Taxation

President Obama Should Seize Opportunity to Call for a Permanent US R&D Incentive

With the State of the Union address merely hours away, much of the buzz surrounding President Obama’s speech has focused on issues that divide Congress and the business community. Yet, the President has an opportunity to highlight one area where he, Congress, and manufacturers across the country agree –a strong, permanent R&D incentive would boost US innovation, jobs, and global competiveness.

The Administration’s fiscal year 2014 budget proposal included a permanent R&D credit with an enhanced alternative simplified credit (ASC). The Administration even released a report in past years on the merits of a robust US R&D incentive, explaining that an “enhanced and permanent credit will fund more than $10 billion per year in research activity in the United States, supporting nearly 1 million jobs in research.” The report also highlights the credit as a vital way for the US to “out-innovate our competition.”

Manufacturers know firsthand that a strengthened, permanent R&D incentive would provide the certainty needed to enhance its incentive value and help ensure the United States’ leadership in global innovation. For this reason, the R&D Credit Coalition recently wrote a letter to President Obama, urging him to include a permanent R&D incentive in his fiscal year 2015 budget proposal. The letter also called for the ASC to be enhanced to 20 percent, from its current 14 percent.

Since the R&D Credit is now expired, the President should take the opportunity tonight highlight the need to reinstate a strengthened credit as a permanent part of the U.S. tax code, an issue upon which we can all agree.

 

 

 

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Expired Tax Provisions Create Uncertainty, Earnings Volatility for U.S. Manufacturers

While most Americans see the start of the New Year as a time for positive changes, many manufacturers  considered January 1, 2014 a day that marked the continuation of an alarming trend – Congress once again allowed the R&D tax credit and other important tax provisions to expire.

Unfortunately, this is repeat of what happened at the end of 2011 when the R&D credit and over fifty tax provisions usually considered in an “extenders” package lapsed and were not reinstated until the fiscal cliff deal retroactively extended the package until the end of last year. The fact that Congress decided to adjourn at the end of 2013 without addressing the expiring tax provisions signals that while lawmakers may feel these provisions matter, they have placed less emphasis on the timing of when they are extended – a significant problem for manufacturers.

The expiration and retroactive extension of the R&D credit spurs volatility in manufacturers’ earnings. A recent Bloomberg article captures this problem, citing that many companies’ Q4 2012 earnings were lower because of the expired tax credit, but then saw a one-time boost in earnings in Q1 2013 after the retroactive reinstatement where five quarters of the tax benefits were claimed. This is a headache for manufacturers and investors alike, as tax rates and earnings may change significantly by quarter or year.

Manufacturers claim the most R&D credit amounts out of any industrial sector and account for the lion’s share of private-sector research and development. Allowing the credit to repeatedly expire creates unnecessary uncertainty for American businesses investing in R&D and serves as a roadblock on the path to innovation.

The NAM urges Congress to include an enhanced R&D incentive as a permanent part of the tax code to boost U.S. investment in R&D, create high-wage jobs, and spur economic growth. Absent action on a permanent incentive this year, the R&D Credit must be seamlessly extended as soon as possible.

 

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Tax Reformers Need to Focus on Growth, Not Targeting the Energy Industry

Manufacturers are totally frustrated with our outdated, anti-competitiveness, anti-growth tax system and appreciate the current focus in the White House and on Capitol Hill on improving our nation’s tax system. As we’ve said many times before, any effort to rewrite the federal tax code should result in a balanced, fiscally responsible plan that allows manufacturers in the United States to prosper, grow and create jobs and also enhances their global competitiveness.

Moreover, since manufacturing accounts for roughly one-third of the energy consumed in the United States, it also is critically important that any tax reform plan allows our nation’s energy producers to make the necessary investments to ensure our nation’s energy security and avoids increasing the tax burden on this vitally important industry sector. Maintaining diverse, reliable and affordable energy sources is crucial to jobs, competitiveness and overall economic growth.

With that in mind, we were shocked by Daniel Weiss’ assertion in a January 17th Real Clear Politics editorial that “one simple tax reform that Congress should pass right away that would make the federal tax code fairer and reduce the deficit with almost no impact on the economy: end special tax breaks for the five biggest oil companies.” Nothing could be farther from the truth.

Let’s start with a simple fact: providing the energy needed to support manufacturers and the broader U.S. economy requires large capital investments by the private sector. Promoting investment should be an integral part of comprehensive tax reform, particularly as it relates to investments in developing our nation’s energy supplies.

In particular, finding and producing domestic oil and natural gas requires large and continuing capital investments. Drilling oil and gas wells involves a number of costs, including labor, repairs, fuel, chemicals, supplies and other expenses that have no salvage value. Under longstanding tax policy rules, energy companies can deduct these costs—known as intangible drilling costs (IDCs)—as ordinary and necessary business expenses, reducing the cost of exploring for and producing oil and gas.

For manufacturers and other energy consumers, the development of shale natural gas in the United States has been a “game-changer” in terms of reduced energy costs, increased access to secure energy supplies and availability of a low-cost raw material. The chemistry industry alone has generated billions of dollars of new investment thanks to this innovation. IDCs cover about 70–80 percent of the cost of a shale gas well. It’s not hard to imagine the negative impact of eliminating the deduction of IDCs as Mr. Weiss suggests.

In the same vein, Mr. Weiss suggests eliminating the Section 199 deduction for U.S. oil and natural gas production, refining and processing. Sec. 199, which was included in the 2004 American Jobs Creation Act, is designed to reduce the tax burden on all domestic manufacturers and help spur investment and create jobs in the United States. Congress already took a swipe at the energy sector by limiting the deduction for oil and gas production. The total repeal of this deduction for the energy sector would further target these companies and, in the process, discourage new oil and gas investments in the United States by making them less competitive economically with foreign opportunities.

Also keep in mind that reserving U.S. energy companies’ access to global natural resources is critical to U.S. energy security. Unlike their competitors, U.S. energy companies with overseas exploration and production operations—so-called “dual-capacity” taxpayers—pay both U.S. and foreign taxes. Current tax rules for dual-capacity taxpayers—already stricter than rules for other taxpayers—reduce the potential of double taxation of income in the U.S. worldwide tax system and limit foreign tax credits to payments that are truly in the nature of income taxes. Existing rules specifically deny foreign tax credits for some payments, such as royalties paid to access a natural resource.

Mr. Weiss suggests that policymakers deny foreign tax credits even for income taxes paid by dual-capacity taxpayers. These proposals will unfairly and retroactively overturn well-established and longstanding rules, subjecting American energy companies to harmful double taxation on new and existing investments. 

NAM has a different message for policy makers on tax reform and the energy sector. In contrast to a tax system that encourages investment in new energy sources and energy efficiency, imposing discriminatory taxes on the energy sector will result in higher costs for all energy consumers in the United States. The increased cost for manufacturers will make it more expensive to produce in this country and make them less competitive in foreign markets, putting millions of current manufacturing jobs at risk.

New energy taxes also will set back current efforts to achieve energy independence. As noted above, the United States has made great advances recently in developing new sources of domestic energy. Unfortunately, imposing targeted tax increases on energy companies will discourage oil and gas investments in the United States, working against the goal of enhancing America’s energy security and boosting new, domestic investments in affordable energy sources.

The NAM remains adamantly opposed to targeted energy taxes, whether in the context of tax reform or as part of a separate effort. Manufacturers believe that tax and energy policy needs to focus on enhancing America’s energy security by encouraging new investments in affordable sources of energy, not imposing new taxes on the energy industry.

 

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Another Opportunity to Fix Dodd Frank

Let’s start the year off on an optimistic note…. Here’s to hoping that 2014 is the year that a bipartisan Congress fixes a number of flaws in the Dodd-Frank Wall Street Reform Act.

As we’ve talked about before, Manufacturers, as derivatives end-users, have been working over the past several years to prevent the implementation of the Dodd-Frank Act from having a negative and costly impact on companies that use derivatives to manage risk. On issues like margin requirements, inter-affiliate trades and the use of centralized treasury units, the NAM has fought against new regulations that will create new costs and burdens on manufacturers who utilize derivatives to mitigate commercial risk and not for speculative purposes. The rationale is simple, manufacturers did not contribute to or cause the financial crisis that triggered Dodd-Frank, and as several regulators have stated before Congress, do not pose a systemic risk. Thus, regulators’ efforts should be focused elsewhere.

So far we’ve made some headway… Bipartisan bills (H.R. 634/S.888) moving through Congress would exempt end-users from margin requirements. In fact, H.R. 634, led by Reps. Grimm (R-NY) and Peters (D-MI) passed the House with a huge bipartisan vote last June with only 12… yes, 12 votes in opposition. The Senate companion bill (S.888) has 18 cosponsors from both sides of the aisle and two strong champions in the bipartisan team that is leading the effort – Sens. Johanns (R-NE) and Tester (D-MT). And that’s not all. H.R. 677, the Inter-Affiliate Swap Clarification Act by Reps. Stivers (R-OH) and Fudge (D-OH) was approved by the House Financial Services Committee also with broad bipartisan support.

Earlier this week, Rep. Hudson (R-NC) introduced legislation addressing another problem we have talked about before, the looming change in CFTC’s criteria for companies to register as a swap dealer. The bill, H.R. 3814, would require that the CFTC take an affirmative action to change today’s de minimis level of $8 billion. Without action, the CFTC’s rules currently lower the threshold to $3 billion by 2018. It seems odd to us that the CFTC has seen fit to set a de minimis level at a reasonable level and while doing so then set into motion an automatic drop in the level by over 60% several years in advance. One would think that regulators would prefer to establish the threshold and then go back and reconsider what the appropriate level will be in the economy of some future year. The bill by Rep. Hudson, like the other ones referenced above, is straightforward and a common sense solution to problems arising from the enactment of the massive Act known as Dodd-Frank.

Manufacturers continue to work to encourage members of both parties in both the House and Senate to move these bills in a timely manner.

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Manufacturers Oppose Proposed Pay Ratio Rule

Yesterday the NAM submitted comments to the SEC in response to their proposed rule implementing the so-called pay ratio requirement that was enacted as part of the Dodd-Frank Act. Manufacturers believe that requiring companies to regularly disclose the ratio of employees’ median pay to the compensation of the company’s chief executive represents a costly and onerous administrative burden on companies that will not produce useful information for investors or advance shareholder knowledge. As the SEC itself points out in the proposal, ““neither the statute nor the related legislative history directly states the objectives or intended benefits of the provision or a specific market failure, if any, that is intended to be remedied.” Yet, despite the absence of a clear benefit, companies will be required to incur significant financial cost, dedicate substantial man-hour resources and overcome numerous administrative challenges in order to attempt to comply with the proposed rule.

Manufacturers are concerned that the idea that a single statistic, like the pay ratio, could be an indicator of a company’s approach to compensation practices, business strategy, or hundreds of other decisions that comprise their business plan is false and overly simplistic – however this reality did not prevent Congress from including this requirement in the Dodd-Frank Act and now manufacturers are facing a compliance hurdle that will put them at a disadvantage to any company that is not required to comply. This issue is just another example of the real and costly impact that the Dodd-Frank Act – enacted to ensure that the financial crisis of 2007-2008 is not repeated –has had on manufacturers who did not cause the financial crisis.

Manufacturers are proud of their commitment to their workforces and want to dedicate resources to competing, growing and investing in their companies, their products and their employees and are concerned about regulatory burdens that will distract them from this mission. Manufacturers hope that the SEC will re-examine this proposed rule and that the Congress will act swiftly to pass H.R. 1135 by Rep. Huizenga (R-MI) to repeal this onerous burdensome requirement and in doing so ensure that manufacturers can spend their time and resources on developing their workforces and their products and not on complying with complicated and costly regulations.

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Another case for fixing Dodd-Frank

Manufacturers, as derivatives end-users, have been working over the past several years to prevent the implementation of the Dodd-Frank Act from having a negative and costly impact on end-users. On issues like margin requirements, inter-affiliate trades and the use of centralized treasury units, the NAM has fought against new regulations that will create new costs and burdens on end-users who utilize derivatives to mitigate commercial risk and not for speculative purposes. The rationale is simple, end-users did not contribute or cause the financial crisis that was the impetus for Dodd-Frank and as several regulators have stated before Congress, end-users do not pose a systemic risk, regulators efforts should be focused elsewhere.

A recent report from Abraham Energy Report highlights yet another threat to end-users. Specifically,  rules issued by the Commodity Futures Trading Commission (CFTC)  that will drastically limit the use of hedging by energy businesses and will impact the broader economy through higher costs and fewer risk mitigation options for all energy users. The CFTC now requires any firm engaged in over $8 billion annually in commodity swaps to register as a swap dealer that makes them subject to a regulatory regime more similar to rules for financial institutions than end-user rules. To date only a few firms have been forced to register as swap dealers. That will change though when the threshold drops, as it is scheduled to do by 2018.  The lower threshold will capture a much broader group of companies and will impose greater costs throughout the economy. In another effort to expand their regulatory domain, the CFTC is also seeking to further regulate the energy market by treating volumetric options of commodities, including oil and gas, as swaps and subject to CFTC regulation. America is on the cusp of an energy boom poised to create a competitive advantage for American manufacturers. That is, unless regulators get in the way.

All of these end-user issues should be reviewed and considered as Congress reauthorizes the Commodity Exchange Act (CEA) and the Commodity Futures Modernization Act. While Congress has been stymied in recent months on myriad issues of importance to manufacturers, one thing that both parties in both bodies should agree on is that action needs to be taken to lessen the impact of harmful regulation on the growth of the economy and jobs. All of these issues should be addressed in the upcoming reauthorization process and manufacturers will continue to urge Congress to do so.

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Ask an Expert: What would a permanent R&D incentive mean for manufacturers?

Members of Congress and the Administration seem to agree on what manufacturers have long known: enhancing investment in research and development, or R&D, drives economic growth. But that growth cannot be sustained without a permanent R&D incentive.

The uncertainty of an on-again, off-again tax credit upends the innovation, new product development and job creation that manufacturers contribute to the economy. When there is no telling whether the incentive would be around for the entire length of a manufacturer’s R&D project, investment in the U.S. manufacturing base suffers. A JP Morgan Chase report released in August found that private spending on R&D slowed to 2.4 percent in 2013. We cannot allow investment to tumble any further. With the credit set to expire for the sixteenth time at the end of the year, that outcome becomes increasingly possible.

That’s why the NAM is advocating a permanent and strengthened R&D incentive as one of our priorities for comprehensive, pro-growth tax reform. The United States has been a leader in promoting R&D for over 30 years, but more and more countries have provided greater certainty for businesses in recent years by enacting permanent—and more generous—R&D incentives. A strong and permanent R&D credit will allow the United States to remain competitive in the global race for R&D investment dollars, particularly as manufacturers are courted by other countries with more generous and more stable R&D tax incentives and lower corporate tax rates.

The certainty provided by a strengthened, permanent R&D incentive would enhance its incentive value and help ensure the United States’ leadership in global innovation.

Christina Crooks is the director of tax policy for the National Association of Manufacturers.

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NAM Applauds Key Investment Incentives in the “Start Up Jobs and Innovation Act”

Manufacturers know firsthand that capital investment is critical for economic growth, job creation and competitiveness, which is why the NAM has long supported a strong capital cost recovery system. Kudos to Sens. Patrick Toomey (R-PA) and Bob Menendez (D-NJ) for introducing the “Start Up Jobs and Innovation Act” and for recognizing the critical role that Sec. 179 expensing plays in encouraging investment by smaller manufacturers. As a capital intensive industry sector, making permanent the higher expensing limit that is in law today is key to helping manufacturers grow and compete. This is a key provision for NAM members.

More generous expensing  lowers the after-tax cost of investing  for manufacturers making capital investments and helps spur sales for manufacturers selling the equipment. The NAM applauds the Senators for making permanent the current $500,000 expensing limit, eliminating the phase-out, and indexing the limit to inflation. These common-sense updates to this provision will allow more manufacturers to realize the benefit of expensing. Manufacturing has the highest multiplier of any other economic sector — every dollar spent in manufacturing adds another $1.48 to the economy. A permanent expansion of Sec. 179 benefits U.S. manufacturers and the economy as a whole. We applaud the Senators for their leadership in this area.

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Senate Mobile Workforce Bill Would Ease Manufacturing Tax Burden

Today’s manufacturing requires flexibility and a mobile workforce. Their work can often take them around the country, crossing state lines to engage in routine repairs, upgrades and other tasks that deliver growth. They are often needed to take their skilled services across America as part of the critical response efforts to natural disasters. In just one recent example, Hurricane Sandy brought out an all-hands-on-deck approach to the recovery efforts, with companies sending employees to repair the massive damage and help a battered region back to its feet.

Unfortunately, the way our tax code is structured regarding out of state workers can actually end up punishing these employers and employees, forcing them to adhere to arbitrary and burdensome compliance requirements. In particular, it takes a toll on small and medium-sized manufacturers. The tax code is complex enough without placing another obstacle in the way of manufacturers’ ability to take care of their business.

Today, a bipartisan group of Senators introduced legislation that could help ease the tax burden currently plaguing American manufacturers simply because their employees travel outside of their home states on work assignments. The Mobile Workforce State Income Tax Simplification Act would apply consistency within tax rules among the states – and simplify the current maze of differing state tax rules applying to the mobile workforce by creating a 30-day bright-line test for when a state can assess income tax on an out-of-state employee who is temporarily working in that state.

The mobile workforce bill is a common-sense clarification that will provide certainty to both businesses and states alike, and that’s a win-win in our eyes and the NAM will work with Congress to advance this pro-manufacturing legislation as quickly as possible.

Background: The NAM thanks Senators Sherrod Brown (D-OH), John Thune (R-SD), Roy Blunt (R-MO), Susan Collins (R-ME), Tim Johnson (D-SD), Robert Menendez (D-NJ), Bill Nelson (D-FL), and Rob Portman (R-OH) for introducing the Mobile Workforce State Income Tax Simplification Act. The Senate bill mirrors legislation (H.R. 1129) introduced earlier this year in the House by Reps. Howard Coble (R-NC) and Hank Johnson (D-GA).

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

 

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Getting the Facts Right is Essential to Tax Reform

The Wall Street Journal has an op-ed out today that delivers a dose of reality to the argument that corporations are somehow not paying their fair share of taxes. Many in the media and numerous policymakers have erroneously jumped on a Government Accountability Office study looking at what the effective U.S. corporate tax rate is – a study that, as it turns out, was based on bad data and selectively chosen information.

The NAM has been a longtime advocate for comprehensive tax reform – a critical factor to resolving our fiscal problems and increasing competitiveness for business in the United States. Currently, the statutory tax rate in the United States is disappointingly the highest in the world – a distinction that we should take no pride in. Manufacturers and other businesses don’t plan their investments, job creation and efforts to grow based on a theoretical rate – they plan on what the tax code tells them. And right now, the tax code places a burden that puts manufacturers in the United States at a clear disadvantage compared to our international competitors.

We need policymakers to take action – the House Ways & Means Committee and the Senate Finance Committee have made positive steps toward the first comprehensive reform of our tax system since 1986 – we’re pleased that there seems to be an appetite to take up these essential reforms. Having the facts and circumstances facing manufacturers right will go a long way to making tax reform an effective part of the solution for our fiscal woes and increase competitiveness and growth in the U.S.

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