Tax Reform Impact on Manufacturing a Positive

Tax Reform Impact on Manufacturing a Positive

Congress recently passed the most significant tax reform legislation since 1986. The tax reform legislation will have a positive impact on manufacturing companies as key provisions of the legislation will converge to drive business investment, employment and wages.

“The reforms enable us to better compete on the world stage and give us a stronger foundation for the investment in innovation, facilities and skills that will support our long-term growth,” Boeing CEO Dennis Muilenburg has said.

Driving consumer demand
Economic momentum was solid at the end of 2017. Business and consumer confidence are increasing. The Brookings Institute reported that 81% of taxpayers will see a tax cut from the tax reform legislation, averaging over $2,000 per year and that only 4.8% of taxpayers, primarily very high earners, will see a modest increase. The demand by consumers for goods and services will continue to increase driving manufacturers to increase production.  

Freeing up company cash
With a lower tax rate, there will be more money to invest in their businesses. This investment will take several forms. Some public companies will use the extra cash to buy-back stock. Others will invest in their businesses via investment in capital expenditures (CAPEX), new hires, and increased salaries and benefits for their employees.

Keeping more capital in the business allows for investment. Capital-intensive businesses such as manufacturing companies can utilize the additional capital to fund the cost of facilities and equipment. Investment in manufacturing has the highest multiplier effect of any industry. For every $1.00 spent in manufacturing, another $1.89 is added to the economy.

The new legislation will have a significant positive impact for small to midsize businesses. These companies, which traditionally relied on bank loans for additional capital, will be able to take an immediate tax deduction to use as equity for their investment, thus encouraging further growth and expansion.

Investment in people
According to the Tax Foundation, the tax legislation will lead to the creation of nearly 600,000 full-time equivalent jobs. In addition to more new jobs and capital investment, legislation is expected to result in higher salaries and better benefits. In the recent National Association of Manufacturer’s survey almost 54 percent of CEOs in the survey said they would hire more workers, and nearly half (48.8 percent) said they would increase employee wages and benefits.

Repatriation
A recent Goldman Sachs study reported that US firms have over $3.1 trillion invested overseas. The provision of the tax reform will serve as a strong incentive for these firms to bring this investment back home. This investment will be in the form of property, plants and equipment for facilities.
Prior to the legislation, the U.S. had one of the highest corporate tax rates in the world. The U.S. marginal tax rate was 35%. With the new legislation, the new corporate tax rate will be 21%. 

According to the Tax Foundation, the average tax rate amongst developed countries was 22%.  By aligning U.S. corporate tax policy with other industrialized countries, Americans stand to gain as companies bring cash back.

More competitive
U.S.-based manufacturers who are doing business overseas and competing with foreign manufacturers will also be more competitive. The previous tax code put American manufacturers at a competitive disadvantage. Having a lower corporate tax rate helps level the playing field for companies that are competing with Asian and European companies that have a lower tax rate in their home country.

According to David Melcher, CEO of the Aerospace Industries Association, the “legislation will unleash our industry’s global competitiveness and potential to create jobs for the American people.”

Regional impact
The cap on state tax deduction at $10,000 is likely to impact location decisions by citizens and companies. High cost of living and high tax states will be at a disadvantage. A likely result of the legislation is that businesses will choose to invest in lower costs and lower tax states. Businesses will want to invest in areas where their employees have a good quality of life and a low cost of living.

Viewpoint written by Brian Gallagher, O'Neal's Vice President of Marketing