In his State of the Union address, President Obama laid out a blueprint for an economy that’s built to last – an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.
I share the President’s believe that “this is a make or break moment for the middle class and those trying to reach it. Manufacturing is the foundation of the middle class, and we are losing the middle class because of the loss of manufacturing jobs. I’ve seen the middle class eroding for decades because manufacturing and the good jobs the industry provides began leaving our shores long before the recession. Too many manufacturers have sourced all of most of their manufacturing offshore, especially in China. It’s the loss of manufacturing jobs that is keeping unemployment so high and creating budget deficits at the local, state and federal level. People who are working pay taxes that generate revenue for our government whereas the unemployed create expenses to government for their “safety net.”
The President’s blueprint has one section covering manufacturing titled, “Manufacturing: Create New Jobs Here In America, Discourage Outsourcing, And Encourage Insourcing,” so let’s examine the points one by one to see if they will make enough difference to “save American manufacturing.”
1. Remove tax deductions for shipping jobs oversees and providing new incentives for bringing them back home: It’s been outrageous that we’ve been giving tax incentives to companies to outsource manufacturing offshore by allowing companies moving operations overseas to deduct their moving expenses and reduce their taxes in the United States. This proposal would eliminate deductions for moving their operations offshore and give a 20 percent income tax credit for the expenses of moving operations back to the U. S. to create jobs for Americans. Eliminating this tax incentive for outsourcing offshore is one of the recommendations mentioned in my book.
2. Target the domestic production incentive on manufacturers who create jobs here at home and double the deduction for advanced manufacturing: This proposal would reform the current deduction for domestic production by more narrowly focusing it on manufacturing activities, expanding the deduction for manufacturers, and doubling the deduction for advanced manufacturing technologies from its current level of 9 percent to 18 percent. This proposal would benefit manufacturers utilizing advanced manufacturing technologies, but I see no reason why it shouldn’t apply to all domestic manufacturing and why oil production should be eliminated from this deduction.
3. Introduce a new Manufacturing Communities Tax Credit to encourage investments in communities affected by job loss: “The President is proposing a new credit for qualified investments that help finance projects in communities that have suffered a major job loss event … would provide $2 billion per year in incentives for three years.” For example, if a major employer closes a plant or substantially reduces the workforce with a mass layoff, the tax credit would support qualified investments in the affected community that would improve local economic growth. This proposal would help communities that lose manufacturing companies or suffer mass layoffs, but would have no effect in preventing manufacturers from leaving or closing plants.
4. Provide temporary tax credits to drive nearly $20 billion in domestic clean energy manufacturing: The President is proposing to extend the Advanced Energy Manufacturing Tax Credit tax credit for investment in domestic clean energy manufacturing to ensure new windmills and solar panels will incorporate parts that are produced and assembled by American workers. However, the U.S. solar industry filed a trade case at the Department of Commerce late last year alleging dumping and unlawful subsidies by China. Until we address China’s currency manipulation and dumping of products including solar panels and windmill parts, America’s clean energy industry will remain at a competitive disadvantage to China. Senate bill 1619 that passed the Senate last fall, and H. R. 639 waiting for a vote in the House would be a good start in addressing China’s currency manipulation. Unfortunately, President Obama has indicated he would veto the bill if passed.
5. Reauthorizing 100% expensing of investment in plants and equipment: The President is proposing to extend for all of 2012 a provision that allows businesses to expense the full cost of their investments in equipment, spurring investment in the United States. This provision was part of the Bush administrations tax cuts and will sunset at the end of this year unless it is extended. It needs to be extended well beyond the end of this year for it to have any real impact in benefitting manufacturers.
6. Closing a loophole that allows companies to shift profits overseas: Corporations right now can abuse the tax system by inappropriately shifting profits overseas from intangible property created in the United States. The President is proposing to close this loophole. This is one of the several steps we need to take to incentivize companies to maintain manufacturing in the U. S. or bring manufacturing back from overseas.
At the same time the President is calling for immediate enactment of this plan, he is pushing forward on a framework for corporate tax reform that would encourage even greater investment in the United States, while eliminating tax advantages for outsourcing. This framework would include:
Making companies pay a minimum tax for profits and jobs overseas and investing the savings in cutting taxes here at home, especially for manufacturing: The President is proposing to eliminate tax incentives to ship jobs offshore by ensuring that all American companies pay a minimum tax on their overseas profits, preventing other countries from attracting American business through unusually low tax rates. The savings would be invested in cutting taxes here at home, especially for manufacturing.
This would only encourage more companies to reincorporate in tax haven countries to avoid paying any corporate taxes in the U. S., which has the second highest rates in the world. A better plan would be to reduce corporate taxes down to the globally competitive 25 percent so that corporations will have less incentive to avoid paying U. S. taxes by building facilities in foreign countries.
Making permanent an expanded Research and Experimentation Tax Credit: The President is proposing to make the Research and Experimentation Tax Credit permanent, while enhancing and simplifying the credit. Again, this is one of the recommendations in my book and would encourage manufacturers to keep R&D in the United States as only research and experimentation performed in the United States is eligible.
Simplify the tax code and close loopholes: The Fact Sheet states that over the last 30 years since the last comprehensive reform, the tax system has been loaded up with special deductions, credits, and other tax expenditures that help well-connected special interests, but do little for our country’s economic growth. The President’s framework will close these loopholes and simplify the tax code so businesses can focus on investing and creating jobs rather than filling out tax forms. As I mentioned in a recent article, the Department of Treasury issued a report in 2007 that made many recommendations of how to simplify the tax code and close loopholes. We don’t need to “reinvent the wheel” to study how to simplify the tax code. Let’s just implement some of the previous recommendations immediately.
Cracking down on overseas tax avoidance and loopholes: The Fact Sheet states that the President has taken strong steps to crack down on overseas tax evasion and loopholes, including signing into law the Foreign Account Tax Compliance Act, which targets tax evasion by U.S. citizens holding investments in foreign accounts, as well as measures to crack down on abuse of foreign tax credits that have allowed multinational companies to inappropriately reduce the amount of taxes they paid in the U. S.
The Fact Sheet touts the tax incentives that President Obama signed into law in the last three years that have helped manufacturers, but he actually only signed legislation extending the tax cuts and tax incentives through 2012 that were originally passed by Congress under the Bush administration. These tax cuts and incentives will end in 2013, if not extended again, and far higher taxes will be imposed under certain provisions of the Affordable Health Care Reform Act of 2010.
One of the big reasons manufacturers and other types of businesses are sitting on millions of dollars in corporate profits without expanding plants, buying new equipment, and hiring more workers is the fear of the higher taxes and health care costs they are facing in 2013 as a result of the Health Care Reform Act.
Therefore, a careful review of the President’s blueprint shows that it doesn’t do enough to save American manufacturing. The few beneficial policies will be more than undone by the tax increases and regulations that will take effect in 2013 and thereafter. What we need is an all encompassing national manufacturing strategy if we truly want to provide enough incentives to retain or bring back manufacturing to the U. S. and discourage corporations from outsourcing their R&D and manufacturing overseas.