January 26, 2013 Fiscal Cliff Deal: Don’t Uncork the Champagne Just Yet

Volume 16 | Issue 1

Sure, we can breathe a sigh of relief. But the National Association of Manufacturers isn’t completely satisfied with the compromise. Congres

As 2012 wound down, the United States teetered on the precipice of the “fiscal cliff.” With no time to spare, congressional leaders made a deal, averting the largest tax increase in history and staving off – at least temporarily – deep spending cuts. This last-minute action likely prevented the United States from plunging back into a recession.

COMPROMISE WITH QUALIFICATIONS
The deal is no cause for celebration. Congress and President Obama may have averted one crisis, but far greater challenges lie ahead. Indeed, the “fiscal cliff” agreement does nothing to address the nation’s long-term budget and competitiveness problems.

First, the good news: The agreement reached by policymakers saved many manufacturers from a big tax increase, though it didn’t spare them all. Two-thirds of manufacturers pay taxes at individual rates, which would have risen absent congressional action. The compromise extends current tax rates for most individuals and families and, importantly, gives taxpayers certainty by making these tax rates permanent. It also locked in investment tax rates, which were set to rise dramatically.

Small and medium-sized manufacturers will also potentially benefit from a permanent fix to the estate tax. The rates and exemptions had fluctuated in recent years, leading to considerable uncertainty for many family businesses. The “fiscal cliff” compromise locks in a permanent 40-percent rate and a $5 million exemption, which will be indexed for inflation.

Manufacturers also saw a number of important business tax provisions renewed or extended. The research and development credit, which expired at the end of 2011, was renewed, as were tax provisions important to manufacturers operating globally. The compromise bill also extended 50 percent bonus depreciation – a measure that reduces the after-tax cost of capital equipment and is a proven incentive for investment.

CALL FOR REFORM
Overall, however, the legislation fails to address our country’s true fiscal problems: an uncompetitive tax code and the out-of-control spending that fuels our growing debt. Policymakers must rein in entitlement and wasteful spending and enact comprehensive tax reform to establish a path forward that will strengthen manufacturing. Until they do, uncertainty will continue to hang over manufacturers, holding them back when it comes to decisions on investment and jobs.

In the months ahead, manufacturers must continue to press the case for comprehensive tax reform – an overhaul of the tax code at both the individual and corporate levels. Our current tax system is far too complex and a hindrance to competitiveness. Other nations have caught on that competitive tax policies can attract investment and jobs. Now it’s time for the United States to do the same.

IT’S NOT OVER YET
The deal’s biggest failure is on the spending side. It delays automatic spending cuts scheduled to take effect on January 1 for two months. Congress will have to revisit this issue in short order. Moreover, policymakers failed to reach an agreement on the debt ceiling and made no progress in charting a path forward for sustainable and pro-growth budget reforms. Congress and the President kicked the can down the road. Now, bigger challenges loom.

Brinkmanship and partisanship have prevented policymakers from accomplishing even the most routine tasks over the past few years. That has to change in 2013. As we begin a new year, manufacturers must continue to advocate pro-growth solutions and utilize every opportunity to advance our agenda in Washington.

Author Aric Newhouse is senior vice president for Policy and Government at the National Association of Manufacturers.

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