the President’s tax reform framework since the budget itself includes a slew of tax increases targeted to individual taxpayers that also will hit many of the almost two-thirds of manufacturers that operate as “S corps” or other ”flow through” entities. And how do you explain to the many family-owned small businesses—including a number of manufacturers— that their hard-won permanent estate tax relief signed into law by the President in January now is temporary. Five years from now the estate tax rate will go up and the exemption will go down.  That’s the kind of change that not only results in a higher tax bill but also higher planning costs and more uncertainty.

Frankly, we’re also puzzled with the number of new tax incentives included in the budget plan given that “broaden the base” tops the list of priorities in the President’s tax reform framework.  Manufacturers know firsthand how difficult it is going to be to agree on base broadeners. Adding more to the mix will only make that effort more difficult. And while we’re on base broadening, we’re concerned that the President identifies roughly $300 billion “revenue changes and loophole closers” either as part of the reserve for revenue neutral business tax reform or to offset other parts of his budget. This creates winners and losers before we even begin the debate on tax reform. And more importantly, and as we’ve said many times before, piece-meal changes or repeal of long-standing rules outside of tax reform will inject more uncertainty into business planning, making U.S companies even less competitive and threaten economic growth and U.S. jobs.

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For the Record…Manufacturers and other American Corporations Do Face a Heavy Tax Burden

Manufacturers were surprised this morning by the front-page story in the Washington Post that calls into question the tax burden faced by U.S. global corporations, including manufacturers. As the Post article accurately points out, the “tax expense” figures on which they base the story are not the same as taxes paid to the IRS. And, despite admitting that “it is nearly impossible to figure out the amount companies are actually paying [in taxes],” the take away from the article is the misconception that American companies are not paying enough.

First, let’s set the record straight. U.S. manufacturers comply with tax laws and pay their fair share of taxes. Indeed, at 35 percent, the United States has the highest corporate statutory tax rate among developed countries.  And that high tax rate does effect a businesses’ investment and business decisions.  Admittedly, the U.S. statutory corporate tax rate doesn’t tell the complete story. The effective tax rate reflects deductions and credits included in the tax code that can reduce a company’s tax liability. According to our friends at the Tax Foundation, the most recent studies show that the average effective corporate tax rate for corporations headquartered in the U.S. at roughly 27 percent, is still higher than our competitors in other countries that face an average effective tax rate of about 20 percent. And there’s more. The effective average rate for new investment in the U.S. is roughly 29.8 percent, 7.4 point above worldwide competition.

And while we’re at it, we’d like to challenge the unnamed “experts” cited in the story who claim that the U.S. code has encouraged companies to shift their income overseas.  Here’s how we see it.  Current U.S. tax laws make it difficult for U.S. companies with worldwide operations to thrive and compete in the global marketplace. In contrast to our competitors, the U.S. system taxes income regardless of where it is earned. As a result, U.S. global companies generally have a higher tax burden than non-U.S. companies — a significant disadvantage when competing for business in a global marketplace.  Manufacturers know firsthand that if U.S. companies can’t 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. Thus, in order to make U.S. multinationals more competitive, the NAM supports moving from the United States’ current worldwide tax system to a territorial tax system similar to systems in most industrialized countries.

Finally, we’re proud to say that the NAM is actively involved in the current debate on tax reform but not,  as the Post would have it  to “protect client interests.” Rather, Manufacturers’ goal is to secure a tax climate that encourages competitiveness and economic growth and  that benefits all businesses and families in the United States.

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Vote-A-Rama Gives Senators Chances to Make The Budget Work for Manufacturing

We’ve already said it but it bears repeating, the NAM appreciates the Senate’s advancing a budget plan for fiscal year 2014 (S.Con.Res.8). Manufacturers are concerned about the historically-high levels of the federal deficit and its impact on the national debt on manufacturing and the overall U.S. economy. We need a budget that marks a path to reduce the federal debt and deficits, focusing both on real and immediate spending cuts and longer term structural changes to our nation’s entitlement programs. We support comprehensive tax reform to promote economic growth and U.S. competitiveness. Unfortunately, the S.Con.Res 8 doesn’t accomplish these goals. However, the vote-a-rama that’s going on now, gives Senators a chance to support amendments that would improve the Senate budget and reject those amendments that would make the plan even more anti-growth and anti-manufacturing.

It’s no secret: our current tax system is broken and  discourages economic growth and U.S. competitiveness. That’s why comprehensive, revenue neutral tax reform is critical to our nation’s economic future. But, the S.Con.Res8 doesn’t include tax reform. Instead it proposes a $1 trillion tax increase. That’s why we support amendments to eliminate this jaw-dropping tax increase and support allowing Congress to advance pro-growth, revenue-neutral tax reform that would spur job creation and investment. Last night we informed the Senate that votes on an amendment by Sens. Grassley and McConnell seeking to strike the $1 trillion tax increase and replace it with a deficit neutral reserve fund for revenue neutral tax reform might be considered as “NAM Key Vote” for 2013. While the amendment failed, the fight is not over. We support Sen. Cornyn’s amendment requiring a supermajority of the Senate to increase tax rates on businesses and individuals.

Manufacturers lead in a lot of areas including in providing quality retirement benefits to their employees. We support amendments Sen. Burr’s amendments to protect these benefits from being a source of revenue for additional government spending. As the world’s leading innovators we strongly support Sen. Hatch’s amendment to preserve and make permanent the R&D tax credit—long been a priority for the NAM.

Many small and medium size manufacturers (SMMs) are family-owned businesses and that’s why we support Sen. Thune’s amendment that will allow for the full and permanent repeal of the estate tax.

We also oppose amendments that will make us even less competitive – amendments that seek tax increases on U.S. global companies. 95% of the world’s consumers live outside of the U.S. and yet U.S. tax laws make it difficult for U.S. companies with worldwide operations to thrive and compete in the global marketplace. To make U.S. multinationals more competitive, the NAM supports the adoption of a competitive territorial tax system as part of a comprehensive tax reform that also lowers the corporate tax rate and reduces rates for the SMMs that pay taxes through the individual tax code.

Speaking of increasing taxes, we support an amendment to repeal the Health Insurance Tax (HIT) included in ACA filed by Sen. Barrasso. This new tax—to be levied on health insurance companies beginning in 2014—will have the unintended result of increasing costs for many SMMs that provide health care benefits for their employees.

Finally, we support Sen. Coats’ amendment that would repeal the 3.8 percent investment income surtax also included in ACA and now in effect. When added to tax increases in the fiscal cliff deal, some taxpayers now pay nearly 50 percent more in taxes on these investments than they did last year. Increasing the tax on savings and investment reduces the amount of capital business owners have available to invest in their companies and we fear that this tax will ultimately result in the loss of vital funds needed for business operations and job creation and for that reason we support the amendment.

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