Cautiousness among manufacturing leaders continues to persist. While there are many signs that 2014 might finally be the year the economy gains some traction, with annual GDP growth of around 3%, there are still reminders that previous years also started with promise only to have such hopes fail to come to fruition.

The top business challenge, cited by 79.0% of those taking the National Association of Manufacturers (NAM)/IndustryWeek Survey of Manufacturers, was an unfavorable business climate due to taxes, regulations and government uncertainties (Figure 1). Rising health care and insurance costs ranked second (77.1%), with the issue hovering near the top of this list for much of the past year and a half due to uncertainties surrounding implementation of the Affordable Care Act (ACA). The numbers clearly show that Washington continues to be the major source of the burdens facing manufacturers.

Many sample comments from survey respondents tended to echo these themes, noting ever-increasing regulatory burdens, the need for tax reform and cost increases due to the ACA as well as the need to address the skills gap. One respondent said, “The three biggest drivers [that challenge our business] are an unfavorable business climate, rising health care costs and the availability of a quality workforce. These are driving the weaker domestic economy.” (For a partial listing of comments in this survey, see the end of this report.)

On the issue of taxes, several key provisions for manufacturers expired at the end of 2013. One of the provisions that expired was enhanced Section 179 expensing, which allows smaller companies to write off up to $500,000 of capital equipment immediately if they invest less than $2 million in a year.

Along with enhanced Section 179 expensing, the so-called bonus depreciation, available to companies of all sizes, expired as well. Bonus depreciation allowed taxpayers to expense 50% of the cost of assets bought and placed into service in 2013. In a series of special questions on this topic, 64.4% of manufacturers said they took advantage of Section 179 expensing or bonus depreciation provisions in 2012 or 2013, or three-quarters of medium-sized firms (e.g., those with between 50 and 499 employees).

Likewise, roughly 40% of small and medium-sized manufacturers felt that the expiration of these provisions would alter their company’s investment plans for this year. Specifically, manufacturers use this tax provision to replace old or out-of-date equipment (73.9%), add capacity for existing product lines (56.7%) and add new capacity for additional products (50.2%). Additional options mentioned included upgrading technology and enhancing overall efficiency. In addition, at least two respondents said they sold capital equipment, and Section 179 was an effective sales tool for them.