Daily Tax Update - July 19, 2012: Hearing on Tax Reform & The US Manufacturing Sector

HEARING ON TAX REFORM AND THE US MANUFACTURING SECTOR:  Today, the Ways and Means Committee held a hearing on business tax issues currently faced by U.S. manufacturing companies.  The hearing examined how comprehensive tax reform could improve the ability of manufacturers to contribute to job creation and economic growth, including U.S.-based public and closely held companies as well as foreign-owned U.S. manufacturers. 

  • In his opening remarks, Committee Chairman Camp said, "It is time America’s tax code puts the American economy first.  We know what doesn’t work – and now it is time for a comprehensive tax reform plan that will work.  Since this Congress convened in January of 2011, the Ways and Means Committee has had more than 20 hearings focused on the steps Congress might take to transform our broken tax code into a pro-growth code that will provide employers the certainty, flexibility and freedom they need to invest and hire.  At the request of the Ways and Means Committee, the last two House-passed budgets have outlined a framework for comprehensive tax reform that lowers rates for individual and corporate taxpayers, repeals the AMT for 31 million households, and transitions America to a more competitive territorial system of taxation – which even the Obama Administration pointed to as a hopeful area of consensus."  Camp added, "The framework is a good start, but more must be done.  Today, we will hear directly from stakeholders in the manufacturing community as they share their ideas for what Congress can do to help – and what we ought to avoid that might hurt."
  • The witnesses were:

Ms. Diane Dossin
Chief Tax Officer, Ford Motor Company
Testimony

Mr. Henry W. Gjersdal, Jr.
Vice President of Tax and Real Estate, 3M
Testimony

Ms. Susan L. Ford
Vice President of Tax, Corning Inc.
Testimony

Mr. Ralph E. Hardt
President, Jagemann Stamping Company
Testimony

Mr. Kim Beck
President and CEO, Automatic Feed Company, on behalf of the Association for Manufacturing Technology
Testimony

Mr. Hugh Spinks
Vice President of Tax, Air Liquide USA Inc.
Testimony

Ms. Heather Boushey, Ph. D.
Senior Economist, Center for American Progress
Testimony  

  • Ms. Dossin stated, "Ford understands that, in the current fiscal climate, achieving a lower corporate income tax rate is probably only possible if the tax base is broadened.  We also understand that base broadening does not come without attendant costs – costs that must be weighed against the relative value of a lower rate.  In considering base broadening alternatives, Ford urges consideration of the full impact of the ultimate tax reform package on the U.S. economy.  The final product should have a net positive effect on the goals of increased competitiveness, economic growth and job creation in manufacturing here at home."
  • Mr. Gjersdal stated, "First and foremost, we recommend the corporate tax rate be reduced. We support the Chairman’s proposal to reduce the rate to 25%; a rate which is more in line with other developed countries that view a lower corporate tax rate as a competitive advantage.  From 3M’s perspective, the current high corporate tax rate has two adverse effects on domestic investment:  it reduces the after-tax return on domestic investments and creates significant inefficiencies in the deployment of the Company’s capital and the management of its balance sheet."  Gjersdal added, "In addition, the high US tax rate imposes an undue cost barrier to repatriating foreign earnings under the current international tax system…  3M would also support the repeal of accelerated and bonus depreciation to partially pay for a significantly lower tax rate…  In addition, 3M would also forego the current R&D credit for a significantly lower rate."  He added, "3M applauds the Chairman’s inclusion of a territoriality system in his proposal…  We agree with the Committee that anti- abuse rules are necessary to prevent the erosion of the US tax base.  Regarding transition rules for pre-enactment foreign earnings, 3M, like many companies, has substantial foreign earnings permanently reinvested in active businesses outside of the US.  The up-front tax impact on accumulated earnings that can never be repatriated to the US. need to be considered, along with the complexity involved in determining the accumulated undistributed earnings for companies that date back over 50 years.  In addition, 3M suggests this tax should not be imposed on accumulated earnings that are invested in assets used in active businesses since theses earnings will never be repatriated."
  • Ms. Ford stated, "We believe Chairman Camp's discussion draft contains several provisions that could increase US competiveness.  A substantial reduction in the statutory tax rate is critical…  A significant rate cut accompanied by a review of existing, often inefficient, tax benefits is in order."  Ms. Ford added, "Mr. Camp’s proposal for a territorial tax system could do as much as rate reduction to foster U.S. competitiveness."
  • Mr. Hardt testified, "In order for manufacturing to succeed in this country we need two things – stability and transparency in our tax code.  Particularly in an industry like ours, we often have to invest millions of dollars into new equipment and training for our employees to remain globally competitive.  We fully support expanded bonus depreciation, Section 179 expensing, and the Section 199 Domestic Production Activity Deduction as tools manufacturers use to create jobs and compete globally."
  • Mr. Beck said, "It seems as though the largest obstacles to continued growth are created by the U.S. government.  High taxes, burdensome regulations, increasing healthcare and energy costs, outdated policies and complicated, broken processes all contribute to the significant competitive disadvantage American manufacturers face when compared to our foreign counterparts."  Mr. Beck added, "A major obstacle is our own tax system.  It significantly adds to our competitive disadvantage in the global marketplace.  The United States now has the highest corporate tax rate in the industrialized world.  In addition, unlike most industrialized nations, it has a worldwide system of taxation.  These factors make it less attractive for companies (foreign and domestic) to invest and manufacture in the United States and more attractive for companies to invest and manufacture overseas."  Mr. Beck also supported extending all the Bush-era tax cuts, extending the 100% bonus depreciation and increased section 179 expensing and the R&D tax credit.
  • Mr. Spinks testified, "We understand that there is a need for fiscal prudence in any corporate tax reform legislation and that base-broadeners may be required to reach a workable solution.  Taking these realities into account, we strongly believe that substantially reducing the US corporate tax rate will significantly improve America’s competitiveness, increase investment and create new jobs."  He added, "For these reasons, Air Liquide supports all efforts by this Congress to undertake sensible tax reforms that protect the productivity and competitiveness of the Nation's manufacturing and industrial sectors and make America an attractive location for new growth and investment."
  • Ms. Boushey stated, "Pass comprehensive business tax reform that both eliminates loopholes and inefficient business tax expenditures without disadvantaging domestic manufacturing.  Currently, loopholes allow companies to avoid paying U.S. taxes by artificially shifting their profits offshore.  Closing these loopholes by adopting strong provisions to prevent base erosion and will promote job growth in the United States and insure businesses are both competitive and fairly taxed.  Find a fiscally responsible way to make the research and experimentation, or R&E, tax credit permanent in order to boost and attract domestic investment in research and development, or R&D, from the private sector.  Studies have shown that the R&E tax credit stimulates as much research and development investment as a direct subsidy and that the social returns on R&D are greater than returns for private investors who finance R&D.  The Obama tax proposal finances the credit exclusively through business tax reform.  Introduce a minimum tax on foreign earnings to prevent production from going to tax havens overseas.  This would also ease the tax code's current bias towards foreign, as opposed to domestic, investment and level the playing field among competing businesses."
  • In conjunction with the hearing, the Joint Committee on Taxation has released a report titled, Background And Present Law Relating To Manufacturing Activities Within The United States
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com

"INSOURCING" BILL FAILS TO ADVANCE IN SENATE:  Today, the Senate rejected a procedural vote (56 to 42) on legislation that ends tax breaks for companies that ship jobs overseas and cuts taxes for businesses to bring jobs back to the United States.  The bill ends a tax break for U.S. companies that outsource jobs and business activity and would give a 20-percent tax credit to companies that transfer overseas jobs back to the United States.  The “Bring Jobs Home Act” (S. 3364), sponsored by Sen. Debbie Stabenow (D-MI), failed to gain the 60 votes needed to advance.  After today’s vote, Sen. Stabenow said, “Michigan has been hit hard by outsourcing.  We need to be exporting our products, not our jobs."  Stabenow added, "It's outrageous that taxpayers are paying companies to send jobs abroad.  Instead of giving tax breaks to companies that ship jobs overseas, Congress should cut taxes for U.S. companies that bring jobs back to America.  We are going to continue to work to get Congress to put politics aside, put American jobs first and pass this bill." 

TAX BILL INTRODUCED JULY 18TH:
S.3401: A bill to amend the Internal Revenue Code of 1986 to temporarily extend tax relief provisions enacted in 2001 and 2003, to provide for temporary alternative minimum tax relief, to extend increased expensing limitations, and to provide instructions for tax reform.
Sponsor: Sen Hatch, Orrin G. [UT] (introduced 7/18/2012)   Cosponsors (1)
Latest Major Action: 7/18/2012 Introduced in the Senate. Read the first time. Placed on Senate Legislative Calendar under Read the First Time.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: 
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