Industry Seeks Tax Fix
August 28, 2012
The Wall Street Journal
Manufacturing is back in vogue as part of the solution to America's job shortage. After years of decline, factory employment has been edging up for the past two years, and some production has trickled back to the U.S. from Asia. So look for political candidates this fall to talk about how to spur investment in factories.
Manufacturing jobs aren't the whole answer to the job shortage, of course. They account for about 9% of all nonfarm jobs, but each factory position created tends to support several more in support services.
While politicians have offered ideas, ranging from more federal support for research to creation of a national manufacturing strategy, many manufacturers wish Washington would concentrate on what they see as the fundamentals: lower and simpler taxes, improved roads and other infrastructure, and better education.
In his most recent State of the Union address, President Barack Obama mentioned manufacturing 15 times. Among other things, the president is pushing for tax incentives for making products, especially high-tech ones, in the U.S. He also wants more focused federal research programs, including funds for new privately run institutes to study advanced manufacturing techniques.
Mitt Romney, the likely Republican candidate for president, has promised to spark "a revival in American manufacturing." His program includes repealing "excessive" regulation in such areas as environmental protection. He also wants to require secret ballots for union-certification votes, which might make it harder for organized labor to win.
Sen. Debbie Stabenow (D., Mich.) has offered legislation that would give tax breaks to help companies cover the cost of moving production back to the U.S. and ban tax deductions for the expenses of moving operations abroad. Rep. David Cicilline (D., R.I.) favors federal grants to help companies upgrade equipment and retrain workers.
All those ideas have their supporters in the business world, but manufacturers tend to see overhauling the tax code as a far bigger priority. "It all sort of starts and stops right there," with corporate tax rates, says Keith Wandell, chief executive of Harley Davidson Inc., HOG -0.90% a Milwaukee-based maker of motorcycles. "We need to be more competitive [with other nations] in that respect."
Stephen Gold, CEO of the Manufacturers Alliance for Productivity and Innovation, an Arlington, Va., research organization funded by industrial firms, says lower corporate tax rates could at least partly be paid for through eliminating many credits and deductions. For instance, he says, some members of his alliance would be willing to give up energy tax credits if they could get a lower corporate tax rate.
A recent ranking by the University of Calgary's School of Public Policy found the U.S. had the highest effective corporate tax rate of the 34 countries belonging to the Organization for Economic Cooperation and Development. The typical marginal effective tax rate for U.S. manufacturers in 2012 was 35.6%, the study found. That includes income and several other types of taxes faced by corporations at the federal and state level but excludes property taxes and temporary or narrowly targeted tax breaks.
Many business leaders want the U.S. to adopt a so-called territorial tax regime, in which companies would pay U.S. taxes only on their domestic, rather than world-wide, income. That would bring the U.S. in line with most other rich countries. While Mr. Romney favors such a shift, the Obama administration has argued that a territorial system would encourage more U.S. companies to shift operations abroad. But Martin Regalia, chief economist at the U.S. Chamber of Commerce, says it would make U.S.-based companies more competitive globally. "To the extent that U.S. firms are more competitive in world markets, they will likely create more jobs in total, both here and abroad," he says.
Taxes play a big role in determining where factories are built, says David Simchi-Levi, an engineering professor at the Massachusetts Institute of Technology who advises corporations on their supply chains. After studying options for one of his clients, a U.S.-based industrial company, Dr. Simchi-Levi concluded it should move all its production to Mexico and Eastern Europe. Though he looked at all types of costs, including labor and transportation, tax savings tipped the balance.
"The current corporate tax structure is driving manufacturing outside the country," Dr. Simchi-Levi says.
In what some might see as a contradiction, some manufacturers want the government to spend more on roads, bridges, airports and other infrastructure even as it lowers corporate taxes. Mr. Gold of the Manufacturers Alliance acknowledges that it would be hard for the strapped U.S. government to fund increases in infrastructure spending immediately. But he says there should be a long-term strategy to ensure that the U.S. has top-quality infrastructure. Carefully targeted spending in that area in the long run would boost economic growth and thus increase tax revenue, he says.
Alexander Cutler, CEO of Eaton Corp., a maker of electrical and hydraulic equipment, proposes an additional tax of 25 cents a gallon on gasoline to finance infrastructure. Caterpillar Inc., CAT -0.35% a giant maker of earth-moving equipment, says crumbling infrastructure is a drag on the economy. "Roughly since about 1970, the U.S. has dramatically underfunded infrastructure," says Jim Dugan, a spokesman for Caterpillar. "We now use Canadian ports to import some parts for our U.S. factories because U.S. ports are so backed up and outdated."
Manufacturers also are clamoring for better educational performance in areas such as science, math and engineering to overcome a shortage of skills needed to operate, program and repair factory machinery. The latest comparison by the OECD showed that 15-year-old students from Shanghai and Hong Kong far outscored their American counterparts in math and science.
"You can have all the tax breaks you want, but if you don't have workers with the right skills, you're going to lose those jobs," says U.S. Rep. Don Manzullo, (R., Ill.).
Along with these long-term issues, manufacturers' wish lists also typically include rapid action by Congress to deal with health-care costs and the U.S. budget deficit. Eaton's Mr. Cutler says uncertainty over the U.S. fiscal situation is hurting demand for some of his company's products, such as truck parts. Customers don't know whether they face sharp tax increases or huge cuts in government spending. "Until there are some policy priorities nailed down, it's going to become increasingly uncertain for people," Mr. Cutler said.