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March 14, 2012 Tax Watch: The Senate Finance Committee on March 6, 2012, took a closer look at the impact tax incentives have on capital investments and manufacturing, as seen through the lens of economic decline and decreased federal revenue.

Panel Looks at Impact of Tax Incentives on Investments, Manufacturing

  • 3/14/2012

Panel Looks at Impact of Tax Incentives on Investments, Manufacturing

The Senate Finance Committee on March 6, 2012, took a closer look at the impact tax incentives have on capital investments and manufacturing, as seen through the lens of economic decline and decreased federal revenue. Finance Committee Chairman Max Baucus, D-Mont., said the panel needs to determine whether current incentives adequately address the existing challenges, or whether there are simpler, more effective ways to encourage manufacturing investment in the U.S.

Ranking committee member Orrin G. Hatch, R-Utah, said the corporate tax rate needs to come down, in addition to other tax reforms, in order to make U.S. companies, including manufacturers, more competitive with the rest of the world.

To illustrate the current problem in finding an effective solution, Hatch cited a recent economic paper that suggests that the investment tax credit may be a better incentive for capital investment than accelerated depreciation, although tax incentives for capital investment are not interchangeable with a corporate tax rate cut.

“They are really two separate issues,” said Hatch. A corporate tax rate cut would not affect many small businesses that are conducted as partnerships, S corporations, or limited liability companies, according to Hatch. In addition, a corporate tax rate cut affects both old and new corporate capital, while expensing and accelerated depreciation affect only new capital.

Dr. Jane G. Gravelle, senior specialist in economic policy for the Congressional Research Service, stated that the federal government was not getting enough “bang for its buck,” as she highlighted how the deduction for domestic production activities, which was enacted in 2004, reduces the effective tax rate on manufacturing activity by 3 percentage points, but manufacturing has still declined.

Other major tax incentives include accelerated depreciation and an expensing provision, with accelerated depreciation being the largest business tax expenditure. Gravelle believes changes are needed. She said revisions to the depreciation system should include: “returning to the alternative depreciation system as proposed in Sen. 727 and by the Fiscal Commission, and a more limited approach of lengthening the lives of the basic equipment classes that is proposed as a CBO (Congressional Budget Office) budget option.”

Dr. Robert D. Atkinson, president of the Information Technology and Innovation Foundation in Washington, D.C., warned against too much tinkering with the current tax system. He said any tax reform that reduces or eliminates key incentives for investing in capital equipment and traded sectors like manufacturing, will reduce growth and competitiveness, not boost them.

“In fact, three of the most costly tax incentives (Code Sec. 199 deduction for domestic production, R&E tax credit, and accelerated depreciation) are the most useful provisions of the tax code in terms of spurring investment and ensuring that traded-sector establishments do not further lose their competitive edge,” Atkinson said.

Dr. Ike Brannon, director of economic policy and congressional relations for the American Action Forum in Washington DC, said economic growth should have primacy in any debate over corporate tax reform. “Most of the deductions, exemptions, and expenditures in the tax code do relatively little to incentivize growth given their cost, and our economy — and government coffers — would be better off if they were eliminated and the savings were used to ‘buy’ a lower corporate tax rate,” said Brannon.

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