The research and experimentation tax credit — aka the R&D tax credit — is intended to be an incentive for companies to invest in critical domestic R&D, which creates high-wage jobs here in the U.S. and leads to the innovative products and new technologies that are so important to our economy. Unfortunately, it’s been almost a year since the R&D credit expired, increasing costs and creating uncertainty for thousands of manufacturers conducting R&D. (continue reading…)
NAM continues to urge Congress to act on tax extenders as soon as possible as a bridge of certainty until comprehensive tax reform can be enacted.
The NAM is leading meetings with members of the House and Senate to call on Congress to act immediately when they return for the Lame Duck session to enact a package of over 50 expired and expiring tax provisions, typically called “tax extenders”. Several expired tax provisions are integral for manufacturers to innovate, grow, and compete in the global marketplace. These provisions include the R&D tax credit, enhanced Section 179 expensing, bonus depreciation, the “look-through” rule for controlled foreign corporations (CFCs), and deferral for active financing income. In the coming weeks, the NAM will outline in a series of Shopfloor Blog posts exactly how important these provisions are to the U.S. economy.
Manufacturers are not alone in calling upon Congress to act to restore the expired tax provisions immediately. Recently, IRS Commissioner John Koskinen wrote in a letter to Senate Finance Committee Chairman Ron Wyden (D-WY) that Congress should act on tax extenders no later than November to avoid disruptions and delays to the 2015 tax filing season. In the letter, Koskinen points out that the uncertainty in whether and when Congress may reinstate the expired tax provisions could delay the 2015 filing season and “delay the processing of tax refunds for millions of taxpayers.” The Commissioner also warned that waiting until 2015 to extend the provisions would be even more problematic.
NAM members echo these concerns, and want Congress to know that a failure to enact a retroactive extension of the tax extenders by the end of the year equates to a tax increase on U.S. manufacturers.
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.
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.
The NAM continues to believe that recent M&A activity in the international arena strengthens the case for a comprehensive overhaul of the nation’s tax laws and the focus on regulatory fixes or targeted legislation is misplaced. While we will take a close look at the guidance released today by the Treasury department, comprehensive tax reform is essential to unleashing the economic growth we so badly need. The NAM will continue to ensure that Washington doesn’t change the discussion and keeps its focus where it belongs – on pro-growth, pro-competitiveness tax reform.
Dorothy Coleman is the Vice President of Tax and Domestic Economic Policy for the National Association of Manufacturers
Several pension issues important to manufacturers were front and center this week during a House Ways and Means Subcommittee hearing on Private Employer Defined Benefit Pension Plans.
Subcommittee Chairman Pat Tiberi (R-OH) outlined his interest in private pension issues during his opening statement, explaining that his focus for the hearing would examine problems facing both multiemployer and single employer pension plans.
Multiemployer defined benefit (DB) pension plans are those sponsored by more than one employer and maintained as part of a collective bargaining agreement. In recent years, more employers have left these plans either voluntarily — requiring the payment of a significant “withdrawal liability” — or through bankruptcy. As one witness at the hearing explained, the employers left in the plan are responsible for the risk of others leaving the system. Over the next twenty years, a few large multiemployer plans are expected to become insolvent, and the insurance backstop for the multiemployer plan system, the PBGC, may not have the resources necessary to cover plan participants if these larger plans go under.
Several committee members acknowledged the difficulties facing multiemployer plans and asked witnesses how Congress could best solve the problem. Witnesses responded that recommendations of the National Coordinating Committee for Multiemployer Plans, entitled “Solutions not Bailouts,” would be an important roadmap for reform. Manufacturers that sponsor multiemployer pension plans urge Congress to move forward on reforms now to provide certainty for the future of the multiemployer pension plan system for workers and employers alike.
Another area in need of reform addressed at the hearing deals with the nondiscrimination rules for single employer pension plans set up to prevent bias toward more highly compensated participants, an area we have blogged about previously. As more employers transition from DB pension plans to 401(k) and other defined contribution (DC) plans, many have done so gradually by closing their DB plan to new hires (and offering these new workers a DC retirement plan instead) but allowing existing employees to remain in the DB plan. Unfortunately, these plans would naturally violate nondiscrimination testing rules over time as the existing employees advance in their careers and become more highly compensated. Without a change to the current rules, companies may be forced to completed close their DB plans to avoid tripping the test.
While the IRS has provided temporary relief for these plans, the NAM wrote to the IRS seeking a permanent solution. Manufacturers applaud the leadership of Congressmen Tiberi and Richard Neal (D-MA) in introducing a bill (H.R. 5381) to alleviate the nondiscrimination problem once and for all. The NAM urges Congress to pass this bill as soon possible.
Attention was also given during the hearing to the significant costs associated with sponsoring DB plans. We have written many times before about the financial burden of PBGC premiums, but the hearing touched on a new issue that could increase pension liabilities for manufacturers in the future: updated mortality tables. Approximately every ten years, the Treasury Secretary must review applicable “mortality rates” for plan funding requirements. As a major component of this effort, the Society of Actuaries (SOA) has worked to update mortality table data, which the IRS will later review for use in calculating funding liabilities. The SOA released a draft in February and is expected to finalize their new mortality study this October, which will reflect that plan participants are living longer than they were a decade ago. With this longer lifespan comes a potential increase (of 4 to 8 percent depending on plan demographics) in plan liability calculations for plan sponsors. The NAM will continue to work to share information with manufacturers about this effort and the potential for higher costs associated with their DB plans in the future.
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.
Manufacturers in the United States were taken aback this weekend when word leaked out that the senior Senator from New York and long-time member of the Finance Committee –Chuck Schumer (D)—is floating a tax increase proposal that would actually reach back 20 years to discriminate against certain businesses that play a critical role in the U.S. economy. While it appears that the Senator’s goal is to discourage recent M&A activity in the international arena (aka inversions), the proposal would actually discourage important foreign direct investment in the United States and set a dangerous precedent for changing tax rules mid-stream, injecting even more uncertainly in our nation’s shaky tax system.
Specifically, what Sen. Schumer’s proposal would do is significantly limit interest deductions for some non-U.S. domiciled companies that were headquartered in the United States at some point in the past 20 years. In laymen’s terms, this would be similar to limiting the deduction for a homeowner’s mortgage interest depending on where they were born. In both cases, it adds up to discriminatory tax policy. At the same time, adopting this revisionist approach to tax policy would open to door to similar proposals affecting other tax deductions and other groups of tax payers, and promulgating even more uncertainty in our uncertain times.
The proposal from Sen. Schumer seems to disregard the very important role that foreign direct investment plays in the U.S. economy and discriminates against non-U.S.-headquartered companies that play an important role in the U.S. economy. Indeed, U.S. subsidiaries of foreign companies employ more than 2 million U.S. workers, over 17 percent of America’s manufacturing workforce. The ability to deduct interest expense is a critical factor in a company’s decision to invest and create jobs in the United States.
As we’ve noted many times before, the NAM believes that recent M&A activity highlights the critical need for a comprehensive overhaul of the U.S. tax system to reflect the global marketplace of the 21st century. In short, the answer is comprehensive tax reform, not punitive tax treatment of foreign-owned companies.
Dorothy Coleman is the Vice President for Tax and Domestic Economic Policy at the National Association of Manufacturers.
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.
Manufacturers continue to tell Congress that failure to renew the expired tax provisions typically contained in the “tax extenders” package creates unnecessary uncertainty and sidelines business investments. Now, even the agency responsible for carrying out U.S. tax laws is joining the debate.
Stating he is “concerned” that Congress will likely not approve a tax extenders package until later this year, John Dalrymple, the IRS deputy commissioner for services and enforcement, said this week that he hopes Congress will pass extenders as soon as possible to give the agency enough time to make the necessary systems changes for the tax filing season.
The NAM has long been pushing Congress to act ASAP to renew the expired tax provisions since the absence of the R&D tax credit, enhanced Section 179 expensing, bonus depreciation and other important tax incentives are having a negative impact right now. Without these incentives in place and without a clear view of when and for how long they will be renewed, manufacturers cannot incorporate new investments into their future business plans. Since investments translate into production and expansion, every day that goes by without these incentives in place is a missed opportunity for growth in manufacturing and in turn, the U.S. economy.
The House has already acted to make permanent several pro-manufacturing tax provisions typically found in the extenders package, but the Senate has not yet passed their extenders bill, the EXPIRE Act. Earlier this year, the NAM joined over 150 organizations in writing to Senators in support of the bill, and continues to meet with Congress to urge that the expired tax provisions be reinstated as soon as possible. After all, eight months is far too long for the U.S. to be sitting on the sidelines while our global competitors continue to incentivize productive business investments.