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JUNE 23, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 2126 words

HEADLINE: PREPARED TESTIMONY OF
MICHAEL E. BAROODY
SENIOR VICE PRESIDENT
POLICY, COMMUNICATIONS AND PUBLIC AFFAIRS
NATIONAL ASSOCIATION OF MANUFACTURERS
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS
SUBJECT - PRO-GROWTH TAX RELIEF

BODY:

Chairman Archer, members of the Committee, my name is Michael Baroody. I am here to testify on behalf of the National Association of Manufacturers; our 14,000 member companies, large, medium and small; our 350 member associations; and the 18 million people who make things in America.
And I am here to testify in favor of pro-growth and pro-worker tax relief.
America's economy has expanded impressively over the past 18 years, with only one relatively mild downturn in the entire period. At the NAM, we are proud of the disproportionately large contribution American manufacturers have made to that expansion. Coupled with the fiscal restraint of recent years, our booming economy has filled federal coffers beyond expectations and yielded the first federal budget surplus in a generation. This made possible a budget resolution, passed by Congress earlier this year, which provides for $778 billion in tax cuts over the next ten years.
Throughout the past decade, the NAM has been an advocate for growth. Against the widespread common wisdom of the early '90s that growth rates of 2 percent to 2.5 percent were all we could expect and all we should strive for -- and that growth rates in excess of that would reignite inflation -- the NAM insisted we could and should do better, with growth rates of 3 percent or more. Regardless of whether we were in a new economy, we said, the old formulas and the old certainties needed a new look. Over the past three years, this economy has averaged non-inflationary growth of about 4 percent. We believe we've been proven right.
The budget resolution I cited - with its projections for a 10-year budget surplus of almost $800 billion, not including Social Security revenues - rests on the assumption of continued growth. We strongly agree that the surplus should be returned to taxpayers through tax relief but we believe just as strongly that a substantial portion of the total tax cut should take the form of an insurance policy for continued growth. Without continuing growth, of course, the entire tax-relief plan will be frustrated.
Last December, the NAM announced our advocacy of across-the-board reductions in tax rates. We called for rate cuts that were balanced between individuals and businesses. In that way, both the growth stimulus and the tax relief would also be balanced - in NAM's terms between our 14,000 manufacturing member companies and the 18 million people who make things in America, between America's working families and the companies they work for, between the supply side and the demand side. We thought then, and think now, that this would be the best insurance policy for growth. But if such a broad-based tax cut seems for the time out of reach, we nonetheless continue to believe that growth-oriented tax cuts should be included in the package, for the sake of maintaining our expansion and realizing Congress' current revenue projections.
As you also know, Mr. Chairman, because the NAM has carried on a much- appreciated dialogue with you over the years, we believe that the federal tax code is the single largest current obstacle to economic growth. It needs to be reformed and replaced with a pro-growth code. Until it is, we believe that certain provisions - such as repeal of the corporate AMT and the estate tax, a permanent extension of the R&D tax credit and simplification of international tax provisions - are essential pro-growth incentives that need to be incorporated into an otherwise anti-growth tax code.
As a final point of preface, Mr. Chairman, we believe that such pro- growth provisions should account for about a third of the total tax cut. This was the proportion that went to businesses in the tax cuts of the '60s and the currently unsettled state of the world economy justifies a similar portion now. That would translate into a 1 O-year total of about $250 billion more than enough to accommodate the four provisions I have mentioned and, importantly, to ensure the prospects for continued expansion.
Corporate AMT
The NAM believes that additional relief from the corporate alternative minimum tax (AMT) is a critical component of ensuring long-term sustained economic growth in the United States. AMT relief enacted in 1997 significantly reduced the cost of capital for AMT payers by conforming AMT depreciation lives with regular tax lives for property placed in service after 1998. Nonetheless, the AMT, sometimes known as the anti-manufacturing tax, remains an impediment to economic growth and job creation in the United States, particularly in the capital intensive manufacturing sector of the economy.
The NAM strongly opposed enactment of the corporate AMT in 1986, arguing that the AMT would have a negative impact on U.S. manufacturing. Unfortunately, this proved to be true. During the early 1990's, many companies, particularly in the manufacturing sector, reported large losses to their shareholders and were forced to reduce employment. At the same time, because of the way the AMT works, these companies were forced to make large AMT payments to the federal government.
Mr. Chairman, the NAM welcomed your proposal in 1995 to repeal the corporate AMT and worked vigorously for enactment of this proposal. Although this effort was not successful, our members appreciated your leadership in advancing the more limited depreciation reforms enacted in 1997.
Despite the changes enacted in 1997, many of our member companies, particularly those in distressed industries, continue to be burdened by the unfair AMT. In order to improve this situation, the NAM strongly supports legislative changes to allow corporate taxpayers to use AMT credits more quickly than they can under current law. It also is important to ensure that companies that have paid the AMT are not further penalized by losing any of the value of these credits. These credits represent assets on the books of AMT companies. The NAM also supports eliminating arbitrary limits on net operating losses and foreign tax credits under the AMT.
A Permanent R&D Tax Credit
A permanent extension of the research and experimentation tax credit, commonly referred to as the R&D tax credit, also would provide an effective economic stimulus. The contribution of research and development to economic growth cannot be overstated. Increased productivity, new product development and process improvements are direct results of technological advances that occur from R&D activities. In fact, two-thirds of the growth in manufacturing is attributable to productivity improvements from technological advances derived primarily from U.S.-based R&D. According to the National Science Foundation, the manufacturing sector performs 77 percent of all private industrial R&D in the United States. The R&D tax credit is a key factor in promoting increased research spending by manufacturers.
The tax credit has been particularly effective in spurring incremental R&D that probably would not have been conducted without additional funds provided by this incentive.

A number of small businesses, which account for $20 billion or 14 percent of total industrial R&D spending in 1996, also benefit from the credit. Moreover, many smallenies that do not conduct enough R&D to benefit from the credit experience a "spillover benefit" when R&D performed by another company generates additional business for them and gives them access to new technology to improve their productivity.
The R&D tax credit is also a job creator and an investment in our greatest asset: people. More than 75 percent of the credit dollars are used for the salaries of American workers performing U.S.-based R&D. These trained and skilled workers performing R&D enjoy greater economic security and higher wages. Without these workers, we would not have the innovative ideas that are the genesis of many R&D activities.
The temporary tax credit is scheduled to expire, once again, a week from today on June 30. A history of lapses and temporary extensions of the credit, since its initial enactment in 1981,stymies business planning for R&D activities and exacerbates m-compliance difficulties. The NAM strongly urges enactment of a permanent R&D tax credit, including a modest increase in the alternative incremental research credit (AIRC) rates, as proposed in the bill (H.R. 835) introduced by committee members Nancy Johnson (R-CT-6) and Bob Matsui (D-CA-5). In addition to extending the credit permanently, the AIRC rate increase will provide greater parity for those companies that do not qualify for the regular credit.
The Johnson/Matsui bill enjoys wide bipartisan support. The bill's 143 cosponsors include half of the Ways and Means Committee members. A companion bill in the Senate (S. 680), has 43 cosponsors, including half of the Senate Finance Committee members.
Death Tax Repeal
Another powerful and effective pro-growth tax policy is elimination of the death tax imposed on a business when an owner dies. The estate tax burden is the leading reason why more than two-thirds of family-owned businesses are sold or liquidated by heirs. Under the current system, closely held businesses devote significant resources to costly and complicated planning to minimize the estate tax, diverting major financial resources from hiring and business expansion. In short, federal estate taxes take a toll on economic growth and job creation. Eliminating this burden would allow small business owners to invest more money in expanding their companies and hiring additional workers. They could make long-range plans based on rational business issues and not tax policy concerns.
Just last week, an NAM member and small business owner, Ron Sandmeyer Jr. from Sandmeyer Steel Company in Philadelphia, appeared before this committee to discuss the difficulties his company faces today as it prepares for the transition to a new generation of ownership and ask you to eliminate the estate tax burden. His testimony reflects the concerns and problems faced by many of our 10,000 small and medium manufacturers in trying to plan for and pay this onerous tax.
International Tax Simplification
Simplification of the current international tax regime would also provide an effective economic stimulus by reducing compliance burdens and helping to level the playing field between U.S.-based companies and their foreign competitors.
The NAM believes that the international tax rules in the federal tax code are overly complex, arbitrary, and, in many cases, unfair. U.S. companies are facing increased competition from counterparts in other countries that have the distinct advantage of a more rational tax policy. Furthermore, U.S. trade and tax policies are at odds. Trade is essential to expand our markets, but our current tax system penalizes foreign source income by taxing it even more severely than domestic source income, and by requiring enormous amounts of additional recordkeeping.The NAM will provide more expansive comments on international tax issues in conjunction with the committee hearing scheduled for June 30.
Conclusion
Clearly the robust economic growth experienced by the United States during most of the past decade has benefitted businesses and workers alike. The NAM believes that it is critical to continue this growth and welcomes the opportunity to work with this committee to develop progrowth tax policies. Undoubtedly, the current tax system represents a major drag on the economy and should be replaced with a simpler and fairer system that encourages work, investment and entrepreneurial activity. Pending reform, there are a number of tax cut proposals that fit within the current budgetary constraints and that will stimulate job creation and economic growth. These pro-growth tax incentives include corporate AMT repeal, a permanent R&D tax credit, elimination of the death tax and international tax simplification.
There also are a number of more targeted tax cuts, supported by the NAM, which would have a positive impact on our economy. Those proposals include education incentives such as a permanent exclusion for employer-provided tuition assistance and an expansion of this benefit to cover graduate education, as well as additional incentives for training, lifelong learning and school donations. The NAM also supports tax-rate relief for small businesses operating as S corporations and capital gains tax cuts for individuals and corporations.
We applaud you, Mr. Chairman, for holding these hearings and for your commitment to meaningful tax relief for American families and businesses. Our members agree with you, Mr. Chairman, that if the surplus is not returned to taxpayers through tax cuts, it will likely go towards more government spending.
END

LOAD-DATE: June 24, 1999

Document 29 of 54.


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