The Restoring American Financial Stability Act of 2010 unveiled this afternoon by Senate Banking Committee Chair Chris Dodd (D-CT) raises more questions and concerns for U.S. manufacturers. For one, manufacturers are disappointed that the new proposal does not make it clear that only businesses that are “predominantly engaged” in financial activities are covered by the overall reform.

Even though the thrust of the reform measure is to restore responsibility and accountability in the nation’s financial system, broadly worded definitions in the bill arguably could pull some non-financial companies into the new regulatory regime. Covered companies are defined as those with “substantial” financial activities and the Federal Reserve Board gets to decide who falls into the definition. Manufacturers that engage in routine financial activities as a small part of their main business, e.g., a global manufacturer that manages a foreign exchange trading operation, an equipment manufacturer that provides financing for customers, are concerned that they could be pulled into the systemic risk regulatory regime, drawing needed capital from their businesses and imposing new administrative burdens.

On the derivatives front, manufacturers were pleased to see that the definition of a “major swap participant” excludes OTC derivatives used to hedge business risk. Unfortunately, because it is not clear that business end-users who do not pose risks to the financial system are excluded from the definition, some manufacturers are concerned they could be considered a major swap participant. Another concern for manufacturers are requirements that they post margin on bilateral, customized derivatives contracts. End-users like manufactures do not pose a threat to financial stability and should be able to continue to access OTC derivatives without tying up valuable working capital.

On a brighter note, there may be more changes on the derivatives provisions during the Committee’s markup session, which could happen as early as next week. In comments this afternoon, Sen. Dodd noted that Sens. Judd Gregg (R-NH) and Jack Reed (D-RI) are working on a revised derivatives section that the committee could vote on next week.

• Text of draft legislation
• Summary of draft legislation (13 pages)

Dorothy Coleman is vice president for tax and domestic economic policy at the National Association of Manufacturers.

While promises to increase taxes on businesses, particularly those with operations overseas, may play well on the campaign trail, it’s clear that, when the dust settles, the rhetoric has no basis in reality. 

In today’s Washington Post, columnist Geoff Colvin does a good job of dispelling any notion that U.S. corporations are up to no good when it comes to the tax code.  In fact, the tax changes proposed by the Administration represent a major change in long-standing tax policy designed to “level the playing field” in a global economy where most countries tax business income at a lower rate.  At the end of the day, these proposals amount to a hefty tax increase on U.S. multinational companies.  The international tax changes, combined with other tax increases like the repeal of “LIFO” and the new carbon “tax and trade,”  are bad news for all of us.  As any economist knows, corporations don’t pay taxes, we—customers, shareholders and workers— do.

NAM’s vice president for tax and domestic economic policy, Dorothy Coleman, appeared on Fox Business News yesterday evening reacting to President Obama’s proposals to raise taxes on overseas earnings of U.S. businesses.

In addition to providing much needed stability to the financial markets, the Emergency Economic Stabilization Act of 2008  signed into law on Friday (President Bush’s statement) also includes a number of NAM’s tax priorities for the year:

1. A retroactive or “seamless” extension of the Research and Development Tax Credit through 2009. Since the R&D credit expired at the end of 2007, this is a two-year extension. The legislation also includes an increase in the alternative simplified credit (ASC) from 12 percent to 14 percent for 2009. In short, the bill includes a multi-year extension of a strengthened credit. The increase in the ASC is important to a number of companies, including smaller manufacturers that use the credit.  (For background, see the R&D Credit Coalition’s website, InvestinAmericasFuture.org.)

2. An extension of deferral of U.S. tax on active business global financing income, through 2009. This is a huge issue for manufacturers with overseas financing arms as well as financial service companies that do business overseas. Without this provision, these companies would be subject to immediate foreign and U.S. tax, i.e., double taxation, on any income from their overseas financial activities. If the companies had to pay double tax, they would not be able to compete with foreign financial service companies.

3. An extension of the look-through rules for payments between related foreign corporations, through 2009. This is a huge issue for many U.S. multinational companies. Very basically, the “look through rules” allow companies to move money between foreign operations without triggering U.S. tax.

4. Multiyear extensions of a number of incentives designed to encourage energy efficient and the development of alternative sources of energy, including a two-year extension of the production credit for facilities that produce energy from renewable sources and an eight-year extension of the investment tax credit for solar energy and fuel cell property.

The bill also includes an NAM-supported AMT/ISO provision designed to help employees (notable in the high-tech industry) that received incentive stock options (ISOs) that generated “phantom income” when stock prices took a nose dive. Many of these employees were forced to pay a significant amount of AMT. Several years ago, Congress did pass some relief for them-this provision finished the job. The bill also includes an NAM-supported provision that reduces the depreciation period for farm equipment from seven to five years, a change long sought by equipment manufacturers.

One the downside, the bill does include three revenue raisers, opposed by NAM, that increase taxes for the oil and gas companies by about $9 billion over ten years. Specifically, the legislation would freeze the Section 199 deduction for income from domestic production activities at six percent for oil and gas companies, tighten rules on the use of foreign tax credits for the oil industry and extend and increase the excise tax rate for the Oil Spill Liability Trust Fund.

As the NAM’s “key vote” letter to the Senate commented, “We believe the unintended consequences of these provisions could leave American consumers and manufacturers more reliant on foreign energy sources and result in higher energy prices.” 

The text of the legislation, including the tax sections is posted at the House Financial Services committee’s website. A revenue table listing the budget impact of the tax provisions is posted at the Joint Committee on Taxation’s website here.  

The Senate Judiciary Committee this morning held a hearing, “Barriers to Justice: Examining Equal Pay for Equal Work,” featuring Lilly Ledbetter, now an active campaigner in person and TV ads for Senator Barack Obama’s presidential campaign.

Passage of any Ledbetter-endorsed legislation is now far-fetched this session of Congress, if only for timing, so today’s hearing was a partisan exercise. But as is custom, at least one witness was given a chance to present contrary points of view; in today’s case it was  Lawrence Lorber of Proskauer Rose. In his testimony, Lorber addressed H.R. 1338, the Paycheck Fairness Act, recent employment law cases before the Supreme Court, and the harm that class-action lawsuits cause in employment law.

For more on today’s hearing and Ledbetter litigation/legislation, see these posts at Point of Law:

• The Senate Judiciary hearing on Ledbetter, fair pay
• One last Ledbetter appearance in Congress