It’s no secret to Washington policymakers, our members, the media and, indeed, the general public that the National Association of Manufacturers (NAM) has been leading the charge for pro-growth, pro-competitiveness and pro-manufacturing tax reform for the better part of a decade, a goal that has become increasingly more important with each passing year.
Over time, we’ve seen some positive changes, particularly for families and individuals. Many of them now pay lower tax rates and are entitled to a permanent—and more generous—child tax credit, among other reforms. Meanwhile, manufacturers in the United States still struggle to compete under an outdated tax system that includes very high tax rates for both corporate and “pass-through” businesses, an arcane system for taxing international income and a significant compliance burden.
In recent years, we’ve seen a few “piecemeal” attempts at business tax reform that address some of the problems of the current tax code (e.g., lower tax rates for corporations only or temporary changes to our international tax rules). We’re generally skeptical of a piecemeal approach to business tax reform—while in the short term these changes could be easier to achieve, the partial changes could make a bad tax system even worse in the long term.
One of our biggest hurdles to comprehensive business tax reform is how to lower tax rates both for corporations and pass-through businesses taxed as individuals. This is a particularly critical issue since nearly two-thirds of manufacturers are organized as pass-throughs, and some of these businesses pay tax marginal rates more than 40 percent. Business tax reform would not be comprehensive—or pro-manufacturing—without tax rate relief for these businesses that are so critical to our industry’s supply chain and customer base.
Fortunately, there’s light at the end of the tunnel. Since 2015, the NAM has been working to develop an alternative way to tax pass-through businesses by reducing tax rates on the income that represents a return on owners’ investment in their business. Over the past several months, significant progress has been made in addressing this challenge.
In mid-2016, small business owner and House Ways and Means Committee member Rep. Vern Buchanan (R-FL) introduced legislation that would reduce taxes on pass-through businesses, ensuring that their tax rates are in line with corporate tax rates. A similar concept is part of the House Republican blueprint on tax reform released last summer by Ways and Means Committee Chairman Kevin Brady (R-TX) and House Speaker Paul Ryan (R-WI). The blueprint, which is on the table as discussions begin on a 2017 tax reform bill, envisions a tax rate of 25 percent on business income for pass-through businesses and a lower tax rate on corporate income. The president has proposed a 15 percent corporate tax—and, as NAM President and CEO Jay Timmons said recently in his State of Manufacturing address at the Detroit Economic Club, it’s a goal we support.
We applaud legislators for thinking “outside the box” to address a difficult tax issue for manufacturers. The NAM remains deeply committed to reach our goal of tax reform that reduces the tax burden on all manufacturers regardless of how they are organized.