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Wednesday, August 27, 2014

Fiscal Policy Uncertainties Continue to Cramp Manufacturers

The fiscal cliff deal still left unanswered many challenges that manufacturers and the U.S. economy, as a whole, face. Credit: Wikimedia Commons

Most of the dust has settled on Congress’s fiscal cliff deal, but challenges remain that could drastically affect manufacturers in the United States. Upcoming economic deadlines will force Washington lawmakers to act swiftly or risk alienating – and damaging – American industry.

Before the fiscal cliff deal, industry organizations expressed their desire for Congress to reform entitlement spending; although discussions between top lawmakers and the White House centered on this aspect of the fiscal cliff problem, it remained largely untouched.

Additionally, the 112th Congress failed to renew a bill that suspended taxes on certain important manufacturing input product and goods imports. Finally, Dec. 31, 2012, also marked the federal government officially hitting the debt ceiling, which the new Congress will have to address in late February or early March – or earlier, if revised forecasts are accurate.

Although manufacturing was the talk of the town regarding the economy in 2012, by the end of the year growth was sluggish. The Manufacturers Alliance for Productivity and Innovation’s (MAPI) quarterly U.S. Industrial Outlook showed a remarkable growth rate of 10 percent in the first quarter of 2012, but this figure slowed dramatically to 1.5 percent by the fourth quarter. MAPI forecasts an annual growth rate of only 2 percent for 2013.

The fiscal cliff deal preserved some government policies on which the manufacturing sector relies. Portions of the Bush-era tax cuts were extended, lowering taxes on individuals and small businesses making less than $400,000 annually, a big cross-section of which is manufacturing companies.

The deal also preserved a tax credit that encourages investment in the wind energy markets and “save[s] up to 37,000 jobs at 500 factories in the U.S.” according to the American Wind Energy Association (AWEA).

Finally, an R&D tax credit was preserved through the end of 2013. “A sudden and unexpected increase in the tax burden associated with R&D activities – including for activities already conducted – would have dealt a devastating blow to U.S. competitiveness,” the Telecommunications Industry Association (TIA), a trade organization representing the manufacturers and suppliers of high-tech communications networks, said in a statement. “We applaud Congress for responding to industry’s call and averting this worst-case scenario. Unlike other nations, the U.S. private sector bears much of the burden for ICT research, making the R&D credit essential to maintaining U.S. leadership in telecommunications.”

Because the credit expired at the end of 2011, the extension also allows companies to apply for the credit retroactively to expenditures from 2012.

But the fiscal cliff deal didn’t handle all of manufacturers’ concerns.

The fact that the R&D tax credit expired at all concerned some. Biz Journals explains, “Businesses would rather see the R&D tax credit made permanent and strengthened” to better bolster industry research and experimentation.

Additionally, industry groups before the end of last year were encouraging Congress for entitlement program reform as part of the fiscal cliff deal. In an open letter to Congress, National Association of Manufacturers (NAM) Senior Vice President for Policy and Government Relations Aric Newhouse posited that “[t]ackling entitlement and comprehensive tax reform is the only way to find a serious solution to our debt crisis, which is critical to long-term growth and job creation.”

Manufacturing Executive was more direct in its letter to Washington. “Specific, scheduled reductions in entitlement spending must be part of the fiscal cliff agreement. Policy-makers can no longer defer action on these important reforms, which are needed to reduce government spending and restore confidence in the economy. Among other reforms, policy-makers should consider raising the cap on Social Security withholding, and gradually extending the age for Social Security eligibility.”

The congressional deal also let expire a tax credit on industrial imports important to manufacturers. The Miscellaneous Tariff Bill (MTB) waived duties on over 600 products “that don’t face any domestic competition and that don’t cost the customs service more than $500,000.” Reacting to the expiration, NAM Vice President of International Economic Affairs Linda Dempsey decried the fact that “Congress’s failure to pass the MTB has resulted in a tax increase on manufacturers in the United States.”

Lawmakers quickly introduced a job creation and manufacturing competitiveness bill on Jan. 4, a package of legislation that includes an extension of the MTB through the end of 2015. The package of “non-controversial” bills has bipartisan support.

Finally, the big buzz on the Hill concerns the debt ceiling. The government reached its borrowing limit on Dec. 31 and has already engaged emergency suspensions to ensure it can continue to function for the next several weeks. However, the Bipartisan Policy Center says the U.S. Treasury Dept. will hit an “X date,” when it will no longer be able meet its fiscal obligations — which could be as early as Feb. 15, Business Insider reported.

If the government does not raise its borrowing limit, it will no longer be able to perform key functions such as issuing Social Security checks, operating prisons and running the justice system, the Federal Aviation Administration and the FBI. The Washington Post published an article on the nightmare scenario of government operations that would be suspended.

Manufacturing groups have historically backed raising the debt ceiling. During a similar congressional battle in summer 2011, NAM did not take sides in the partisan battle over how to raise the borrowing limit, but did endorse its increase.

“During the current uncertain economic times, Americans desperately need jobs,” NAM President and CEO Jay Timmons wrote in a statement. “It is unreasonable for our government to stand by idly and allow interest rates to increase for families and businesses. Doing nothing also will result in a decrease in foreign investments in the United States and a general hit on the economy.”

The impending debt ceiling battle, following the drawn-out negotiations over the fiscal cliff, has extended the expected effects of economic uncertainty. CNBC reported that small-business manufacturers, already curbing capital expenditures and avoiding new hiring preceding the fiscal cliff deadline, have continued to keep their belts tight in light of the unresolved debt ceiling. The method and timeline of a debt ceiling deal – as well as the other policy issues most impacting manufacturers – remain unknown, and the uncertainty prevents companies from freely acting.

Despite that uncertainty, some are confident that lawmakers will make rational decisions, even if it takes time. MAPI Vice President and Chief Economist Daniel Meckstroth told Biz Journals that while the future is unclear, manufacturing progress rests on the necessity of resolving the problems.

“What happens is forecasters like me and the modelers have to make assumptions. You have to assume the rational course, that things will work out that the deficit is too high and unsustainable,” he said. From there, one can “assume a rational process of gradually reducing the debt to GDP ratio of the U.S. economy.”

“I think, unfortunately,” added Meckstroth, “while we won’t suffer dramatically because of this cliff, the issue has not been settled.”

Brian Lane

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