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Bonus Depreciation Thwarts Partisanship

Yesterday more than 100 associations, representing a cross section of industries on the front line trying to grow and create jobs in a fragile economy, urged in a letter to conferees on the payroll tax cut extension bill HR 3630 to include in the final conference agreement an extension of 100% bonus depreciation (sometimes referred to as 100% expensing) through 2012.

This provision has garnered bipartisan, bicameral support as well as the support of the White House. The broad support is due in part to the fact that bonus depreciation allows manufacturers to write off the full cost of capital investments, e.g. plant machinery and equipment, in the year of purchase rather than over the depreciation life of the capital investment, which typically span 10 to 20 years.

Given our fragile economy, this provision gives a temporary boost to the customers who want to buy and the suppliers who want to manufacture capital equipment in the USA.  Jobs are maintained and created. Just ask small manufacturer Campbell Fittings of Boyertown, PA, about job creation related to this provision effective for past 2 years. Bonus depreciation drove his company’s decision to make more capital investments that resulted in hiring 40 new workers in the past 15 months to run the new equipment. If 100 percent bonus depreciation were extended through 2012, he plans to make more capital investments.  The new equipment allows his company to compete with foreign competitors. 

Today’s Wall Street Journal article “With Tax Break Corporate Rate is Lowest in Decades” was disingenuous in citing a price tag of $55 billion in each of the past two years for bonus depreciation.  Bonus depreciation is a timing issue, and as such, that means companies can write off the cost of a $100,000 piece of new machinery purchased this year and thus would not be taking depreciation for the next nine years for a typical piece of machinery.  

Kudos to Congress and the Administration in recognizing this private sector job creating provision given our abysmal unemployment rate exceeding 8 percent. Capital investments equal putting people back to work.

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Simplifying State Taxes for the Mobile Workforce

Bipartisan action in Congress can happen and did occur today as lawmakers in the House Judiciary Committee favorably reported HR 1864, the “Mobile Workforce State Income Tax Simplification Act of 2011.”  This bill represents a commonsense tax simplification for both employers and employees by creating a bright line test to establish fair and uniform rules clarifying that states cannot assess income taxes on non-resident employees who temporarily work in a state.

If the bill is enacted, nonresident employees who work in a state for 30 days or fewer during a calendar year would not have to file a state income tax return or pay state income taxes to the nonresident state. Also, employers would no longer be required to calculate and remit state income tax withholdings for these short work periods.  Some 30 states currently have laws requiring non-resident employees to pay state income taxes based on working only one day in the non-resident state.

The yearly ritual of filing taxes causes enough nail biting and the thought of having to file an additional state income tax return simply because an employee worked one day in a non-resident state seems beyond absurd.  This prudent legislation would eliminate some of the unreasonable tax filing burdens imposed on both employees and employers.  HR 1864 would be a win-win situation bringing common sense tax change for job creators and workers and we will strongly advocate that this legislation be brought before the full House for a vote as soon as possible.

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Business Coalition Weighs in on Need for Tax Extenders

Once again a number of important tax incentives are scheduled to expire on December 31st, clearing the way for a tax increase on millions of U.S. taxpayers that benefit from these provisions. Manufacturers have an interest in a number of these provisions including the Controlled Foreign Corporation (CFC) look through rules, deferral for active financing, and the R&D tax credit that help us create and retain jobs and compete in the global marketplace.

Because of the importance of these and other provisions to the business community, the NAM today joined more than 1,500 other companies and organizations on a letter to all members of Congress urging them to act quickly to extend these pro-growth, pro-job provisions.

While many in Congress focus on much-needed tax reform, the letter makes a strong case for why these “extenders” can’t wait until negotiators agree on how to revamp the tax code.

“The lack of timely congressional action to extend these provisions would inject more instability and uncertainty into the economy and further weaken confidence in the employment marketplace… Even though Congress has begun to consider tax reform proposals, a wide-ranging group of taxpayers is making decisions right now related to current law which will have an immediate impact on the economy.”

Plain and simple, “tax extenders” mean jobs and competitiveness for the U.S. economy It’s something that we can ill-afford to wait for in these unsettled economic times.

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NAM Joins Bipartisan Effort to Support SAVE Act

Job creation and increased supply and demand in the manufacturing community is a centerpiece of bipartisan legislation introduced today by Sens. Michael Bennet (D-CO) and Johnny Isakson (R-GA). With support from manufacturers and other business leaders, they introduced the Sensible Accounting to Value Energy (SAVE) Act, which would improve the ability of federal mortgage loan agencies to determine the energy costs a homeowner can expect to pay over the life of a mortgage and would increase taxpayer qualification of federal mortgage loans for energy-efficient homes. 

The benefits to this bill are clear – it will offer homeowners reasonable financing options to make their homes more energy efficient. As a result, manufacturers and their employees across the U.S. stand to see a significant increase in demand for energy-efficient products, ranging from insulation to HVAC units and more. 

CEO of Johns Manville Todd Raba speaks about the SAVE Act

CEO of Johns Manville Todd Raba speaks about the SAVE Act

According to recent studies, homeowners spend approximately $2,200 on energy costs per year – a number that remains high due to barriers in mortgage financing of energy-efficient improvements. If federal mortgage loan agencies are allowed to account for these expenses at the outset of a home purchase, homeowners could properly plan for upgrades that will save them money in the long run while creating immediate manufacturing demand. 

In today’s struggling economy, the SAVE Act is expected to create approximately 83,000 jobs in a variety of industries across the country. This is a win-win solution for the economy, the environment, job seekers and manufacturers. 

Monica McGuire is senior policy director for taxation, National Association of Manufacturers.

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A Bittersweet Anniversary for the U.S. Research and Development (R&D) Tax Credit

The U.S. R&D tax credit, a proven tool for spurring innovation and creating jobs, has a bittersweet 30th anniversary on August 13. Bittersweet because the credit, the best R&D incentive in the world in the mid-1980s, is one of the weakest today.

This negative trend is bad for manufacturers and the economy, especially now that other countries aggressively court American manufacturers to move their domestic research by offering better and often permanent R&D tax incentives.  (To learn more about what other countries are offering, read this Deloitte survey of R&D tax incentives around the world.)

These countries have discovered the multiple spillover and societal benefits, like a higher standard of living, associated with the innovations derived from research. For sure, there has been a steady increase in the migration of domestic research offshore–the U.S. share of global R&D has dropped from 39 to 33 percent in less than a decade as more nations have entered the race to attract R&D dollars.

The credit’s power to spur innovation and create jobs hasn’t been helped by its history of lapses and retroactive extensions. Since its enactment in 1981, the credit has expired 14 times, including a one-year lapse in the mid-1990s that was never reversed—and the credit is set to expire once again at the end of this year.  The uncertainty caused by these stop-and-go credit extensions has had a damaging impact on companies’ future R&D budgets because companies cannot rely on the credit to exist for the duration of a research project, which typically spans 5 to 10 years for manufacturers.

R&D fuels innovations and technological advances that drive new product development and increased productivity—key factors necessary for growth in the manufacturing sector.  Many lawmakers are voicing repeated interest in creating a pro-manufacturing climate in the United States.  Now they can turn their words into action, specifically through enactment of H.R. 942, bipartisan legislation that would strengthen the alternative simplified research credit rate to 20 percent from its current 14 percent, and make it permanent.  There is a long history of bipartisan, bicameral congressional support as well as presidential support for a strengthened, permanent R&D tax credit.  Future anniversaries of the credit would be sweeter if the U.S. R&D tax credit’s incentive value is restored to a position of global leadership.

 
For more information about the R&D credit, visit the website of the R&D Credit Coalition.

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President Proposes Expensing, Would Boost Manufacturing Investment

Manufacturers, the largest sector using expensing, a tax provision that lowers the cost for companies making new business investments, such as in machinery and equipment used on the plant floor, got a boost today by the President’s proposal in support of temporary expensing from September 2010 through 2011. President Obama outlined the plan during a visit to the Stromberg Sheet Metal Works facilities in Beltsville, Md. (Remarks.)

This proposal, if not counteracted by punitive tax increases on business, is a way to boost job creation for the workers needed to build and the workers needed to run the new machinery.

With 2010 3Q GDP today registering anemic 2 percent growth and a relentless unemployment rate hovering at 9.6 percent, increased expensing is a proven, effective tool for powering new jobs. In fact, increased expensing was successfully launched by both a Republican Administration after the 2001 terrorist attacks as well as by the current Democratic Administration in recent stimulus laws. This issue might be just the trick (no pun intended on this eve of the eve of Halloween) to foster bipartisanship consensus at both ends of Pennsylvania Ave — between Congress and the Administration.

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Depreciation in Small Business Loan Bill Spurs Investment, Jobs

President Obama this afternoon signed into law H.R. 5297, the Small Business Jobs and Credit Act, which allows businesses of all sizes to immediately write-off 50 percent of the cost of depreciable property purchased and placed in service anytime during 2010.  This provision is a temporary extension of the bonus depreciation provision included in both the 2008 and 2009 economic stimulus laws.  The new law also includes a provision that increases Section 179 expensing for two years by increasing the expense limitation to $500,000 with a phase-out threshold of $2 million for years 2010 and 2011.

The bonus depreciation provisions will encourage manufacturers to make investments that create jobs.  For example, Joseph McGlynn, executive vice president of Campbell Fittings Inc., a small manufacturer of industrial hose couplings in Boyertown, Pa., is working now to purchase factory floor equipment that will be eligible for the 50 percent  bonus depreciation extension available thanks to the new law. The company plans to hire an additional 4-5 employees to run two new pieces of equipment it hopes to purchase and have operating before year’s end.   

For a technical explanation of the new investment incentives, see pages 7-15 of the Joint Committee on Taxation technical explanation.

Details on the 2010 bonus depreciation and expensing provisions, prepared by Deloitte, can be viewed on the NAM website on pages 2 and 3.

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New Business Investment Tax Incentives Will Encourage Hiring

As the continued anemic economic recovery with high unemployment challenges manufacturers, bravo that Congress finally acted, albeit nine months into the year, in passing a proven business capital investment tax incentive that garnered bipartisan support.  Specifically, the tax relief included in the now-passed Small Business Jobs and Credit Act , H.R. 5297, will allow businesses of all sizes faster recovery of investment costs by permitting businesses to immediately write-off in the first year 50 percent of the cost of depreciable property purchased and placed in service in 2010.*

Jobs will be saved and jobs created with this investment incentive, as there are customers who want to buy and sellers who want to sell new equipment.  And it takes workers to manufacture and run such equipment.  The positive ripple effect of this new law will be immediate. 

After yesterday’s House passage of this provision, two testimonials quickly arrived in my e-mail. One Midwest small manufacturer reports he will now spend $150,000 on new equipment and hire seven full time employees and one part-time employee to operate the new plant equipment. Another East Coast small manufacturer told me he is quickly ordering new equipment and will hire an additional 4-5 more employees to run it. 

Bonus depreciation will allow manufacturers to act, that is, to purchase and sell machinery and plant floor equipment and put workers back to work. We look forward to President Obama signing the bill on Monday.

* The bonus depreciation extension in H.R. 5297 — which passed by a vote of 237-187 – is a temporary extension through 2010 of the bonus depreciation included in both the 2008 and 2009 economic stimulus laws.  The President’s Fiscal Year 2011 Budget included an extension of bonus depreciation through 2010. Also included in the new law is an increase in Section 179 expensing for two years. 

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Facing the Reality of Global Competition with an R&D Tax Credit

The Wall Street Journal last weekend published an op-ed by Tufts University professor Amar Bhidé arguing against the efficacy of the federal research and development tax credit, “Don’t Expect Much From the R&D Tax Credit.”

Bhidé’s argument falls short because he barely acknowledges the global competitive realities faced by manufacturers in the United States, including the growing race for R&D investment dollars worldwide. (It’s an odd oversight coming from a professor from Tufts, an institution with a sterling reputation for studies in diplomacy and international economics.)

Congressional failure to renew the R&D tax credit, which expired last December, would represent a unilateral surrender in this competition. Innovation and jobs would both suffer as companies adjusted their domestic R&D to reflect the U.S. abandoning the race.

A few key facts:

  • In 2009, 21 OECD countries offered R&D tax incentives — 16 of which offered stronger incentives than the United States — compared to just 12 OECD in 1996. This 75 percent increase over 15 years is anything but coincidental, but rather a targeted effort by countries to jumpstart technological advancements and innovations by the private sector.
  • The U.S. share of global R&D has fallen from 39 percent in 1999 to 33 percent in 2007, while China’s share increased fourfold. (Source: Organization for Economic Co-operation and Development, “Ministerial Report on the OECD Innovation Strategy,” May 2010)
  • China surpassed Japan’s ranking in 2009, taking the No. 2 spot behind the U.S. in world R&D spending.

Nearly 18,000 companies use the credit, far more than just the largest companies with large R&D budgets. Indeed, companies of all sizes doing R&D on American soil continue to be courted, in some cases aggressively, by other countries to move their U.S.-based R&D offshore.

The U.S tax credit is available only for research and development performed in the United States. IRS statistics further show that the R&D credit is a jobs credit – 70 percent of the claims made against the credit are for employee salaries.

Manufacturers are keenly aware of the tax credit’s incentives and impact. The manufacturing sector accounts for nearly 70 percent of R&D credit claims and performed 70 percent of all business R&D in the United States. The emphasis is understandable: R&D fuels the innovation that drive new product development and increased productivity — two necessary factors for growth in manufacturing.

The professor’s arguments make might sense in a theoretical setting, but manufacturers live in the real world where many countries are competing for companies that do research and development. From a manufacturer’s perspective, a more accurate title for Professor Bhidé’s op-ed might have been, “Don’t Expect Much if the R&D Tax Credit is NOT Renewed, Strengthened & Made Permanent.”

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Dead Last in the Global Race for R&D Investment Dollars

It is no secret that the United States’ position as a world leader in research and development is slipping as the world gets flatter, evidenced by the growth of R&D popping up around the globe, attracted by more generous R&D tax incentives. With major U.S. trading partners offering refundable R&D credits or super tax deductions, the attraction for U.S.-based R&D to move offshore is proving to be strong. No surprise when the French minister of Higher Education and Research visited Washington, D.C., this month that she touted her government’s R&D tax incentive as the best one offered among EU countries. In the mid-1980s, the U.S. had the strongest R&D tax incentive among OECD countries. By 2009, the U.S. R&D tax credit ranked 17 out of 21 countries offering an R&D tax incentive. Today, the United States ranks dead last with an expired credit!

And prospects for renewing the U.S. R&D tax credit this year grow dimmer as Congress fails to act despite bipartisan, bicameral support and President Obama’s repeated championing of the credit. Manufacturers are the biggest users of this jobs credit, claiming nearly 70 percent of R&D credits. Why? Because R&D fuels innovations and technological advancements that translate into new products and increased productivity—two necessary components for growth in manufacturing.

With the manufacturing sector having lost two-plus million jobs in the recession that began in December 2007, a sure bet to keeping high skilled, high wage R&D jobs in the United States is to seamlessly renew the credit in the short term, and strengthen and make permanent the credit in the long term. More than 70 percent of R&D Credit dollars are attributable to wages, U.S. wages only, because the credit only applies to research performed in the United States.

With unemployment hovering around 10 percent, swift congressional action to renew the credit would be a formidable step in saving and in comes cases creating jobs, in addition to boosting the incentive value of the Credit because companies would be certain that the credit will be available for R&D done in the United States in 2010. I hope House Majority Leader Hoyer’s public comments of July 23, “My own personal view would be to make it retroactive again” become true. The credit has been extended temporarily 13 times since it was enacted in 1981, 10 times packaged with permanent tax increases and the remaining times with other tax increases. There was a permanent gap of no credit from mid-1995 to mid-1996. To have an anemic credit restored is better than to have no credit at all, if the United States is serious about competing in the global race for R&D investment dollars.

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