Uncertainty About Tax-Reform Irks Business : Some Projects Stalled, Others Accelerated as Firms Guess Outcome
Almost two years ago, a Platteville, Wis., businessman began doing what he thought were all the right things to prepare for the opening of his second McDonald’s restaurant.
“I sat down with our CPA, talked about our advantages and disadvantages of expanding,” said the businessman. A crucial consideration was whether the investment would be worth it in terms of the tax advantages.
The accountant said go ahead, but the weatherman refused to cooperate. The 1985 opening had to be postponed because of extraordinarily wet weather and when the faSt-food store finally opened recently, the businessman was not overjoyed.
If his restaurant had opened before the new year, the owner would have been assured of lucrative tax breaks that are slated to be eliminated retroactively as of Jan. 1 in the tax-overhaul plan now under consideration in Congress.
“It’s not fair. If you do anything on a tax bill, it has to have an effective date somewhere in the future so people can plan accordingly,” the businessman complained. “I’m not trying to say a tax bill is good or bad. It has to have an effective date and not penalize people who made commitments in 1984 and 1985.”
Businesses Scramble
Uncertainty over the tax-overhaul debate in Congress is causing consternation from coast to coast as businesses scramble to postpone, cancel or hurry up investments to beat the threatened elimination of tax breaks.
The tax-revision plan was intended to encourage businesses to buy equipment, expand plants and make other capital commitments based not on tax decisions, but on the economics of the investment itself. Instead, the uncertainty about the tax legislation is causing businesses to make investment decisions driven largely by their tax implications.
There are at least three schools of thought on the impact of tax revision on companies. One is that businesses will cancel or postpone plans because they are not sure how tax revision will affect them. Another is that businesses will hurry and make all of their investments this year in hope that the effective dates will be moved back when the bill is finally passed. And finally, there is the feeling that tax revision won’t pass, so business will go on as usual.
“For the most part, there’s skepticism” that any bill will pass, said Delos Smith, associate economist for the Conference Board, a private, nonprofit research organization supported by business. “Is there really going to be a bill? There’s uncertainty about Gramm-Rudman and everything going on, especially in the financial community and that’s a community that hates uncertainty. That makes them very, very nervous.”
Uncertainty over tax revision was “one of the factors which entered into business-spending plans in 1986 showing no growth in real terms,” said Robert Ortner, the Commerce Department’s chief economist. “Uncertainty is never a favorable factor for investment. . . . “
Hurrying Decisions
“If anything, the high probability that there will be a tax-revision bill this year is causing business to hurry up their business decisions so they can get in under the wire,” said Jerry Jasinowski, chief economist for the National Assn. of Manufacturers. “Business investment in ’86 could be higher.”
Firms ranging from small and large manufacturers to real-estate developers are particularly concerned about these provisions of the tax bill passed by the House and pending in the Senate:
- Elimination of the investment tax credit, which subsidizes up to 10% of the cost of new equipment and machinery.
- Changes in depreciation, which will make it less lucrative to purchase equipment and real estate.
- Restrictions on industrial revenue bonds, which prohibit their use for financing many projects with non-governmental uses.
- Limits on the deductibility of interest.
- Creation of a comprehensive alternative minimum tax on corporations.
Most of these provisions have effective dates that would wipe out the old tax breaks retroactive to Jan. 1. Because the effective dates could still be changed, many business people said they aren’t sure when their investments might be affected by the new law--if there is one.
In the real estate industry, many developers are said to be holding off on decisions because of threats to the depreciation write-offs and interest deductions that draw billions of dollars each year into multifamily housing, low-income projects and other types of real estate transactions. In real estate, tax breaks usually make the difference between profit and loss on investments and sometimes are the only income investors derive from projects.
Just about all of the evidence about businesses changing plans is anecdotal since no major business group or the government has studied how businesses are reacting. Many large companies said they anticipate no changes resulting from tax revision because their investments are so vast and planned so far in advance that they cannot be stopped.
Increased Investment
So far, the business community’s nervousness has produced increased investment in the last few months and probably for the first half of the year, said Ortner and Jim Weidman, a spokesman for the National Federation of Independent Business, which represents thousands of small and medium-sized businesses around the country.
Real spending is expected to decline by 1% this year, according to the Commerce Department. But Ortner said many businesses are speeding up spending plans in the first half of the year partly in hope they can somehow be spared the tax-revision ax.
Ortner points to the most recent Commerce Department survey of business-spending plans for 1986. Manufacturers, many of whom say they will be hurt by tax revision, plan a decline in real spending of 4% from 1985 levels. Durable manufacturers plan to spend 6.2% less and those in non-durables will invest 1.8% less this year, the Commerce Department said.
On the other hand, non-manufacturing firms, many of which have said they will not be adversely affected by tax revision, plan a 0.9% increase in plant and equipment this year, the Commerce Department said.
Weidman said many small businesses have moved up investment plans this year in large part because of uncertainty over tax revision. According to recent polls of about 2,000 of its members, borrowing is at record lows not only because businesses are frightened by borrowing costs that remain high, but also because “there’s a lot of uncertainty out there,” Weidman said. “They’re just not taking on a lot of debt for expansion. They don’t know what’s going to happen to them.”
Using Cash Flow
Although these businesses plan to expand, they plan to do it from their cash flow, because they expect sales to be good, inflation still is low and “uncertainty over tax revision is pushing them to spend more now than later,” Weidman said.
“There’s a lot of use-it-or-lose-it” as far as using tax credits for capital spending, Weidman said.
In the survey of NFIB members, 32% of the respondents said they plan to purchase plant and equipment in the next three to six months, up from the 30% who reported planned expenditures in the fourth quarter of last year and 29% in the third quarter.
Most of the capital sending planned by the firms is large--generally more than $50,000--suggesting that businesses want to take advantage of tax breaks on large purchases and new facilities, Weidman said. There is no sense of panic in the business community, he added, and tax revision is not the only consideration in making investments.
But uncertainty over tax revision is keeping on ice a project to help revitalize the downtown area of Green Bay, Wis. The city had hoped to sell industrial revenue bonds to finance upgrading the area along the Fox River, but the tax-revision proposal threatens to end the tax-exempt status of many of the bonds.
Because the tax-revision plan threatens the value of the bonds to be used for the project, “nobody is purchasing these bonds on the bond market,” said Nan Nelson, executive director of economic development programs for the Green Bay Chamber of Commerce.
