Taxation

Just What the Doctor Ordered

Last Friday President of the Federal Reserve Bank of Minneapolis Narayana Kocherlokata (Ph.D.), noted in a speech that, “the future course of the U.S. economy is not predetermined by the events of the past seven years. Both history and theory have the same lesson: It is possible to undo what might now appear to be permanent changes.” The way that he proposes to do this is by reducing he suggests is by, “reducing the tax rate on the process of transforming current goods into future goods. In practice, the government can accomplish such a reduction in a relatively targeted fashion by allowing businesses to completely expense any investments into equipment, structures, or R&D.” Doing so, “leads to a higher rate of capital accumulation, which stimulates future economic activity by lowering the future costs of production,” something all manufacturers agree is critical.

This particularly timely prescription for economic recovery comes just days after two bills were introduced to make two critical, pro-investment incentives permanent, H.R. 4457, by Reps. Tiberi (R-OH) and Kind (D-WI) to permanently extend increased Section 179 expensing and H.R. 4438 to simplify and make permanent the research credit introduced by Reps. Brady (R-TX) and Larson (D-CT. These bills are just what the Ph.D. ordered.

The NAM has long supported the extension of enhanced Section 179 expensing and the bill introduced by Reps. Tiberi and Kind would take this one step further and make this important pro-growth, pro-investment incentive permanent. The expiration of the enhanced Section 179 at the end of 2013 has put investment decisions on hold for many small and medium sized manufacturers who do not know what tax provisions may be in place by the end of this year. H.R. 4457 would raise the cap for Section 179 expensing from $25,000 where it is today to $500,000 with a $2 million phase out. Making this provision a permanent part of the tax code will help these manufacturers invest and compete but it will also help those manufacturers whose customers rely on enhanced Section 179 to help defray the tax cost of their investment.

Likewise, the R&D tax credit is a proven incentive for spurring private-sector investment in R&D and creating domestic, high-wage R&D jobs, as 70% of credit dollars are used to pay the salaries of high-skilled R&D workers. For manufacturers, R&D fuels innovation that translates into new product development and increased productivity—two key factors necessary for growth in manufacturing. Unfortunately, the credit has never been a permanent part of the tax code since it was first enacted in 1981, and Congress recently allowed the R&D Credit to expire on December 31, 2013, creating unnecessary uncertainty for American manufacturers. The NAM supports the strengthened, permanent R&D credit provided in H.R. 4438, which will enhance the credit’s incentive value and increase U.S. competiveness in the global race for R&D investment dollars.

So while not full expensing, by seeking to make these important policies permanent, these two measures would go a long way towards injecting some certainty and growth into our still lagging economy and would be actions manufacturers would certainly applaud.

Carolyn Lee is Senior Director of Tax Policy for the National Association of Manufacturers.

Christina Crooks is Director of Tax Policy for the National Association of Manufacturers.

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NAM End-User Priorities Advance in House CFTC Reauthorization

Legislation to ensure that certain Dodd-Frank requirements do not overburden manufacturers advanced on Wednesday when the House Agriculture Committee approved legislation to reauthorize the Commodities Futures Trading Commission (CFTC) (H.R. 4413) that included a number of NAM end-user priorities. Prior to consideration of the bill, the NAM joined the Coalition for Derivatives End-Users in urging committee members to approve the bill.

As approved by the committee, H.R. 4413 would ensure that manufacturers and other nonfinancial end-users would not be subject to mandatory margin requirements when hedging business risk. This provision is similar to a bill (H.R. 634) that already passed the House overwhelmingly last year with 411 votes, but has yet to be considered in the Senate even though the bill (S. 888) is backed by 20 Senators from both sides of the aisle. A recent survey finds that without this fix, a company that uses derivatives to hedge commercial risk may be forced to sideline approximately $125 million, negatively impacting business investments, R&D, and job creation.

Manufacturers that use a centralized treasury unit or hedging center would also be relieved of unintended consequences stemming from Dodd-Frank in the Agriculture Committee’s bill. Currently, companies that use this centralized structure, a best practice in corporate treasury, may be forced to clear and margin their hedges since this unit may be considered a “financial entity,” preventing them from taking advantage of the end-user exemptions provided by Dodd-Frank. The CFTC reauthorization includes language stemming from a bipartisan bill (H.R. 677) which was approved by the Committee last year.

The CFTC reauthorization also included provisions from another bill (H.R. 3814) the NAM has supported to require the CFTC take an affirmative action before lowering the swap dealer de minimis threshold. Without action, the exemption level for engaging in a de minimis quantity of swap dealing automatically drops from the current $8 billion threshold down to $3 billion in 2018.

This bill was approved overwhelmingly by a voice vote, and will next move to the House floor. The NAM is also advocating for the Senate to include these important pro-manufacturing issues in their version of the CFTC reauthorization.

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Manufacturer Testifies on Need for a Permanent R&D Credit

Last week, Congress took a positive first step to reinstating the R&D tax credit when the Senate Finance Committee passed a tax extenders package that included a two-year retroactive extension. Today, the House signaled its intention to consider a permanent R&D incentive during a Ways & Means Committee hearing on the benefits of permanent tax policy for job creators.

Judith Zelisko, Vice President of Tax for  Brunswick Corporation testifies before the House Ways and Means Committee.

Judith Zelisko, Vice President of Tax for Brunswick Corporation testifies before the House Ways and Means Committee.

Judith Zelisko, Vice President of Tax for manufacturing company Brunswick Corporation urged members of the House tax-writing committee to reinstate the R&D tax credit and to make the incentive permanent. Brunswick, a manufacturer of recreation products including marine engines and boats, utilizes the R&D credit in the design and technological developments for their 14 boat brands sold around the world. According to Zelisko’s testimony, attaining effective results from research and development help Brunswick innovate and compete successfully.

Since its lapse at the end of 2013, the NAM and the R&D Credit Coalition have been urging Congress to seamlessly extend the R&D credit as soon as possible. Last week, the Coalition released a statement of support of the extenders package that the Senate Finance Committee passed by a voice vote, but also submitted comments to House Ways and Means Committee Chairman Dave Camp (R-MI) on his tax reform draft. The Coalition’s comment letter applauded Camp for including a permanent R&D incentive in his tax reform plan, but opposed the elimination of supplies and computer software from qualifying for the credit.

The House is expected to introduce a bill, separate from the Camp tax reform discussion draft, to provide an enhanced, permanent R&D tax credit. Meanwhile, the tax extenders package must still be considered on the Senate floor. As both chambers move forward with their separate approaches, the NAM will continue to advocate for a strengthened, permanent R&D incentive, and at a minimum that the now expired R&D tax credit be retroactively extended as soon as possible

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Simpler and Fairer – The Baseline of Any Tax Reform

Many Manufacturers right now face a very confusing landscape when it comes to state taxes. An increasing number of states tax businesses that have “substantial nexus” to the state, but there is no uniform definition of what that means. Setting aside the administrative nightmare of complying with 50 different standards, Manufacturers are also facing a situation where states are expanding that definition  of nexus, taxing businesses that have no employers, plant, or physical presence in the state. This can present serious problems for manufacturers who may not realize that they are subject to a state’s tax and may face costly penalties down the road.

NAM is pleased to see that Congress is taking a close look at this growing problem. Late last month House Judiciary‘s Regulatory Reform, Commercial and Antitrust Law Subcommittee held a hearing on H.R. 2992, the “Business Activity Tax Simplification Act of 2013,” and featured testimony from two manufacturers, Sage V Foods and McIlhenny Company. The witnesses spoke about the growing problem of unfair taxation of interstate commerce by many states and their individual run-ins with state tax agencies.

In order to address this problem, Rep. Jim Sensenbrenner (R-WI) introduced H.R. 2992, the “Business Activity Tax Simplification Act of 2013.” This bipartisan legislation would establish a bright-line rule that all states would follow when determining if a company is subject to a state’s tax. The NAM submitted comments to the House Judiciary Committee for the hearing record in support of this measure and manufacturers urge Congress to pass this much-needed, pro-growth legislation.

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Restating the Obvious

The release today of NAM/IndustryWeek Survey of Manufacturers confirms what manufacturers have long known, 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. According to the survey, the expiration of two of the key incentives for manufacturers, the “enhanced” Section 179 expensing and the so-called “bonus depreciation,” forces many manufacturers to rethink with investment plans. The enhanced Section 179 allowed smaller companies to write off up to $500,000 of capital equipment immediately if they invest less than $2 million a year and the so-called “bonus depreciation”— available to companies of all sizes — allowed taxpayers to expense 50 percent of the cost of assets bought and placed into service in 2013.

The survey found that 64.4 percent of manufacturers (three-quarters of medium-sized firms with between 50 and 499 employees) said they took advantage Sec. 179 and/or bonus depreciation in 2012 or 2013, or. “(R)oughly 40% of small and medium-sized manufacturers felt that the expiration of these provisions would alter their company’s investment plans for this year.”  As we’ve long maintained, manufacturers use these tax provisions to replace old or out-of-date equipment (73.9%), add capacity for existing product lines (56.7%) and add new capacity for additional products (50.2%). And in rebuttal to those who think that the impact of Section 179 is limited to small businesses, respondents also confirmed what the NAM has long known, that “they sold capital equipment, and Section 179 was an effective sales tool for them.”

Today much of the focus over tax policy is centered squarely on the need and various proposals for comprehensive tax reform. Indeed, the NAM has long called for comprehensive reform however in the meantime while policymakers work through the process of arriving at this much needed overhaul, manufacturers need these critical incentives extended now, not resurrected during the Congress’s final hours in December. Once again, this survey finds that government created barriers continue to hold back a full and robust economic recovery finding that, “(a)ll told, 79 percent of respondents said there is an unfavorable business climate because of taxes, regulations and government uncertainties.”

The tax extenders package, which includes Sec. 179 and bonus depreciation, is a poster child for the drag that uncertainty has on the economy. Let’s hope that the Congress acts quickly to reinstate these provisions and keeps them in effect until we can get to a newly reformed system which will really allow the economy to take off and grow.

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IRS Goes All-In to Squelch First Amendment Rights of Advocacy Groups

Not satisfied with the level of controversy they generated by the targeting of nonprofit groups based on their political leanings, the IRS has gone all-in with a recent proposal to classify many legislative advocacy and civic activities of non-profit groups as “candidate-related political activity.”  To say that the proposal has gotten a lot of attention would be an understatement: at the close of the public comment period, more than 140,000 individual comments had been filed.  Proponents have cited their interest in ridding the political process of “dark money.”  Opponents, such as the NAM and a myriad of nonprofit groups across the political spectrum, note that the IRS proposal strikes at the very heart of the First Amendment.

The rule moves beyond FEC definitions of political activity and sweeps in such core good government practices as get out the vote (GOTV) drives, distribution of voter guides, and voter registration activities.  It seeks to classify any communication containing the name of a candidate (of course, every member of the House of Representatives and a third of all US Senators are candidates in any even year) as political activity if it takes place within 30 days of a primary or 60 days of a general election.  Even holding events with elected officials within these time windows would be transformed into a political activity if this proposal were adopted.  Communications involving state and local candidates are also swept in.

As drafted, the proposal applies to 501(c)(4) entities—however, the IRS indicates it is considering applying the new rules more broadly, asking for comments on how the changes would affect 501(c)(5), such as labor unions, and 501(c)(6) business organizations, like the NAM.  This is a strong suggestion as to the direction in which the agency is headed.   Regardless, any rule adopted for 501(c)(4) entities pertaining to political activity could be applied by the IRS and tax law practitioners by analogy (if not directly) to other tax-exempt organizations, and thus it hardly matters whether the rule is applied directly.  It will chill legislative advocacy and civic engagement across all types of nonprofit groups.

In short, the proposal is an onerous incursion into the First Amendment rights of associations and goes to the very heart of our ability to effectively represent our members.   The NAM is all-in to fight this misguided proposal.  To access our formal comments, click here.

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in·cen·tive

noun \in-ˈsen-tiv\  : something that encourages a person to do something or to work harder (from Merriam-Webster)

For the past several years, Congress has seen fit to enact policies that would incentivize capital investment namely through an enhanced Sec. 179 and what is referred to as bonus depreciation. While the investment caps and phase-outs have varied over the past 10 years, one thing that has remained constant is that Congress has agreed that an incentive for companies to make capital investments is good economic policy. As we stated in our comments to former Senate Finance Committee Chairman Max Baucus’ staff discussion draft on cost recovery and accounting tax reform, a basic premise of economic theory is that investment is a positive function of an increase in demand and a negative function of costs. The cost of capital to a firm includes three components: the price of capital equipment, the cost of financing the equipment and the tax treatment of investment. Thus, policies like the enhanced Sec. 179 and bonus depreciation make sense. Of course just because the economic theory makes sense, since we’re dealing with our tax code, it’s not as simple as that because like many other commonsense tax policies (including the R&D credit to name one) the enhanced Sec. 179 and bonus deprecation incentives expired at the end of 2014.

Now, while the NAM has long advocated for comprehensive tax reform that results in a pro-growth, pro-competitive, permanent, simpler code, while we slog through the process of getting to the “new and improved” code, we need to ensure that the right policies are in place so business can continue to grow and compete. This is why manufacturers support the extension of these incentives because for manufacturers it’s not just giving them incentives to buy new equipment and machinery but it ensures that for those who make equipment and machinery that their customers are able to make these purchases as well. Consider the nearly 40 percent of farmers who according to an AgWeb.com article who aren’t buying machinery in 2014 mainly because of uncertainty around Sec. 179. And if manufacturers don’t have as many customers for their products then our still struggling economy won’t have as much of the juice provided by manufacturing. The impacts on manufacturing are particularly important because for every $1.00 spent in manufacturing, another $1.48 is added to the economy, the highest multiplier effect of any economic sector.

So while manufacturers await much needed comprehensive tax reform, keeping pro-growth tax incentives in law certainly makes sense.

 

 

 

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Manufacturers Urge Congress to Take Action and Renew R&D Credit

Over one month has passed since the R&D tax credit expired, and Congress has yet to consider legislation or even schedule a vote on legislation to renew the credit – a proven incentive for innovation and growth in manufacturing. The resulting uncertainty is having a real impact on manufacturers, causing earnings volatility and in some cases throwing cold water on plans to hire new R&D workers. Today, the R&D Credit Coalition sent a letter to the House and Senate alerting members that the R&D tax credit expired on December 31 and urging immediate action on a retroactive extension of the credit.

Ron Dickel, Chairman of the Coalition states in the letter that “Extending the R&D credit now can help provide a bridge to tax reform going forward.” The Coalition also calls for a permanent research and development incentive to be included in any tax measure considered by Congress. Last month, in its response to the Senate Finance Committee’s tax reform discussion draft on cost recovery and accounting, the NAM advocated for a strengthened, permanent R&D incentive to be included in and any plan to reform the U.S. tax code. The certainty provided by a permanent research and development incentive would enhance its incentive value and help ensure the United States’ leadership in global innovation.

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Energy Tax Policy Should Support an “All of the Above” Strategy

Last Friday, the NAM submitted comments on Senate Finance Committee Chairman Baucus’ Energy Tax Reform discussion draft. Since manufacturing accounts for nearly one-third of the energy consumed in the U.S., Manufacturers could not let this draft go by without a strong statement that any tax reform plan must allow our nation’s energy producers to make the necessary investments to ensure our country’s energy security and that reform should not increase the tax burden on this vitally important industry sector.

Echoing our cost recovery comments this submission emphasizes the need for policies that support capital investments – such as those that are regularly required to produce energy – and that those policies must support all types of energy production. This is even more important today as thanks in large part to the investments and developments in shale gas production, the abundance of increased low cost energy and raw material is producing a competitive advantage today for many manufacturers and other energy consumers. Tax policy must reflect the fact that finding and producing domestic oil and natural gas are requires large and ongoing capital investments. Current policies that allow, for instance, intangible drilling costs (IDCs) to be deductible as ordinary business expenses are the types of policies that will continue to allow companies to make the investments necessary to develop these resources.

Further, because as we support incentivizing investment, we also oppose policies such as a carbon tax that seek to penalize production. Such a punitive tax would impair the ability of U.S.-based producers to compete in a global marketplace, would increase energy prices and would have a negative impact on economic growth. This was a key finding of a study, “Economic Outcomes of a U.S. Carbon Tax” undertaken for the NAM last year by NERA Economic consulting.

The NAM is a strong champion of domestic energy production as well as efforts to promote energy efficiency and develop renewable sources of energy, and has long pointed to the important role a favorable tax climate plays in achieving these goals. As we look towards comprehensive tax reform the ultimate goal should be the creation of a tax code that is pro-job, pro-growth and pro-competitiveness and policies that support the development and investment of energy resources will help us attain that goal.

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The President’s Ideas on Tax Reform Will Hurt, Not Help Manufacturers

 

Manufacturers haven’t been shy in pushing for pro-growth, pro-competitiveness and pro-manufacturing tax reform.  We know firsthand how our current complicated and antiquated tax code, with the highest corporate tax rate among developed countries, makes it more difficult for manufacturers and other businesses in the United States to compete and succeed in a global economy. So our ears perk up when we hear the President mention tax reform, though tonight he touched only around the edges.

Previously, President Obama has called for a 28 percent tax rate for corporations – it is simply not enough. That wouldn’t even put US companies on a par with the rest of the developed countries whose average corporate tax rate is about 25 percent—and why should we be average? NAM supports a corporate tax rate of 25 percent or lower—with an accent on the lower.

We’re also more than a bit concerned about his talk of unspecified “loophole closers” or the more technical term, “base-broadening.”  Manufacturers are pragmatic enough to recognize that broadening the income tax base will be part of any debate over lowering corporate tax rates, but policy makers need to consider the potential impact of expanding the tax base on economic growth and the competitiveness of capital-intensive industries like manufacturing. Some current tax rules are key to a strong manufacturing sector, and the benefits of these provisions should be maintained in a new system.

The NAM supports greater investment in infrastructure but the tax code isn’t the place to look for financing.  The President’s proposal to repatriate overseas earnings as a means to direct additional investments in infrastructure is a very complicated financing tool that will make it even harder to achieve a modern international tax system that’s so important for U.S. manufacturers.

Like the President, manufacturers support an “all of the above” energy strategy. And we truly mean “all.” so we were concerned that the President again is suggesting we create winners and losers in the energy sector by increasing taxes on the oil and gas industry. It’s time to retire that tired, inaccurate talking point and acknowledge that manufacturers consume one-third of our nation’s energy ad know that higher taxes on some energy producers will translate into higher energy prices.

Finally, with his focus solely on corporate tax reform, the President totally ignores two-thirds of manufacturers—companies organized as “flow throughs,” like S corps and pay taxes at the individual level.  These companies are a critical part of the manufacturing ecosystem and dealing them out of the tax reform effort could leave them with a higher tax bill.

Here’s the bottom line for us: a new system should not result in a net increase in manufacturers’ U.S. tax burden—a change that would undoubtedly derail efforts to enhance U.S. economic growth, investment and jobs.  Unfortunately, the ideas the President outlined tonight are not good news for U.S. manufacturers.

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