Uncertainty Over Taxes Causing Anxiety, Paralysis for Chemical Manufacturers
3:05 PM MDT | August 15, 2012 | By LAWRENCE SLOAN, SOCMA PRESIDENT AND CEO
The uncertainty over taxes is wreaking havoc with the economy and essentially paralyzing any movement in the manufacturing industry, especially for smaller chemical companies. Companies aren’t hiring new employees. They’re not spending money on research and development, and they are not taking advantage of investment opportunities. They are simply in a holding pattern, waiting to see what their taxes will be come January 1, 2013. And if Congress doesn’t quickly address these issues, it could mean a slow, painful death to the country’s modest economic recovery.
Just how bad is the tax situation? Dorothy Coleman, Vice President of Tax and Domestic Economy Policy for the National Association of Manufacturers (NAM), describes it as an “abyss” or “taxmageddon.” And Federal Reserve Chairman Ben Bernanke told Congress the combination of tax increases and spending cuts is creating an economic threat called the fiscal cliff.
Absent legislation, marginal tax rates for American taxpayers will go up in 2013 to levels not seen since 2001, prior to the Bush tax cuts, and many small and medium size chemical manufacturers will face billions of dollars in new taxes. U.S. manufacturers already face higher tax costs than their competitors in other countries, with the U.S. statutory corporate rate highest among developed nations.
There’s also a misconception regarding the differences in how businesses are taxed. Many people don’t understand that two-thirds of manufacturers, including many chemical companies, are organized as “flow through” entities. These include small businesses, many of which are set up as S-Corporations or Limited Liability Corporations that pay taxes on their profits at the individual level. So when the tax rate goes up for individuals making more than $250,000 a year, or those Congress considers “the wealthy,” it’s essentially a huge tax increase for small companies. The current lower individual tax rates have played an important role in helping these companies survive challenging economic times and retain and create jobs.
A host of other tax relief provisions are also set to expire at the end of the year, including tax rates on capital gains, which would jump from 15 to 24%, and dividends, which will rise from 15% to north of 40%. Then, there’s $22 billion in new taxes from the health care law set for 2013, which includes a 3.8% surtax on top incomes. And the estate tax will go back to 2001 levels, from 35 to 55%, and the exemption will drop from $5 million to $1 million. As a result of all these tax changes, the economy will take a huge hit, which will easily undermine any signs of economic recovery seen thus far.
There’s about $80 billion in tax provisions also set to expire at the end of the year. These are typically renewed year by year, but there has been no movement so far on these extensions.
This includes the R&D tax credit, which is especially important to the specialty chemical industry. As one of the most innovative manufacturing sectors in the U.S., SOCMA members use R&D credits to develop new chemical products and remain competitive in the global marketplace. SOCMA recently sent a letter to Representative Dave Camp, Chairman of the House Committee on Ways and Means, voicing support for strengthening the R&D tax credit and making it permanent. The tax credit would provide new opportunities for businesses of all sizes to expand and invest in their future, ultimately creating jobs and growing the economy.
With the looming threat of tax increases and government spending cuts, we are seeing a high level of anxiety among chemical manufacturers.
We must urge Congress to act on these tax issues sooner rather than later because our industry needs clarity. There’s no way chemical manufacturers can move forward if they don’t know how much money they have to work with, or how much money they owe in taxes at the end of the day.
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