THE FINAL TAX BILL : Industry : Changes Could Aggravate Decline in Manufacturing

After years of taking a pounding from foreign competition, America’s industrial base came face to face with a new nemesis Monday--the tax overhaul.

The impact of the sweeping revision of the nation’s income-tax system falls unevenly on corporations in America’s basic industries, with some winners and some even bigger losers. General Motors and Chrysler, for instance, stand to reap millions from parts of the massive tax bill, while steel companies such as Inland and USX face the prospect of losing coveted tax incentives.

Economists agreed, however, that the most profound impact on the Rust Belt may come from the elimination of the 10% tax credit on investments in plants and equipment in the United States, which may further damage America’s ability to compete with foreign manufacturers.

In the end, they predicted, the change will accelerate the movement of manufacturing plants overseas and reduce the likelihood that America will be able to revitalize its troubled manufacturing base.

Further Flight Seen

“American manufacturers have been moving offshore for a decade, and this bill is just going to accelerate that trend,” said Robert Ragland, a tax specialist at the National Assn. of Manufacturers.

“This bill does not provide a single incentive to manufacture in the United States,” added John Loffredo, chief tax counsel to Chrysler Corp.

While the tax bill lowers the corporate income tax rate from 46% to 34%, it also eliminates the 10% credit that businesses previously took off their taxes for investments in plant and equipment, and it stretches out the time it takes to write off assets for tax purposes.

Although many industry executives believe the lower tax rates for business could offset at least partially the loss of the investment tax credit and the changes in depreciation schedules, they warn that the tax code will no longer provide any incentive for businesses to make their capital investments at home.

“We cannot help but be concerned about the impacts these changes will have on the international competitiveness of American industry,” noted Ford Motor Co. in a prepared statement.

Without a 10% subsidy for building a plant in the United States, manufacturers will be more tempted to make their products in lower-cost operations overseas, especially since, as importers, they will still benefit from the cut in taxes on their profits in the United States.

‘Bottom Line’ Is Demand

“The bottom line of this bill is that it will spur demand among consumers, (through lower individual tax rates) but those people will be buying more imports,” complained Ragland.

Overall, the bill is likely to reduce dramatically corporate investments in domestic capital projects, according to John Hagens, an economist with Chase Econometrics, an economic forecasting firm. With fewer inducements to build or modernize facilities in the United States, the total value of the nation’s plants and equipment will grow more slowly. Hagens predicted that by 1995, America’s physical assets will be worth $200 billion less, under the new tax code, than they would have been worth under the current law.

Still, a number of industrial analysts and executives were reluctant on Monday to condemn the new tax package. Some said it could help, by eliminating unproductive tax shelters that have drained investment funds away from manufacturing industries and thus making the nation’s economy more efficient and productive.

Others said that the congressional conference committee’s approval of the bill would help heavy industry by unleashing spending on new equipment by corporations that have been uncertain about how the new tax code would affect such investments.

Spending Was Suspended

“A lot of our customers had postponed capital investments because they weren’t sure what the tax rules would be,” said John Redding, a spokesman for Cincinnati Milacron, a major machine tool producer. “The loss of the investment tax credit is certainly a negative factor for our sales, but how you balance that against the end of the uncertainty is hard to say.”

And many joined in a common refrain on the Monday morning after: It could have been worse.

“This bill increases taxes on investments in machine tools by 47.5%--is that helpful to the competitiveness of the machine tool industry? No.” said James Mack, director of public affairs for the National Machine Tool Builders Assn. “Is it as bad as it could have been? No.”

For Detroit, the loss of the heavily used investment tax credit should be more than offset by lower corporate tax rates on the huge profits the auto makers have been posting over the last few years. Loffredo estimated that Chrysler will lose $1 billion in investment tax credits over the next five years, but that the loss will be evenly balanced by the cut in tax rates, expected to save the auto maker $200 million annually.

“This bill is very good if you are a very profitable company,” said Loffredo. “But if you are a marginal company, it makes it very difficult to invest and modernize. If this bill had happened to us during our financial crisis in 1981, it would have been terrible for Chrysler.”

Auto Sales Predictions

Chrysler and the rest of the Detroit auto industry have also been counting on somewhat improved car sales to come from the increased demand expected to result from the reduced personal tax rates, but most industry analysts now believe the impact on car sales will be quite small. Ted Sullivan, an analyst at Chase Econometrics, said that the elimination of the deduction of interest on car loans will tend to wipe out the benefits that potential car buyers gain from lower tax rates.

Meanwhile, Loffredo warned that the auto-leasing market may be hurt by the elimination of the investment tax credit. Under current lease agreements, the auto makers buy cars back from their dealers and lease them; the car becomes a piece of business equipment for the auto company, allowing the firm to take a 10% tax credit on it. Without the tax credit, the cost of leasing cars will increase, and so leasing rates could rise as well.

Still, the auto makers have been able to win a few special breaks to ease their tax burden. Under special provisions in the Senate bill, which may still show up in the final conference package, General Motors’ Saturn (small car) plant in Tennessee, Mazda’s Michigan plant, Toyota’s Kentucky plant and the Chrysler-Mitsubishi joint-venture facility in Illinois would be exempt from the elimination of the investment tax credit.

The provision for the Saturn plant would save GM $60 million in taxes, while the Chrysler tax break would save $30 million.

Low-Profit Firms Vulnerable

Less profitable industries have more to worry about in the tax bill than do the auto makers. Makers of steel, equipment and other capital goods products for other manufacturers believe it could take a long time for a jump in demand to translate into greater capital spending by industrial customers.

Their sales of equipment to other manufacturers may also be hurt by the changes in depreciation schedules. Most manufacturing equipment will be written off over seven years, rather than the five years allowed under current law, and investments in industrial buildings will be written off over a longer period. The change in the depreciation schedules will hurt equipment sales by reducing the tax incentives to make such purchases.

Many such capital goods manufacturers are only marginally profitable and do not pay taxes at the 46% corporate rate now. As a result, they can’t take full advantage of the reduced corporate tax rate.

Some may even be forced to pay higher taxes, since a 20% minimum tax rate on all profitable corporations could bring some firms into a higher tax bracket.

Such firms won’t have lower tax rates to offset the loss of investment tax credits, and some cash-starved companies may be forced to delay capital spending.

That could hurt even the companies that are losing money and, thus, aren’t paying any taxes. To save money, cash-poor steelmakers often lease the equipment in their mills from profitable firms that need the investment tax credits they can take from investing in equipment.

Without those tax credits, equipment leasing rates will rise by 20% to 30%, so it will be more difficult for marginally profitable producers to invest in new tooling, according to Donald McCambridge, manager of tax legislation analysis for Bethlehem Steel.