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Exclusive AED Analysis: What Would Camp's Tax Reform Plan Mean for Equipment Distributors
On Feb. 26, the House Ways & Means Committee unveiled its long-awaited proposal for comprehensive tax reform. By any objective measure, the draft bill that Ways & Means Chairman David Camp (R-MI) and his staff have spent more than a year drafting is an impressive piece of work. It’s the most comprehensive and detailed proposal for revamping the U.S. tax code anyone on the Hill has put together in a generation.
Broadly speaking, the bill would:
Camp’s stated objective was to craft a tax reform bill that would first and foremost grow the economy. "We've already lost a decade, and before we lose a generation, Washington needs to wake up to this reality and start offering concrete solutions and debating real policies that strengthen the economy and help hardworking taxpayers. Tax reform is one way we can do that,"Camp said. The Joint Committee on Taxation has said Camp's plan would create up to 1.8 million new private sector jobs and increase Gross Domestic Product (GDP) by $3.4 trillion (the equivalent of 20 percent of today's economy).
- Flatten the code by reducing rates and collapsing today’s brackets into two brackets of 10 and 25 percent for virtually all taxable income;
- Reduce the corporate tax rate to 25 percent;
- Increase the standard deduction to $11,000 for individuals and $22,000 for married couples
- Tax long-term capital gains and dividends as ordinary income at the new rates, but exempt 40 percent of that investment income from tax
- Eliminate the alternative minimum tax; and
- Modernize the international code.
For all the anticipation, the Ways & Means reform plan has received an ambivalent response. Given that there's something for almost everyone to both love and hate in the bill, GOP leaders generally praised Camp for his efforts, while distancing themselves from the substance. With that in mind, no one expects tax reform to get done this year. There's simply too little time on the congressional calendar between now and the November mid-term elections. But the parameters of the tax reform debate are now pretty well set and the risks and opportunities for specific industries are now clearer.
So how did AED's priorities fare in Chairman Camp’s draft bill and what would the plan mean for equipment distributors? Here’s our deep-dig analysis:
Simplifying the code and restoring predictability. AED members almost universally agree that the tax code's complexity and uncertainty are undermining economic growth. Chairman Camp clearly understands that. While we may not like everything about Camp's reform plan and have heartburn over things that would get the axe, it would make compliance simpler for almost everyone. The Ways & Means draft would repeal more than 220 tax code sections, cut the size of the income tax code by 25 percent, and eliminate complexity and compliance burdens by, among other things, adopting a larger standard deduction, enhanced child tax credit and lower rates.
Equal benefit for pass-throughs and corporations. Two-thirds of AED members are pass-through entities whose owners pay company taxes at individual rates. AED has long maintained that tax reform shouldn’t just benefit corporations, particularly if Congress were to pay for lower corporate rates by eliminating parts of the current tax code that benefit all businesses. Camp has clearly understood our concerns in this area. His proposal would lower both individual and corporate rates and reduce complexity for businesses of all sizes.
Capital investment cost recovery. The Ways & Means plan would repeal the modified accelerated cost recovery system (MACRS) and, for tangible personal property like construction equipment, apply rules similar to the current alternative depreciation system (ADS). Under current ADS rules, construction equipment has a six-year class life, farm and mining equipment has a 10-year class life, and equipment used for energy exploration and production has a 14-year class life. Camp’s bill would extend cost recovery periods and thereby hurt cash flow for equipment owners, but it's dramatically better than the asset pooling cost recovery system proposed in the Senate last year under which assets would be depreciated much more slowly and never get to zero tax basis.
Sec. 179 small business expensing. AED has long urged Congress to permanently increase Sec. 179 expensing and phase-out levels to make it more attractive for more companies to buy equipment. Under current law the expensing and phase-out levels are $25,000 and $200,000 respectively. The Camp draft bill would allow companies to expense up to $250,000 in capital investments, with a dollar-for-dollar phase out of the expensing allowance for each dollar investments exceed $800,000. Under Camp's plan, both the expensing and phase out levels would be indexed for inflation. In contrast, the Senate Finance Committee’s business tax reform bill would peg the expensing and phase out levels at $1 million and $2 million respectively and index them for inflation.
Family business estate tax reform. The estate tax takes a significant toll on the family business-dominated, capital-intensive equipment industry. In 2012, AED members spent an estimated $31.82 million on estate tax-related insurance premiums. Additionally, between 2010 and 2013, AED members paid lawyers and accountants an estimated $6.69 million to design plans to protect their dealerships from the estate tax. The 2012 Taxpayer Relief Act permanently set the top estate tax rate at 40 percent and raised the per person exemption to $5 million (indexed for inflation). However, there’s still no easy way to exclude a taxpayer’s business assets from the tax, meaning that companies often have to sell off assets or borrow substantial sums to pay the estate tax when an owner dies. While AED is continuing to push for permanent estate tax repeal, that's unlikely to happen in the current political environment. As an interim measure, we've urged Congress to defer estate taxes on business assets until the assets are sold. Unfortunately, family business estate tax relief has not been included in either the House or Senate tax reform plans.
Protecting LIFO. The last-in, first-out (LIFO) accounting method is used by approximately 40 percent of equipment distributors and, as of the end of 2012, AED members were estimated to have combined LIFO reserves of close to $600 million. AED has long been a leader in the fight against LIFO repeal. A major theme of our opposition is that it would be unfair and destructive to force small businesses to pay taxes on LIFO reserves that have accumulated over the course of several generations. While Camp's draft bill repeals LIFO, it’s clear that he and his committee have at least partially understood our concerns. The bill would require business to include their LIFO reserves in income over a four-year period beginning in 2019 under the following schedule: 10 percent of the reserve included in income the first year, 15 percent in the second year, 25 percent in the third year, and 50 percent in the fourth year. Companies with fewer than 100 owners would be subject to a significantly reduced tax rate on their LIFO reserves (seven percent). Assuming that all AED members who use LIFO would qualify for the lower rate, Camp’s bill reduces the cost of LIFO repeal for equipment distributors from an estimated $200 million to $42 million. While the Camp plan would ease the sting of repeal a bit for smaller companies, it neglects the impact on larger companies (including equipment manufacturers) and disregards the broader economic and policy consequences of eliminating an accounting method that's been acceptable and widely-use for almost a century. The LIFO fight continues.
Protecting LKE. In recent years, many AED members have initiated like-kind exchange (LKE) programs to mitigate the near-term tax consequences of moving equipment with little or no tax basis out of rental fleets. For the equipment industry, LKE has become an important tool to ensure that dealers – and equipment users - can upgrade their fleets without negative tax consequences. As of the end of 2012, approximately one-fifth of AED members used LKE and AED members collectively had more than $720 million in combined LKE deferrals. The Ways & Means draft bill would repeal LKE for transactions occurring after 2014. The drive to repeal LKE seems to be motivated by the fact that it’s so widely used on appreciate assets like real property and expensive works of art and that LKE is perceived as a way for rich Americans to avoid taxes on gains. Few members of Congress (including knowledgeable members of the Ways & Means Committee) seem to understand that LKE is used in industries like construction when the value of assets declines. That means that AED and our members have to redouble efforts to educate lawmakers about LKE and its growing use by equipment distributors and users.
Equipment user tax provisions. AED has been mindful of the impact tax reform could have on our members customers. Aside from our concern about cost recovery changes (which could hurt anyone with an equipment fleet), we've also been concerned about proposals to repeal code provisions such as percentage depletion, which mine and quarry owners use to depreciate natural resources. Percentage depletion and host of other industry-specific provisions are repealed by the Camp proposal in the name of reducing rates and simplifying the code. We’ll continue to work with organizations representing the various sectors that buy and use our members' equipment as they work to determine whether the benefits from Camp’s proposal offset losing these key tax provisions.
Putting the federal highway program back on solid fiscal footing. The federal Highway Trust Fund (HTF) faces enormous near- and long-term challenges because annual highway investment levels have long exceeded user fee revenues. In late summer, the HTF is expected to run out of money, putting at risk an entire year's worth of highway spending – roughly $40 billion – as well as $2.4 billion in equipment market opportunity and 4,000 equipment dealership jobs. AED has been ringing alarm bells for more than a year and urged Congress to use comprehensive tax reform as a vehicle to fix the Trust Fund. Camp’s draft bill makes it clear that our message is getting through. He’s proposed to transfer $126.5 billion to the HTF, which the Ways & Means Committee says would be enough to keep transportation spending at current levels for eight years. AED supports any reasonable, politically-feasible solution that restores the HTF’s solvency. However, our preference is still for new user fees (gas tax increase, vehicle miles traveled tax, etc.) that ensure a consistent, predictable revenue stream for the HTF in the long-term. While we’re extremely pleased that Congress is finally seriously discussing how to solve the problem, solving the HTF crisis can’t wait for a tax bill to get done. Congress needs to fix the problem immediately to give states the ability to plan and provide a level of certainty for contractors and their suppliers.
The bottom-line is that for the equipment industry, Camp's proposal is far from perfect, but it's a vast improvement over the piecemeal Senate Finance Committee proposal, which would hurt distributors and equipment users and provide only minimal benefit. The ball is now in our court (AED and its members) to provide feedback to Camp and his colleagues about the bill. Let us know what you think by sending us an email at firstname.lastname@example.org.
Article Date: 2014-03-03
Source: Associated Equipment Distributors
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