Taxation

Manufacturers Support Pension Law Clarification

There is no question that maintaining a traditional defined benefit pension plan comes with significant complexity and costs for the manufacturers that sponsor these plans. We have written before about the millions of dollars manufacturers must pay the Pension Benefit Guaranty Corporation (PBGC) in the form of premiums, but manufacturers are also running up against further costs as a result of the PBGC’s interpretation of an existing pension law.

Under Section 4062(e) of the Employee Retirement Income Security Act (ERISA), companies with traditional pension plans must notify the PBGC when they cease operations at a facility and 20 percent of employees in the pension plan are separated from employment. The PBGC then determines if the company is liable for providing financial security to the pension plan. Unfortunately, the PBGC has been interpreting the law in an overly broad manner and undertaking enforcement measures even if it is not clear that a 4062(e) triggering event occurred.

As a result, manufacturers are holding off on making important changes to their business operations, such as closing a plant in an inconvenient location and moving employees to another location, because the liability requirement can force the company to sideline millions of dollars away from productive business investments.

The NAM met with the PBGC twice this year as well as the Department of Commerce to voice the concerns we have heard from manufacturers facing 4062(e) liability. Soon after these meetings, the PBGC announced that they would place a moratorium on their enforcement of 4062(e) until the end of 2014.

While the moratorium is a positive first step, manufacturers need the certainty of a permanent solution. To that end, Senators Tom Harkin (D- IA) and Lamar Alexander (R-TN) introduced legislation (S. 2511) to clarify the definition of substantial cessation of operations contained in Section 4062(e) so that manufacturers will know exactly what type of changes to business operations will trigger liability.

The NAM wrote a letter supporting the Harkin-Alexander bill, which was approved by the Senate Committee on Health, Education, Labor, and Pensions Committee today by voice vote, and urges the Senate and House to pass S. 2511 as soon as possible.

 

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Manufacturers Be Aware: Money Market Fund Reform Rules are Now Finalized

For years, regulators have threatened to impose new reforms on money market funds (MMFs) in an attempt to reduce the risk of future runs and maintain financial stability. Today, by a 3-2 vote, the Securities and Exchange Commission (SEC) approved final rules that will change the way MMFs operate. Since many businesses use MMFs to meet short term financing and investment needs, manufacturers should be aware that these new rules may impact how manufacturers manage cash.

The new rules, effective over a two year transition period, require that institutional prime funds adopt a floating net asset value (NAV) instead of using the current stable value, meaning that the share price will fluctuate. The rule also implements new discretionary liquidity gates and fees for all non-government MMFs.

After the reforms were proposed last year, the NAM, in a joint letter to the SEC, noted that the floating NAV may carry negative accounting, tax, and operational implications. The NAM also requested that the SEC hold a roundtable on the proposal to gain the perspective of key stakeholders before any changes are finalized – a request that was unfortunately ignored. The NAM has blogged before about the negative impact that the proposed MMF reforms could have on manufacturers and other business. For example, moving to a floating NAV could cost investors up to $2 billion initially and close to that amount in annual operating costs.

In her statement, SEC Chairman Mary Jo White said the Commission has worked to address at least one concern raised by the business community regarding the additional tax burden that the floating NAV would bring. To that end, the Department of Treasury and Internal Revenue Service will release guidance and proposed rulemaking today aimed at providing relief through a simplified aggregate tax accounting method and exempting investors from tracking individual transactions for tax reporting.

Republican Commissioner Daniel Gallagher voted in favor of the final rule, stating that his support had been contingent upon fixing the tax issue. On the other hand, Republican Commissioner Michael Piwowar told his fellow Commissioners that the public should have the opportunity to review and weigh in on proposed IRS tax rules before the SEC’s MMF rules are finalized, and opposed the rule for this and other reasons.

Now that the rules are final, manufacturers should consider the costs and administrative impacts that moving to a floating NAV, along with potentially paying fees or facing a gate when trying to redeem cash from a fund fees, will have on their cash management practices. Manufacturers should also review the proposed tax changes that the Treasury and IRS release today and consider if they adequately provide relief from additional tax reporting burdens.

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TRIA Reauthorization Passes Senate with Strong Support from Manufacturers

This week, in a rare moment of bipartisanship, the Senate passed Terrorism Risk Insurance Act (TRIA) reauthorization legislation. The program was created during the aftermath of 9/11 when primary insurers and reinsurers ceased to provide coverage for terrorism events. While it has never been used, the program provides a federal “backstop” in case of a catastrophic event.  Under TRIA, once claims against the insurance industry reach $100 million, the government would pay a portion of a company’s insured losses, after the insurer pays a deductible. The law caps the government’s annual liability at $100 billion and requires [] the Secretary of the Treasury to impose surcharges on property/casualty insurance policies to recoup 133 percent of outlays to insurers under the program.

So why is this important for manufacturers? TRIA has prevented the cost of workers’ compensation (WC) from increasing significantly. Unlike other lines of insurance, WC statutes rigidly define the terms of coverage so, without TRIA, insurance companies would limit their exposure by raising premiums and declining coverage to employers facing high terrorism risk. Because WC coverage is mandatory for nearly all U.S. employers, manufacturers operating in areas deemed to have a high risk of terrorism would be forced to purchase coverage in alternative markets, at a significantly higher cost.

Manufacturers support TRIA because it ensures that businesses in high-risk areas have access to affordable terrorism coverage and taxpayers are protected from any losses.  The NAM is pleased that S.2244, the Terrorism Risk Insurance Program Reauthorization Act passed with overwhelming bipartisan support – a vote of 94-3. We hope that the House passes its own reauthorization legislation that allows terrorism coverage to be available and affordable for all manufacturers.

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Setting the Record Straight

There’s no doubt that the U.S. tax code— which includes the developed world’s highest corporate tax rate, outdated international tax rules and a host of temporary provisions—is a drag on economic growth and competitiveness. And while Manufacturers continue to push for comprehensive tax reform, NAM members recognize that, until that happens, we have to operate and compete under the current system. Unfortunately, that reality is being largely ignored in the current rhetoric flying around Washington about corporate inversions.

In today’s Wall Street Journal Miles White, the Chairman and CEO of Abbott Laboratories, sets the record straight on the realities of the U.S. tax system in his oped,  Ignoring the Facts on Corporate Inversions, and notes that legislation to block inversions would simply make a bad system worse. We agree strongly with Mr. White that piecemeal proposals to change the tax code will do more harm than good and the real solution is one Manufacturers have been pushing for all along, “fact-based, thoughtful, comprehensive [tax] reform.”

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House Votes to Ease Regulation of Non-Banks Under Dodd-Frank

The  Dodd-Frank financial reform law enacted in 2010 in response to the crippling financial crisis imposed new regulations on financial markets and companies. Unfortunately, the law’s vast reach sweeps manufacturers into areas of new oversight and regulation, even though manufacturers had nothing to do with the financial crisis.

We have written many times before about the negative impact of Dodd-Frank derivatives requirements on manufacturers, but another provision of the law, which grants broad regulatory authority over companies involved in financial activities, threatens to designate some manufacturers as systemically important financial institutions (SIFIs).

The Dodd-Frank Act created a council of regulators made up of representatives from several different regulatory bodies called the Financial Stability Oversight Council (FSOC) that is charged with identifing existing or emerging systemic risks to the financial system. Section 113 of the Act authorizes the Council to consider whether a nonbank financial company could pose a threat to financial stability and if they determine that there is a threat, then they can subject that company to Federal Reserve supervision and “enhanced” prudential standards – aka more regulation.

The problem is the FSOC looks at a company’s size and scope as part of its determination for what is a nonbank financial SIFI, threatening some large global manufacturers that must engage in lending and financing as part of their everyday course of business. Despite the global reach of these companies, manufacturers did not contribute to the financial crisis and do not engage in the same type of financial activities that banks do, especially not ones that would threaten the financial system. A SIFI designation can bring unnecessary costs for companies that could be put to better use by investing in the business and creating jobs. The NAM wrote to FSOC previously to express concerns with their proposal.

FSOC has already begun to designate companies as nonbank SIFIs, but the House this week adopted an amendment to the financial services appropriations bill offered by Rep. Garrett (R-NJ) to the put an end to this process by ceasing funding for the FSOC designation of non-bank companies as SIFIs. Manufacturers that need to be engaged in financing large projects or machinery as a part of their regular business, should not be regulated as if they were large banks.  The NAM applauds the House action. Global manufacturing companies already face enough challenges remaining competitive internationally, and the NAM will continue to support efforts aimed at preventing unnecessary regulation of these businesses.

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Support the United States: Enact Comprehensive Tax Reform

Manufacturers in the United States have struggled to compete under our nation’s broken tax system for years so it’s natural that the NAM is a leader in calling for pro-growth, pro-competitive tax reform. Even though some say tax reform is “stalled” in Congress, NAM continues a constant drumbeat on the need to reform our nation’s tax code to bring us into the 21st century. Indeed, our voices are getting louder by the day as we see Washington policy makers drag their feet on reform or, worse yet,  suggest one-off changes to the tax code to address problems that would be eliminated entirely by overall reform.

While the NAM is a strong advocate for comprehensive reform of our current tax code, we also believe it is critically important to keep our current tax system in place until policymakers agree on a final reform plan. Piece-meal changes or repeal of long-standing rules will inject more uncertainty into business planning, making U.S companies even less competitive and threatening economic growth and U.S. jobs. A key objective for the association, as outlined in NAM’s “A Growth Agenda: Four Goals for a Manufacturing Resurgence in America,”[1]  is to create a national tax climate that promotes manufacturing in America and enhances the global competitiveness of U.S. manufacturers.  Manufacturers want the United States to be the best place in the world to manufacture and attract foreign direct investment. The way to do this is to enact a pro-growth, pro-competitive tax code

[1] Available at http://www.nam.org/

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Dodd-Frank Relief for End-Users, Still A Focus Four Years Later

During two separate events today, current and former Senators spoke about making Dodd-Frank derivatives requirements work better for manufacturers, an issue championed by the NAM ever since the financial reform law passed in 2010.

Senator Jon Tester (D-MT), lead cosponsor of a bill (S. 888) introduced by Sen. Mike Johanns (R-NE) to exempt end-users from margin requirements, questioned Federal Reserve Chair Janet Yellen today on the topic of Dodd-Frank in a Senate Banking Committee hearing. Senator Tester asked Chairman Yellen if she is comfortable with exempting end-users from costly margin requirements given the minimal risk they pose to the overall market. Chairman Yellen responded with a succinct “yes,” essentially supporting the legislative fix that Senators Tester and Johanns have been attempting to advance in the U.S. Senate.

Meanwhile, during an event at the Bipartisan Policy Center, Chris Dodd, the former Democratic Senator from Connecticut and lead author of the Dodd-Frank law, spoke about the law as we near its fourth anniversary. Dodd responded to a NAM question on the need to clarify the end-user exemption by saying he “would not be hostile to the idea of revisiting” areas of Dodd-Frank that would make the law “more hospitable to the people of the manufacturing sector.”  Senator Dodd explained that a challenge with doing so continues to be the current political environment, as bringing even a narrow Dodd-Frank clarification to the Senate floor may open up the law to other, more substantial, changes seeking to unwind the law.

Still, the NAM will continue to lead the charge in seeking a clear end-user exemption from unintended derivatives requirements.

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Good News from Capitol Hill: the House Votes to Permanently Ban Taxes on the Internet

Amid persistent reports of historic gridlock in Washington, there was a brief flash of bipartisanship in the House this afternoon when representatives voted to permanently ban taxes on Internet access. Manufacturers know first hand that the Internet has become a critical piece of infrastructure in the United States and the 16-year ban on new state and local taxes on Internet access has helped spur the incredible amount of investment in broadband networks.

Unfortunately, this temporary moratorium will come to a halt in November 2014 unless Congress acts. Last month the House Judiciary Committee approved bipartisan legislation—the Permanent Internet Tax Freedom Act—which calls for a permanent moratorium on taxing Internet access. We applaud the House for coming together to advance the legislation.

Extending the moratorium will ensure continued robust broadband adoption and investment in the United States and promote competitiveness and job creation. Especially given our lackluster economy, the sooner Congress removes the tax threat the better. Let’s keep this bipartisanship rolling–next stop: the U.S. Senate!

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Leading

Later this week, the House of Representatives is scheduled to take up the a bill that is exactly the kind of legislation we need to see more of if Congress truly wants to set policies to help American manufacturers grow, compete, create jobs and strengthen communities.

One may ask how a single bill can do all of this?

The bill I’m speaking of is, H.R. 4718, authored by Rep. Pat Tiberi (R-OH) and would make 50 percent first year expensing (aka “bonus depreciation”) permanent. This bill is one of the handful of bills moving through the House this spring and summer that seek to make various provisions of the “extenders” package permanent. And, and it’s a very important bill for manufacturers. This bill would extend retroactively to the beginning of 2014 provisions which were in place and working up until they expired at the end of 2013.

Why is this bill so important for manufacturers? Manufacturing is a capital intensive industry and those costs have three significant factors: the price of equipment, the cost of financing and the tax treatment of the investment. Bonus depreciation lowers the after-tax cost of capital, increasing the number of profitable projects a firm can undertake and helping spur the growth in business investment. And so in the 7 months since it expired uncertainty has settled in. And uncertainty slows investment. Our March 2014IndustryWeek/NAM Survey of Manufacturers confirms that the expiration of the on-again and off-again investment tax incentives have companies holding off on making key purchases and thus delays the robust economic growth we need.

What does this really mean for Main Street? With pro-investment tax policies, companies like Marlin Steel Wire Products can invest in new cutting edge technologies like the IDEAL welding system. As Drew Greenblatt, the President of Marlin Steel put it, “policies like these allow companies like us to take a risk, put our necks out there and invest.” There are only five of these automated welding machines in the world and Marlin Steel, located in Baltimore, Maryland, is now the only company outside of Germany that owns one. According to Greenblatt, the investment in this new technology means that, “now our employees have the greatest technology at their disposal and now they can compete even better with foreign competitors. This machine will help us make a faster, more precise part and clients will be happier and order more products. This will help protect our employees’ jobs and help us to grow and hire even more employees.”

As we at the NAM have heard time and time again, policies that incentivize investment – especially when those policies are permanent – will help the economy take off because companies large and small will be able to take risks and invest and grow.

So yes, bills like H.R. 4718 will help Marlin Steel make a better material handling basket and so much more. The NAM urges all members of the House of Representatives to vote for this important pro-growth, pro-manufacturing legislation.

 

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PBGC Proves There’s No Need for More Premium Increases

A report published this week by the Pension Benefit Guaranty Corporation (PBGC) underscores what the NAM has said all along — any further PBGC premium increases are unnecessary and harmful.

Ok, so the PBGC did not say this exactly, but their recent FY2013 Projections Report does show that the PBGC’s “deficit” – the justification previously used for further premium increases — has virtually disappeared, making any further premium hikes unnecessary. The PBGC report shows that the single-employer pension plan so-called deficit will shrink by over 360 percent from $27.4 billion to $7.6 billion by 2023. The business community has criticized the PBGC’s deficit calculations in the past for using false assumptions and historically low interest rates, driving their deficit projections way above the actual levels. Therefore, the fact that the PBGC’s own report shows a diminishing deficit further validates that any more PBGC premium increases are not needed.

For manufacturers who were recently hit with nearly $17 billion over ten years in PBGC premium hikes, the shrinking of the PBGC’s “deficit” problem comes as no surprise since manufacturers pay more premiums (approximately half) than any other industry. As a result, manufacturers are paying much of the cost of 2012 and 2013 premium increases, which will nearly double and triple the flat rate and variable rate premiums by 2016. A recent NAM and Pension Coalition study shows that further premium increases will also have a negative ripple effect throughout the entire economy, draining an average of 42,000 jobs per year, resulting in a $51.4 billion hit to the economy over 11 years.

The NAM alerted Congress to the negative consequences of any further PBGC premium increases in a letter signed by 70 companies and associations, and is leading meetings with key House and Senate offices urging members against further PBGC premium hikes. The PBGC report issued this week is just one more reason that Congress should not raise PBGC premiums, which would be an unnecessary and harmful tax hike on manufacturers and other pension plan sponsors.

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