President Barack Obama told the American people during the State of the Union that a revised corporate tax code would make the decision easier for more companies to add jobs. But what the administration and many in Congress do not understand is that not all American manufacturers looks alike. Taking a one-size-fits-all approach to taxing corporate America will leave many industries spending more in taxes and less in salaries.
Relying on a system that does not recognize critical differences among different sectors of our economy could end up raising taxes on this country’s manufacturing base. This will hurt the sectors that have a proven track record of producing quality jobs and innovation and that have been the backbone of our long-term economic success. They are also the companies most likely to lead us through our burgeoning manufacturing renaissance.
The current proposal before the Senate — which was offered by Senate Finance Committee Chairman Max Baucus before he was nominated as ambassador to China — represents an attempt to modernize and simplify our tax system by reducing the overall corporate rate and, in part, through eliminating so-called corporate loopholes. But in reality, these are important deductions that allow industrial corporations to spend the money they need to grow their inventory, compete internationally and contribute to the nation’s economy. These deductions were created to directly address the challenges that manufacturers face in choosing where and when to invest.
Not all industries have limited overhead and fast turnaround times like service and web-based businesses. Many industries rely on large projects, expensive processes and pricey inventory to prepare goods for the marketplace. These assets have a multiyear lifespan, and the tax system is designed to better reflect the cost to pay for them and replace them when the time comes.
But those tax provisions — accelerated depreciation and the “last-in, first-out” accounting structure, known as LIFO — seem to be top targets for elimination in proposals being discussed in Congress.
Accelerated depreciation allows manufacturers to deduct the cost of assets over their lifespan, with a higher amount taken during its early years. It mitigates the high upfront capital costs businesses face when purchasing expensive machinery and equipment as they grow or modernize.
Similarly, LIFO is an accounting method that assumes the most recent inventory purchased will be the inventory used or sold. It’s designed to take into account the greater costs of replacing inventory when costs are rising, giving a better measure of the financial condition of the business and the economic income that should be subjected to tax.
Both accelerated depreciation and LIFO help manufacturers account for the changing costs of inventory and prevent businesses from being overburdened by costs. The Georgia Institute of Technology and the American Institute of Certified Public Accountants recently found that nearly 40 percent of all businesses use LIFO to determine income and tax liability.
Eliminating these deductions will increase the cost of capital for many U.S. business owners and result in less capital investment and fewer available jobs. Increasing taxes on inventory will force companies to spend cash they don’t have.