Let's Have Fairness, Facts in Tax Reform Discussion

Mark Green
Posted August 28, 2013

From a Reuters story about tax reform efforts in Washington:  

Billions of dollars in U.S. tax breaks prized by manufacturers, energy companies and other industries could be targeted for elimination when two powerful lawmakers are expected to introduce proposals to overhaul the United States' tax system. Democratic Senator Max Baucus, chairman of the Senate Finance Committee and Republican Representative Dave Camp, head of the House Committee on Ways and Means, are … considering trimming a slew of tax deductions and other breaks to offset the cost of cutting the top corporate and individual rates to as low as 25 percent, say aides and others. The corporate rate now tops out at 35 percent, while the highest individual rate is about 40 percent.

The effort to overhaul the U.S. tax code certainly is a heavy lift. The code is enormous, enormously complex and has wide reach across America. The reform discussion should be thoughtful, fact-based and fair. Too often those are missing from the dialogue. Later in the Reuters piece:  

Another tax break facing bipartisan scrutiny is an accounting method known as "last-in, first-out accounting," a method of tracking inventory that President Barack Obama and some bipartisan tax reform groups have proposed scrapping. "LIFO has to be repealed," to generate revenue for the revamp effort, a senior Republican staff member working on the tax overhaul said. …  Energy companies are the biggest users of LIFO, according to the Committee for a Responsible Federal Budget.

LIFO is an accounting method, not a tax break. More than 30 percent of U.S. companies use LIFO, so it’s not unique to the energy industry. As detailed in this post, taxpayers have used LIFO for more than 70 years. From a LIFO Coalition white paper:

LIFO is used extensively by both publicly-traded and privately-held companies, manufacturers, extractive industries, wholesaler-distributors, retailers, newspapers, automobile and equipment dealers, and a wide range of other businesses. … It is widely used by small businesses and is particularly important to businesses which have thin capitalization, small profit margins, and/or particular sensitivity to rising materials costs. Many of these companies have been on LIFO for decades, creating many years of LIFO reserves.

Repealing LIFO would result in companies being taxed on inventory instead of income, requiring them to redirect cash or sell assets to cover the tax payment. For energy companies, the tax costs – estimated at $28.3 billion over 10 years – could impact investments in energy development and production.

Returning to the larger point, a fair discussion of tax reform should be – well, fair and accurate. Don’t call an accounting measure a “tax break.” Don’t suggest that accounting used by a variety of businesses and industries is reserved for oil and natural gas companies. Similarly, in discussion of the Domestic Production Activities Deduction (also mentioned in the Reuters piece), the fair and accurate thing to report is that most proposals  to eliminate the deduction would single out just oil and natural gas companies – although the measure is available to all U.S. manufacturers who manufacture in the U.S.

A fair and fact-based conversation will help ensure that any tax reform results in a system that encourages investment, job creation and economic growth while fostering U.S. business competitiveness in the global marketplace. This is necessary to build on our country’s recent energy renaissance.