AED Washington Insights Newsletter|
Prepared by Christian A. Klein, AED Vice President of Government Affairs
and the AED Washington team
In this Issue:
New AED Survey Report Shows Impact of Tax Code, Proposed Changes on Equipment Distributors|
AED's 2012 member tax survey has yielded valuable information about how construction equipment distributors are affected by the current tax code and proposed changes. AED has also used the information provided by its members to make economic projections about the equipment industry.
Among the key findings:
The complete results and survey methodology are at:
- AED's U.S. dealer members earned $26.67 billion in total revenues in 2011 and employed close to 47,000 people.
- AED members supported $85 billion in direct, indirect, and induced U.S. economic activity in 2011.
- The equipment industry is dominated by closely-held, pass-through entities. Two-thirds of survey respondents classified themselves as either S-corporations, Limited Liability Companies (LLCs), or Limited Liability Partnerships (LLPs). The respondents classifying themselves as either C or S-corporations had an average of 5.5 shareholders; partnerships had an average of 2.4 owners.
- New and used equipment sales account for just under half of respondents' revenues, while parts, service, and product support make up nearly one-third of revenues (See Chart).
- Thirty percent of survey respondents reported using the last in, first out (LIFO) inventory accounting method and 28 percent use first in, first out (FIFO). The average reported LIFO reserve was $8.16 million. Respondents reported combined LIFO reserves of $220 million. AED projects that its members have approximately $588 million in combined LIFO reserves. Were LIFO to be repealed, AED estimates that its members would be subject to close to $200 million in retroactive tax liability.
- Approximately one-fifth of respondents reported having a like-kind exchange (LKE) program in place for their rental fleets. Respondents reported combined LKE deferrals of $295 million, an average of $12.3 million per company. AED projects its members have more than $720 million in combined LKE deferrals.
- Respondents reported $1.29 billion in total rental revenues in 2011, an average of $12.03 million per company. AED projects its members' 2011 rental revenues were more than $3.3 billion.
- The total estimated acquisition cost of respondents' depreciable rental fleets (including rent-to-sell units being depreciated) as of Dec. 31, 2011, was $3.13 billion, an average of $31.26 million per company. AED estimates the total combined acquisition value of member rental fleets at $9.02 billion.
- The combined reported interest expense deduction for 2011 was $92 million, an average of $872,000 per respondent company. By contrast, the total interest expense deduction reported by respondents for 2007 was $163.19 million, an average of $1.75 million per company. The total projected interest deduction for all AED members in 2011 was $232.05 million, while the total interest expense deduction in 2007 was $468.53 million.
- Approximately one-tenth of respondents earn income outside the United States.
- The estate tax takes a significant toll on the family business-dominated, capital-intensive equipment industry. AED members cumulatively spend an estimated $31.82 million on estate tax-related insurance premiums each year. Additionally, over the past three years, AED members responding to the survey have collectively paid lawyers and accountants an estimated $6.69 million to design plans to protect their companies from the potentially devastating impacts of the estate tax.
- Respondents identified their top priorities for the tax reform debate as: protecting the business deductions (especially business interest), cost recovery issues (e.g., preventing Congress for tampering with depreciation periods for construction equipment, Sec. 179 small business expensing, and the depreciation bonus), and identifying new user fees to support federal surface transportation investment.
AED conducted the survey in November and December 2012 to gather data to support the association's engagement in the federal tax reform debate. Survey forms were mailed to all U.S. AED dealer members, who were given the option of returning the survey to the association's Government Affairs Office by email, fax, or regular mail. Each survey had a unique identifier to prevent multiple responses. Ultimately, 115 distributors responded to the survey (representing 28 percent of the association's dealer membership).
Thanks to all the members who took the time to participate! You've given AED's lobbying team vital data that will make us more effective advocates for your interests on Capitol Hill. Please contact AED Vice President of Government Affairs Christian Klein at 703-739-9513 if you have questions or comments.
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New AED Study Examines Fuel Efficiency Impact On Gas Tax Receipts, Projects $365 Billion Highway Fund Shortfall|
As automobile fuel economy increases, the federal highway program's fiscal position will become ever more precarious, according to findings from a new AED-commissioned study by researchers at the College of William and Mary.
The team from William and Mary's Thomas Jefferson Program in Public Policy forecasts that over the next 23 years, as Corporate Average Fuel Economy (CAFE) standards rise, gasoline consumption will decline. This will lead to a drop in gas tax payments to the federal Highway Trust Fund (HTF), the highway program's primary funding source. Failing to change the existing tax structure while maintaining current investment will cause the HTF's account to incur a $365.5 billion deficit over the next 23 years, the study concludes.
The highway program is already in dire straits. Although it has been self-sustaining for many years thanks to the gas tax and other user fees, declining revenues have made transfers from the general budget necessary to prevent road and bridge spending cuts. Myriad studies have shown that merely maintaining current spending is insufficient to build the infrastructure our growing economy needs. One report by the Texas Transportation Institute found that traffic congestion, resulting in large part from inadequate capacity, costs the country more than $100 billion per year in wasted time and fuel.
"HTF revenues are inadequate to support today's road and bridge spending levels, which are already well below what's needed to maintain the interstate system's performance," said AED Vice President of Government Affairs Christian Klein. "As part of the broader tax and budget reform debate, Congress needs to do something bold to put the program back on solid fiscal footing."
The William and Mary study offers a few possible solutions. The gas tax was last increased - to 18.4 cents per gallon - in 1993. The research team determined that restoring the gas tax's 1993 spending power by raising it to 25 cents and indexing it for future inflation would raise $167 billion above current baseline spending requirements over the next two decades. The study also examined ways to implement a vehicle mileage-based user fee.
"We hope Congress will take these findings to heart and act quickly to identify new revenue streams for the road program," AED President and CEO Toby Mack said. "Highways are the arteries of commerce and the arteries are clogged. The longer lawmakers wait to tackle the problem, the worse it'll get and the harder it'll be to fix."
The full report is available at:
CBO/TTI Reports Confirm Gloomy Highway Trust Fund Numbers
Days after AED released its study, the Congressional Budget Office (CBO) and the Texas Transportation Institute unveiled new reports confirming the HTF's dismissal future and the consequences of inaction.
On Feb. 5, CBO issued a report projecting the impending demise of the HTF. According to the report, the fund will be bankrupt by Fiscal Year 2015, one year after the most recent highway bill, MAP-21, expires. The CBO's projections estimate a $92 billion annual shortfall by 2023 unless lawmakers find new and sustainable revenue streams.
On that same day, new research from the Texas Transportation Institute found that in 2011 congestion cost Americans more than $121 billion in wasted time and fuel.
Now is the time for bold action to ensure the vitality of our nation's highway system. Visit AEDaction.org today to urge your lawmakers to find new revenue streams for the HTF.
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IRS Seeks Comments on Dual Use Equipment|
On Feb. 6, the IRS issued a notice seeking comments on dual-use property as it considers issuing new guidance to reduce disputes between equipment dealers and the agency.
Specifically, the IRS wants to know "whether construction and agricultural equipment held simultaneously for sale or lease to customers ("dual use property") by a dealer in such equipment is properly treated as inventoriable property or as a depreciable property." The notice also asks for comments about when dual-use property may be eligible for like-kind exchange (LKE) treatment.
IRS's uncertain treatment of dealer rental fleets has been a problem for the industry for decades.
In 2005, AED led efforts to beat back a draft IRS Coordinated Issue Paper (CIP) that proposed to treat equipment held out for both rental and sale as inventory, rather than as a business asset. Although it had not been finalized, IRS agents in the field began using the CIP in audits of equipment distributorships around the country. Even worse, the IRS threatened to apply the document retroactively, raising the specter of tens of millions of dollars in retroactive tax liability. The CIP was withdrawn in early 2006 under pressure from AED, allied industry groups, and concerned members of Congress.
In the recent notice, the IRS makes a veiled reference to the uncertainty surrounding the issue. It says the purpose of the current information gathering exercise is to develop guidance on the dual use issue to "minimize disputes between the IRS and dealers in construction and agricultural equipment."
The IRS is specifically seeking industry input on:
Comments are due June 16, but AED's Washington team is already designing a process to develop comments and a proposed long-term solution to the dual use question. If you would like to be involved, please contact AED Vice President of Government Affairs Christian Klein.
- Factors that are relevant in determining whether construction and agricultural dual-use property is inventoriable or depreciable property, or eligible for § 1031 like-kind exchange treatment.
- Whether a safe harbor or bright-line test would be helpful in resolving these issues, and if so what methodology or criteria should be incorporated in such a safe harbor or bright-line test.
- Whether guidance is needed for dealers of dual-use property, other than dealers in the construction and agriculture industries, regarding whether dual-use property is inventoriable or depreciable property, or eligible for § 1031 like-kind exchange treatment.
- Whether the Industry Issue Resolution (IIR) process (see Rev. Proc. 2003-36, 2003-1 C.B. 859) would be a useful approach to resolving these issues.
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Chairman Shuster's Visit to Cleveland Brothers Highlights Federal Highway Program's Local Impact|
On Jan. 30, Cleveland Brothers Equipment Co. Inc., the authorized Caterpillar distributor for 58 of Pennsylvania's 67 counties, hosted Rep. Bill Shuster (R-Pa.). Shuster is the new chair of the House Transportation & Infrastructure Committee, which has jurisdiction over federal surface transportation, water, and other infrastructure programs.
During the visit, Shuster met with Cleveland Brothers employees and toured the company's Harrisburg facility, which provides equipment sales, rental, leasing, and product support services to construction contractors and other Pennsylvania businesses.
Cleveland Brothers executives and AED senior staff briefed Shuster on the impact of federal highway spending and energy development on the equipment industry. Shuster also received the first copy of AED's new study by researchers at the College of William & Mary that reinforces the need for Congress to find new and increased user fee revenues to put the federal Highway Trust Fund back on solid footing (see related story).
"Highway and water infrastructure bills are among the major issues pending before Chairman Shuster's committee," Cleveland Brothers President Jay Cleveland said. "We're pleased to have had the opportunity to give him a first-hand look at how federal investment in these areas creates jobs in our local community and lays a solid foundation for our state's long-term economic growth."
AED estimates that the roughly $1.5 billion that Pennsylvania receives from the federal government for road building each year supports more than $96 million worth of local construction equipment market activity and 3,000 jobs in Pennsylvania's equipment industry.
However, federal infrastructure programs have been in a state of crisis in recent years. Congress has slashed funding for drinking water and sewer programs lately and gas tax revenues to the Highway Trust Fund are inadequate to support current investment levels.
"Chairman Shuster has a great track record on transportation issues," Cleveland said. "He's taken on a tough job, but an important one. We're looking forward to working with him in the months and years ahead to put federal infrastructure programs back on solid fiscal footing."
Facility visits like Shuster's to Cleveland Brothers are an excellent way to educate lawmakers and raise the equipment industry's political visibility. AED's Washington team stands ready to work with members to help organize similar events. For more information, please contact AED Senior Director of Government Affairs Daniel Fisher.
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Obama Rehashes Agenda in State of the Union|
On Feb. 12, President Obama used his annual State of the Union address as an opportunity to articulate an ambitious and aggressive agenda.
From tax reform to infrastructure investment, President Obama hit on many of AED's legislative priorities. While the association was pleased to see several of its key issues mentioned in the address, it was disappointed with the lack of concrete policy proposals.
Additionally, it will require a bipartisan approach to achieve lasting success on the most important matters in Washington. The association urges the president to work closely with GOP leaders in the House and Senate to find permanent solutions to the nation's challenges.
Tax Reform, Deficit Reduction, and Sequestration
Echoing the association's position, President Obama declared, "Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit."
Yet, when it comes to reforming the nation's tax code, the devil is in the details. The president's past statements indicate that he will strongly push House and Senate leaders on a broad range of measures designed to enhance federal revenues with less of a focus on entitlement reforms and immediate reductions to reduce the size of the federal government. Recognizing that no party will be 100 percent satisfied with the reform process, however, the president acknowledged the need for "modest reforms" to programs such as Medicare. When it comes to reforming corporate tax rates, Obama has largely focused on eliminating business tax expenditures, which in the president's view includes LIFO and other important accounting features he classifies as "gimmicks."
With just days remaining until the March 1 impact of sequestration, the package of automatic, across-the-board federal spending cuts instituted in 2011 as a way to encourage progress on deficit reduction, the president called on Congress to avoid sequestration's blow. "These cuts would certainly slow our recovery, and cost us hundreds of thousands of jobs," Obama said.
On infrastructure issues, the president called for a "Fix it First" program to help repair deteriorating roads and bridges while putting Americans back to work. He also unveiled a "Partnership to Rebuild America," a program to attract private capital to upgrade American infrastructure.
However, in reading the President's Plan for a Strong Middle Class & a Strong America, released to provide more detail on his remarks, it becomes clear that these ideas appear to be recycled from past proposals. Funding for the Fix it First program would come from the "peace dividend," savings from ending the wars in Iraq and Afghanistan, an idea panned by congressional leaders. The Partnership to Rebuild America, meanwhile, bears similarities to prior calls for an infrastructure bank that have languished in Congress.
President Obama praised recent investments in energy production, noting that America is "finally poised to control our own energy future." Yet, while recognizing increased oil and gas production, the president placed more emphasis on renewable efforts, whose impact on America's transformed energy output pales in comparison to the benefits derived from unconventional oil and gas extraction. To truly achieve energy independence, America's energy producers need freedom from overly burdensome regulations - not State of the Union platitudes.
The president used the speech as an opportunity to renew the administration's commitment to the Trans-Pacific Partnership (TPP), an important trade pact between Pacific nations. Obama pledged to complete negotiations by the year's end.
The TPP is particularly important for the association's Canadian members. AED advocated for Canada's inclusion to the partnership. In addition to improving Canada's access to global markets, Canada's participation in the TPP will benefit both the U.S. and Canadian economies by improving efficiencies for companies doing business on both sides of the border.
It is critical that AED members keep the pressure on the administration and lawmakers to ensure that action is taken on these important matters.
Where President Obama was short on details, AED will be working with lawmakers to ensure that final solutions have a positive impact for the equipment and construction industries. On areas where the association and the president differ, such as the importance of LIFO, AED will work closely with elected officials to protect its members' interests.
To urge your members of Congress to take immediate action on AED's top legislative priorities, visit the new AEDaction.org today!
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Congress Punts Debt-Limit Debate to Late Spring|
On Feb. 4, President Obama signed into law a bill (H.R. 325) to suspend the debt limit until May 19. In addition to putting off a major debt battle, the bill requires both chambers of Congress to pass budgets by April or it will force lawmakers to give up their pay.
The bill made its way through the legislative process quickly, avoiding the protracted political debates that have confronted similar bills recently. The rapid movement reflects a growing consensus within the GOP that fights over the debt-limit are a political loser.
The move, however, does not provide a permanent solution to the debt-ceiling problem. By delaying an ultimate resolution, lawmakers bought themselves more time to focus on the automatic across-the-board spending cuts to all federal agencies scheduled to go into effect on March 1. Additionally, Congress must deal with funding the federal government before the current continuing resolution expires on March 27. As May 19 approaches, sparks could again fly over this contentious issue.
AED is urging lawmakers to reach a tax and deficit reduction deal that simultaneously puts the nation's fiscal house back in order while restoring certainty to the federal tax code.
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New Keystone Route Approved, Senators Urge Action|
On Jan. 22, Nebraska Gov. Dave Heineman (R) signed off on a revised route for the Keystone XL oil pipeline that avoids the state's most environmentally sensitive regions. The following day, a bipartisan group of more than 50 senators sent President Obama a letter urging approval of the project.
The green light from Nebraska's governor will likely clear the way for a conclusion by the president regarding the pipeline's future. However, the project first requires a new draft supplemental environmental impact statement from the State Department followed by a comment period and revisions.
While the president has indicated his desire for an "all-of-the-above" approach to securing American energy independence, his recent pivot toward climate change legislation could endanger the pipeline's progress. Should the president slow-walk approval, Sen. John Hoeven (R-N.D.) has indicated his willingness to introduce legislation that would bypass the need for a presidential permit.
To remind our leaders that the Keystone pipeline would enhance our national defense by reducing our dependence on far-away oil and create hundreds of thousands of American jobs, visit AEDaction.org today!
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Canadian Distributors Press Ministers for Infrastructure Investment|
In a letter sent late last month, 34 Canadian AED members urged Transport, Infrastructure & Communities Minister Denis Lebel and Finance Minister James Flaherty to renew and expand the country's commitment to infrastructure.
Signed at the annual Canadian reception and luncheon at the 2013 AED Summit, the letter expresses the industry's concern that under investment will harm the nation's long-term economic vitality and competitiveness.
"We urge you to work during the current budget cycle and in the coming year to lay the foundation for a long-term infrastructure program, future annual federal investment of at least $5.75 billion, and the indexing of the gas tax to ensure it keeps pace with inflation," the signatories stated.
AED is ramping up its pressure in Ottawa as Building Canada, the $8.8 billion fund for construction projects, is set to expire in 2014. Working with its members in Canada and with the Canadian Chamber of Commerce (CCC), AED hopes to raise visibility on the critical need for sustaining the country's infrastructure networks. The association recently committed $5,000 to a new CCC infrastructure initiative to press the Canadian government for long-term, stable infrastructure investment.
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Addressing Barriers to Canadian Competitiveness|
On Feb. 13, the Canadian Chamber of Commerce (CCC) released a report detailing the obstacles impeding Canada's economic progress. The analysis, "Tackling the Top 10 Barriers to Competitiveness," urges the government to adopt solutions that will improve the nation's ability to compete globally.
The Chamber identified public infrastructure planning as one of the chief barriers undermining productivity. Recognizing that modern, effective, reliable infrastructure networks are a key component in encouraging growth, the report bemoaned the lack of a long-term national investment strategy. Warning that the cost of the crumbling infrastructure is enormous, the CCC called for greater intergovernmental cooperation, a long-term federal commitment, and policies to encourage private sector investment.
In addition, the CCC identified the following barriers:
AED has been active in Ottawa on many of these issues, working closely with the Chamber on efforts to reduce trade roadblocks, simplify the tax code, and promote energy development. The association's membership in the CCC helps to ensure that Canadian distributor's interests are heard in parliament and the ministry. Additionally, AED's participation on the CCC Transportation Committee gives the association a strong voice with our allies in Ottawa in developing 21st century transportation solutions.
- Shortage of a skilled labor force
- Getting Canadian energy products to the world markets
- Inadequate workforce productivity
- Tax complexity and structure
- Poor innovation performance
- Deficient strategies for trade success in new markets
- Internal barriers to trade
- Uncompetitive travel and tourism strategies
- Lack of access to capital
Canada West Foundation Report Spells Importance of Investment
A new study, At the Intersection: The Case for Sustained Public Infrastructure Investment, highlights the CCC's recommendations for increased public infrastructure investment by showing the strong link between Canadian public infrastructure investment and long-term economic growth.
The study asserts that meeting the urgent need for strategic infrastructure investments will secure the nation's productivity and yield high economic value and important social returns.
The group recommends policymakers:
The cost of inaction, the study suggests, could pose long-term threats to Canada's economic prosperity.
- Continue sustained and strategic public infrastructure investments.
- Make public infrastructure that enhances economic performance a priority.
- Encourage innovative approaches to infrastructure design.
- Give due consideration to renewing existing public infrastructure (which often has as much as, if not more economic benefit than new projects).
- Continually evaluate infrastructure funding for future improvement.
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Ontario Government Updates Tire Regs|
On Feb. 9, the Ontario government published a new regulation requiring the Ontario Tire Stewardship (OTS) to implement a cost-recovery-based funding model for the province's Used Tires Program.
The regulation, which amends the Waste Diversion Act, requires OTS to calculate tire stewardship fees (TSFs) based on the prior year's actual costs and to annually reconcile program expenses and revenues.
In addition to changing the calculation method, the revision alters the way stewardship fees on the supply of new tires into Ontario are reported and paid. Under the current system, tires are classified based on rim diameter and use. However, the revised system requires classification by weight to ensure a more equitable distribution of program costs.
The regulation will come into effect on April 1.
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