August 26, 2012 Uncertainty Looms for Manufacturers

Volume 15 | Issue 3

Uncertainty can be a positive force that causes Americans to hold account political leadership. But it can also be a negative that compels m

Outcome of upcoming elections are anyone’s guess. Will President Obama secure another term? Can Republicans maintain House majority? Will Democrats retain Senate control?

Such uncertainty we’re used to. It’s a healthy sign of our vibrant democracy and civic engagement. Unfortunately, the uncertainty that manufacturers face is far less healthy. Indeed, it’s downright harmful to economic growth and job creation. Worse, this uncertainty was entirely preventable.

Looming above manufacturers’ heads are end-of-the-year tax increases and automatic cuts to the nation’s defense budget. If tax hikes and spending cuts take effect, expect dramatic impact. Prospects are already having a chilling effect on the economy: It’s hard to make new investment decisions—and in turn create jobs—when so many questions swirl around the nation’s business climate.

Answer: Congressional Action
The manufacturing sector has helped lead US economic recovery. Congress needs to provide industry with certainty, but it’s running out of time. Congress can’t delay action until the last minute—as it too often does—especially when the country teeters unbalanced on the precipice, looking into a dark fiscal abyss.

When the clock strikes midnight on December 31, 2012 taxes will increase: on individuals, on investment, and on businesses. When the chimes ring, investment taxes will jump dramatically; tax rates on dividends could almost triple. Anticipate new taxes on medical devices. But perhaps the tax increase with the most wide-ranging impact will be the jump in individual tax rates.

The individual tax rate matters for manufacturers (two-thirds of manufacturers pay taxes at individual rates because they are organized as S Corps or other flow-through entities). If Congress fails to act, many small and medium-sized manufacturers could pay a top rate of nearly 40 percent on their income – and that’s just at the federal level. Add in Social Security and Medicare taxes, and state and local taxes, and these manufacturers will face a stifling tax burden.

Compounding the problem for manufacturers are the automatic cuts to the federal budget that will begin in 2013. Congress and President Obama need to get control of the budget and rein in the nation’s debt. Impending cuts could lead the US in the wrong direction, hurting the economy and costing jobs.

Congressional Failure
Cuts result from the congressional “Super Committee.” Late last year, Congress failed to come up with a viable plan to trim the federal budget. The created “Committee” proved about as effective as Congress itself; the automatic cuts—officially called sequestration—kicked in.

These cuts can slice deep. They would have a disproportionate impact on our nation’s defense spending, which threatens our nation’s security, economic and protective.

Something else to consider: Entitlement spending will not be touched, which will continue structural deficiencies in our nation’s budget.

What’s at Stake?
Much for manufacturers, according to a recent study by the National Association of Manufacturers (NAM): Defense cuts could wipe out at least 130,000 manufacturing jobs. (The report is available at www.nam.org.)

Manufacturers aren’t the only ones who stand to lose. Cuts will cost more than a million jobs nationwide and boost the unemployment rate by nearly one percent. Economic growth will suffer. Projections indicate that gross domestic product will decline by one point in 2014.

The impact isn’t just immediate. The deleterious effects will linger. Defense manufacturing helped drive innovation in United States. Leading edge products kept us safe at home and abroad. That’s one reason why costs will cut more deeply into than just the economy.

At a time when unemployment is high and growth anemic, Congress must avert the looming fiscal disaster. It shouldn’t wait until the last minute. Uncertainty has sidelined investment, which thwarts manufacturers’ efforts to grow and create jobs.

Forward Focus
The United States is a nation only just emerging from a severe recession. We have to look for leadership in this crucial time of economic recovery. Manufacturers stand proud and ready to bear that mantle of leadership.

Unfortunately, Washington-created policy has only led to increasing uncertainty, which holds manufacturers back.

So the questions continue. We don’t know what our tax rates will be next year. We aren’t certain whether critical funding for our nation’s defense will dry up. We aren’t sure what costly and burdensome regulation will come at us next.

Such questions come as quickly as the rapidly approaching national election. Washington DC is a political animal. Americans are justifiably skeptical that Congress and President Obama can take care of business before November 6.

It has come time to dare our leaders to prove our skepticism wrong – to put partisan politics aside, to enact policies that will make our manufacturers more competitive, to avert the fiscal abyss.

Nothing less than US prosperity—and our citizens’ quality of life—are at stake.

Author Jay Timmons is president and chief executive officer of the National Association of Manufacturers (NAM) and a leading advocate for the nearly 12 million Americans employed in the manufacturing sector. NAM is the largest US manufacturing association. Its mission is to foster a stronger economy by enhancing the competitiveness of American manufacturers. To learn more about the organization, visit www.nam.org.

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