This month’s column is not about the latest crisis facing the U.S. economy from the automatic spending cuts (known in Washington speak as “sequestration”).  At this writing, depending on whom you listen to, the cuts that began on March 1 will either be a total disaster unlike anything we’ve ever witnessed or a big yawner that few people even notice (at least not immediately). No one knows who’s right, and history may be the final judge, so we’re not going to pretend that we are smarter than everyone else by predicting the outcome or the effects.

    Instead, this column is about comprehensive tax reform, which is under serious discussion for the first time in many years – perhaps since the last major tax-reform legislation passed in 1986. To be sure, there are many huge hurdles and pitfalls between here and any tax reform becoming law, but in our view there is at least a chance that something could pass in the 113th Congress.

    As an indication of the seriousness of the discussion, House Speaker John Boehner announced on Feb. 26 that he was reserving the first House bill of the 113th Congress, HR 1, as the vehicle for comprehensive tax-reform legislation.

    Rep. Dave Camp (R-MI 4), chairman of the House Ways and Means Committee, is committed to producing comprehensive tax-reform legislation this year based on the following principles:

    • Lowering the overall tax rates

    • Broadening the overall tax base

    • Creating economic growth

 

    Rep. Camp has been working steadily on this goal for at least the past year, releasing “discussion drafts” on key elements of tax reform and soliciting input from a broad cross section of businesses, academics and individuals. Similar work has been ongoing in the Senate Finance Committee, led by Chairman Sen. Max Baucus (D-MT) and Ranking Member Sen. Orrin Hatch (R-UT). Most recently, Reps. Camp and Sander Levin (D-MI 9), the Ranking Member on Ways and Means, appointed 11 bipartisan working groups to gather information on specific areas of the tax code and to report back to the full Committee by April 15.

    Significant changes to the tax code may be viewed either positively or negatively, depending on your vantage point, and forgers have a unique vantage point.

    For example, many forging companies are organized as “pass-through” entities (S Corps, LLCs or partnerships), which means that owners pay taxes at the applicable individual rates. So, reducing the corporate tax rate would not benefit them at all. One of the 11 working groups described above will focus specifically on small business and “pass-through” entities. 

    Similarly, “broadening the base” likely means that many exemptions and deductions would be eliminated in order to lower the overall rate for all taxpayers. Many forging companies currently utilize the research and development tax credit, accelerated depreciation for capital equipment, and the domestic production tax credit to lower their effective tax rate. These companies will want to be sure that the overall rate reduction is sufficient to offset the benefits of deductions and exemptions that may be eliminated. Another of the 11 working groups will focus specifically on manufacturing.

    Other tax ideas being discussed by various members of Congress and outside groups include a potential carbon tax, which is seen by supporters as a revenue-raiser for government and a means to reduce the use of fossil fuels. Forgers have long been concerned about such a tax since forging is an energy-intensive process and many forging operations use substantial amounts of natural gas.  

    To ensure that these and other industry concerns are known, the Forging Industry Association (FIA) has been communicating with members of Congress on an ongoing basis, and we are now making those views known to the Ways and Means working groups on small business/pass-throughs and manufacturing. 

    There is certainly no guarantee that comprehensive tax-reform legislation will be signed into law this year, but FIA is in the thick of the debate as this issue moves to center stage in the next few months.