Manufacturing's Public Policy Challenge

Convincing the President and Congress to extend tax relief to big manufacturers won't be easy.

It's the biggest public policy challenge manufacturing has faced since October of 2001, when it became apparent that the sector had started an inexorable slide into what's fast becoming its most frustrating downturn in 20 years. That was just after President George W. Bush advanced an economic stimulus proposal in the form of individual tax cuts -- and when he told the business community, "Wait your turn." It was also before anyone could have predicted just how long the slowdown and how uneven the recovery would be. The following March, Congress gave business a 30% capital expense deduction, causing a blip in spending that tailed off toward the end of the year. Now, with the manufacturing sector having shrunk to 16.5 million jobs -- a loss of more than 2 million jobs since July of 2000; with the trade deficit ballooning to nearly $38 million monthly; and capital expenditures languishing in negative territory for the sixth consecutive quarter, the question facing big manufacturing companies is: How can the manufacturing sector convince the President and Congress to give them a bigger piece of the billions of dollars proposed to spur economic growth? With the debate about the President's economic growth plan in full swing, manufacturers throughout the nation are at once praising the proposal while stepping up lobbying efforts to make changes that will deliver some much-needed help for the struggling sector. They've formed a business coalition that includes the Association for Manufacturing Technology (AMT), the U.S. Chamber of Commerce, Americans for Tax Reform and dozens of other organizations and businesses to lobby Congress for additional help for manufacturers and business. "What we're asking the Congress to do is, in effect, sweeten the 30% allowance that's in the code now until 2004, and maybe extend it a little bit," says Jim Mack, vice president of tax and economic policy for AMT. The group, called the Cost Recovery Action Group, submitted its proposal in late January and had plans to testify to Congress in February, according to Mack. Officials leading the group are optimistic. Says Mack, "Unlike 2001 when the President advanced the individual tax cut, the business community was urged: 'Don't try to fiddle with it. Wait your turn.' They aren't saying that anymore." He notes that House Majority Leader Tom DeLay, R-Texas, has publicly said he would like to see a bigger package. Mack adds that AMT and the coalition support the President's plan entirely but, "We think Congress in its wisdom ought to go beyond what the President has proposed to make sure the recession gets over quickly." Noting political realities, members of the group and others shrug off the fact that Bush has publicly stated he won't compromise. Thomas J. Duesterberg, president and CEO of Manufacturers Alliance/MAPI, a public policy and business research organization based in Arlington, Va., sums up the general thinking on the matter: "It seems clear that Congress, as it always does, will want to leave its own mark. One of the likely areas will be in expanding the depreciation relief beyond the small business sector to apply to the entire business sector. There appears to me to be bipartisan support in Congress for that sort of measure." Formidable Challenges Yet the manufacturing/business lobby faces some formidable challenges to getting more help. First off, the plan is very well crafted and difficult to argue against -- even if you're a big manufacturer. Most economic analysts agree that it will have a positive effect on the economy and agree that the fundamental tax reform elements in the plan are unassailable. Further, the plan artfully addresses most of the problems that are perceived to have caused and exacerbated the slowdown. To wit: Do you think the dot-com bubble, the resulting stock market crash and lack of investor confidence caused the problem? The dividend tax cut will lure the investor back, say the plan's proponents. Perhaps weakening consumer confidence is stalling the recovery? Those same dividend tax cuts will put money in their pockets, along with extra cash from the individual income tax cut. Or is it business capital investment slowdown and lack of business confidence, as most manufacturing organizations contend? Well, the plan helps small business, which, the administration argues on its Web site, represents more than 99% of all employers, employs more than half the private work force and creates more than two-thirds of new jobs. Perhaps it's more complicated than that: Maybe recent business scandals are hurting consumer and investor confidence. The dividend proposal addresses that too. (More on that later.) When boiled down, the debate revolves around the question: Just what are we trying to achieve with this plan: stimulate the economy or fix the tax code? While even critics concede that the plan will help the economy, they've scored some points questioning whether the plan provides a big-enough, fast-enough stimulus to kick-start a long, healthy recovery. This is the battle big manufacturing has to win. Quite a few analysts question the need for a jump-start saying instead that the economy just needs an insurance policy for long-term growth. The President no doubt feels this way, since he avoids using the term "stimulus" to describe the plan. Whether the economy needs stimulus, and whether that stimulus needs to help big manufacturers are good questions, says Bruce Josten, executive vice president of the U.S. Chamber of Commerce. The fact is, Josten says, there are several things working against manufacturing. "No. 1, you just came off four quarters of productivity gains averaging about 5.3%," Josten explains. "If you continue to receive productivity gains of 5.3%, that instantly tells everybody that output per hour is increasing dramatically with the existing work force. Meaning there's no need to add people with that kind of productivity surge." Another factor, he says, results from the remnants of the massive Y2K upgrade of information technology equipment. He contends that the Y2K purchasing disrupted the normal three-year hardware and software replacement cycle, and there's nothing that would have propelled businesses to invest in new hardware and software any earlier. "This is the year you return to that three-year cycle," he says, implying that business will now begin buying hardware and software even without a tax incentive to do so. The third factor, he says, is, "When the manufacturing community as a whole, on an average, is operating at a plant capacity level of about 73%, there is absolutely no need to purchase additional equipment, let alone build additional facilities." Ultimately, he says, it is a question of "too many goods chasing too many customers," so the plan's emphasis on increasing consumer demand is what's needed. As for big manufacturers getting help, he says, "If you went back over history, you'd find that it is the small business sector that is the first to spend money-on new equipment, new plants, new hardware and software and hiring people -- coming out of a downturn." Recent research from Manufacturers Alliance/MAPI refutes the notion that manufacturers won't or don't need to begin investing until their capacity utilization rates increase. "Historical evidence suggests that that's really not the case," says Duesterberg. The report, released last January, found that "it is the direction of change in capacity utilization and not the level that influences a recovery in business equipment investment." The report explains that during a recession, companies tend to under-invest. Then, when the economy begins to grow, "firms find that investment in equipment has been cut below the replacement level, and they must increase equipment spending to meet even the lower level of business demand." Duesterberg points out also that much of the existing capacity now not in use may be so old "that it will probably never come back on line." Lurking in the background of the debate is an even bigger problem for manufacturers, something David Friedman, senior fellow at the New American Foundation, Washington, D.C., calls "an almost aesthetic or cultural distaste for blue-collar work among our political, economic and media leaders." In an article published in the January/February issue of "The Atlantic Monthly," he contends that public policy at all levels of government discriminates against manufacturing in favor of promoting "New Economy" industries. At the federal level, he cites the U.S. policy of maintaining a high dollar and an uneven trade policy as examples. Keeping the dollar high, he says "benefits the financial-services industry. . . but undercuts the ability of domestic manufacturers to compete with foreign producers." The uneven trade policy, he says, is evident in how aggressively the U.S. government has fought to open other economies' financial markets and to protect "New Economy" companies concerned about copyright infringement, but "failed to enforce its own trade laws and allowed collapsing Asian economies to flood the U.S. market with low-cost steel." At the local level, he says state and local business incentives, such as land-use rules, tax policy and development policies discourage goods-producers and encourage "New Economy" businesses. If not a cultural aversion to all things blue collar, it's not difficult to find public policy leaders who believe that an ailing manufacturing sector is nothing to be worried about. Worse, many others believe that the slide in U.S. manufacturing represents the inevitable progression of the U.S. economy. A Look on the Bright Side Even though big manufacturers were notably absent from the Bush economic proposal, they will benefit from it in a variety of ways. The trouble is they won't benefit as directly as they need to, and a few of the benefits taste a lot like medicine. First, most analysts agree that manufacturers will gain from the overall lift the package will give to the economy. An analysis by Manufacturers Alliance/MAPI economic consultant Jeremy Leonard, says the proposal is "likely to add nearly 1 percentage point to GDP growth in 2003, giving a strong and much needed boost to the U.S. economy." More directly, he concludes that the industrial equipment sector will gain from the tripling of expensing limits for small business equipment purchases. ". . . even though first-year tax relief of $2 billion to purchasers of industrial equipment seems small, it implies a much larger eventual increase in actual purchases, which will have a significant impact . . ."Also, looking on the bright side, MAPI's Duesterberg points out: "Even though the expensing or accelerated depreciation only apply to small business, the companies that make the equipment that small companies buy are big companies." In addition, he says that the companies that have always paid dividends tend to be manufacturing companies, and the dividend tax cut "gives a preference to their type of stock that has been depressed in the last 10-15 years because of the preference for capital gains." Other long-term benefits (here comes the medicine) derive from the incentives the plan provides to encourage companies to pay dividends. "We [the manufacturing sector] are not unique in this," says Duesterberg. "The transparency benefits from giving incentives to companies to report earnings in a way to pay dividends out will help broader public understanding of how companies are doing and redress the public opinion of reporting. "It's [also] fair to say it will encourage companies to rely on equity rather than debt, and to make less use of domestic and off-shore tax shelters," says Duesterberg. "And in the long run that's all good." More Fish to Fry While they're fighting for immediate tax relief to be added to the current economic plan, manufacturers have their hands full calling for reform on several other tax fronts. Included in The National Association for Manufacturers' Pro-Growth Policy Agenda, and echoed in other manufacturing association agendas, are calls for the repeal of the Corporate Alternative Minimum Tax (AMT), a resolution of the Foreign Sales Corporation impasse with the WTO, the implementation of a permanent R&D tax credit, and reform of the Social Security System. A host of other concerns that many call taxes by another name, that of government regulation, are also on the agenda. Calls for limiting "uncontrolled litigation and uncontrolled health care," as well as plans to work for less onerous environmental regulations are top concerns.As for whether the final economic growth plan will help or hinder manufacturers, the answer is clearly: It will help. The critical questions that remain are, how much will it help, and how directly and quickly will that help be delivered? And the answers to those questions rest on still other questions that are near and dear to the manufacturing community's heart: Do our public policy officials understand the importance of manufacturing to our nation's economy? And, if they do, do they have the political will to implement policies that will ensure the future success of U.S. manufacturing?

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Estimated Funds Transferred From The Federal Government To Private Sector
via Bush's Economic Security Proposals (billions of dollars)
Provision 2003 Cumulative 10-year
Accelerate income tax rate reductions to 2003 29 64
Accelerate marriage penalty relief to 2003 19 58
Accelerate child credit increase to 2003 16 91
Accelerate expansion of 10% tax bracket to 2003 5 48
Alternative Minimum Tax adjustments for the above tax changes 8 29
Exclude personal dividend income from taxation 20 364
Increase small business expensing limits 2 16
Personal re-employment accounts 4 4
TOTAL 102 674
Sources: U.S. Department of the Treasury, U.S. Department of Labor, Manufacturers Alliance/MAPI
via Ranges of Enhanced Expensing that expire in 2005. (Totals in billions of dollars)
If the 30% expensing in first year increases . . . 2003 Cumulative 10-year
to 100% 185 44
to 60% 79 22
to 50% 53 -27*
to 40% 27 -31*
Source: Cost Recovery Action Group * Represents a revenue gain for the Federal Government. With bipartisan support for some level of enhanced expensing for all companies, says AMT's Jim Mack, the size of the additional expensing "will be driven by what is an acceptable first year revenue loss given the budget situation."
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