July 3, 2017 - Weekly Legislative Update
On June 23, the TIA Board of Directors affirmed their opposition to Congressional proposals to repeal LIFO. (The Last In First Out GAAP - approved inventory accounting system).
Repeal of LIFO, a popular accounting system in the tire industry, would raise some $105 billion that could be targeted to deficit reduction or infrastructure funding.
TIA continues to actively lobby Congressional members to save LIFO. We are very active in the LIFO coalition and have been conducting visits on the Hill to express to members the importance of keeping this accounting system alive for tax purposes. LIFO repeal continues to be looked at as an option in tax reform discussions and it is important that we let our elected officials know how important this issue is for many businesses in the tire industry.
Repeal of LIFO would hurt TIA members and other American businesses. It would significantly hinder the competitiveness of U.S. businesses in the worldwide marketplace by placing a significantly increased tax liability on those companies that use LIFO.
The majority of the businesses using the LIFO inventory method are organized in the form of pass- through entities, such as partnerships or S corporations. The real owners of these entities are taxed at individual tax rates. Any reduction in corporate income tax rates that might accompany a repeal of LIFO would not provide any offsetting relief for pass-through entities. Should this proposal be enacted, the consequences for LIFO taxpayers would be more devastating than any other change to the tax rules.
The "new revenue" that is touted by supporters of LIFO repeal comes in the way of retroactive taxes. Businesses using LIFO would have to pay retroactive income taxes on deferments they took while using LIFO in the past. Unlike ANY other tax expenditures that have been discussed for elimination, repealing LIFO is the only proposal that would require a business owner to pay taxes retroactively.
Any proposed tax rate reductions would not compensate LIFO taxpayers for the damaging effects to their businesses. Taking LIFO reserves and turning them into taxable income, even spaced out over time, would wreak havoc on cash flows, capital reserves, expansion opportunities and job creation for American businesses using this method of accounting.
Saving LIFO remains a top priority for TIA.
TIA is actively lobbying members of Congress to oppose LIFO repeal. The following is the position paper we are using. As members talk to their legislators, feel free to use this document to augment your appeal.
Fact Sheet on Last-in, First-out Inventory Accounting Method
Purpose of LIFO and FIFO inventory accounting system:
1) To track product. A business always wants to have adequate inventory on hand to meet demand, whether manufacturing, distribution, or retail.
2) To track costs. A business must manage cash flow to maximize efficiencies. Since inventory items tend to be fungible, inventory conventions are a key part of tracking costs.
3) To determine income. The tax code requires taxpayers to use the best inventory accounting practice in the trade or business that most clearly reflects income. FIFO (First-in, First-out) is best suited to a business with falling prices. LIFO is best suited to a business with rising prices.
4) LIFO and FIFO achieve the same purpose: they most closely match the cost of goods sold with the cost of the replacement inventory the company must purchase in order to remain in business.
5) Myth-buster: Tracking the flow of physical inventory and tracking costs are two different things. Both FIFO and LIFO track costs, not the flow of physical inventory.
LIFO is not a tax expenditure:
LIFO is a 76-year-old GAAP-approved inventory accounting system which does not meet the statutory definition of a tax expenditure. From its adoption in 1939 through 2008, LIFO was not included in the Joint Tax Committee list of tax expenditures, and is still not included on the Department of Treasury list of expenditures today.
LIFO repeal would slow the economy, cost jobs, and reduce revenue prospectively
The economic dislocation that repeal of LIFO would cause would more than offset any new Federal revenue. A Tax Foundation study released in February, 2016, found that repeal of LIFO would reduce GDP by $116 billion per year, reduce federal revenue by $518 million annually, and cause the loss of as many as 50,300 jobs. Click here for a Tax Foundation study on the impact of LIFO repeal http://savelifo.org/wp-content/uploads/2016/02/TaxFoundation-FF501.pdf
LIFO repeal would be uniquely and punitively retroactive:
LIFO repeal would require the retroactive recapture all LIFO-related deductions that have been taken by LIFO taxpayers, sometimes over many decades. Under current law this recapture tax is paid only when the company reduces its inventory levels, experiences deflation, or goes out of business. To impose that tax in the absence of any of those triggering events would retroactively change the rules for LIFO taxpayers. For more on this click here: http://savelifo.org/pdf-2012/LIFO-Coalition-White-Paper-re-Retroactivity-Updated.pdf and here: http://savelifo.org/lifo-repeal-retroactivity-patrick-driessen-article-published-by-tax-analysts/
LIFO works the way it was intended to work:
LIFO is designed to react to price fluctuations. LIFO has a built in "toggle switch" that triggers tax when prices go down. For example: Crude oil has dropped in price in recent years, significantly reducing the LIFO reserves of oil and gas companies and bringing millions of dollars into current taxable income. Under current statute, the benefit from LIFO is recaptured when the taxpayer's inventory levels decline, prices fall, or the taxpayer goes out of business, in which case the taxpayer no longer needs tax treatment under LIFO.
LIFO is used by a wide cross-section of industries and not exclusively by large energy companies:
LIFO is used by more than a third of all U.S. companies, including hundreds of thousands of pass-through small and mid-sized businesses, including manufacturers, distributors and retailers of a wide variety of products. Click here for a list of LIFO Coalition members: http://savelifo.org/about-lifo-coalition/ and here for a Georgia Tech study on LIFO usage: http://savelifo.org/pdf-2011/GA%20Tech%20Study%20Consequences%20of%20the%20Elimination%20of%20LIFO.pdf
Small businesses would be disproportionately harmed by LIFO repeal:
Small businesses that operate on tighter margins particularly rely on LIFO to ensure their ability to maintain inventory levels. Repeal could force many of them into debt not only to pay the recapture tax, but to replenish inventory - a backward spiral that will put them in a position of always trying to play catch up. Some may be forced out of business. Click here for a Small Business Administration Office of Advocacy letter: http://savelifo.org/pdf-2011/SmallBusAdministrationLetter.pdf
LIFO should not be repealed on a prospective-only basis:
LIFO was added to the U.S. tax code as an approved inventory accounting method in 1939 to address the corrosive impact of inflation on the ability of U.S. companies to maintain adequate levels of replacement inventory. The need for LIFO has not changed. If a company which sells a product that rises in price does not have sufficient after-tax profit to buy replacement inventory that company cannot remain in business.
LIFO repeal should not be repealed in the context of tax reform or to offset tax rate reductions:
A reduction in income tax rates would not compensate LIFO users for repeal. Many companies have built up their LIFO reserves over many decades and their LIFO reserve is a multiple of one year's taxable income. A simple deferred payment scheme for the repayment of tax from LIFO repeal would not be sufficient to mitigate the harm that LIFO repeal would cause. Repeal would force some smaller companies out of business.
No factually accurate substantive arguments have been made to justify LIFO repeal:
While LIFO repeal has been discussed for nearly a decade, no factually accurate substantive argument for repeal has been made; rather, LIFO repeal has been proposed to generate revenue to fund other programs or tax cuts. Click here for a letter on LIFO legislative history and purposes: http://savelifo.org/wp-content/uploads/2017/01/Camp-Letter-re-Comments-Draft-Tax-Reform-Act-03-31-14.pdf
Senate Vote on ACA Repeal/Replace Bill Delayed
News has come from the Hill that the Republican leadership has decided to delay any floor action on the BCRA until after the Senate's Fourth of July recess (from which they will return on July 10).
This move came after five Republicans Senators (Collins, Johnson, Paul, Lee and Heller) indicated that they would vote to block debate of the bill in its current form. At least five more Republicans (Murkowski, Moran, Portman, Capito, and Cassidy) have either raised concerns about the bill or declined to say whether they will support it yet. For the Senate Republican leadership, who can only afford to lose the support of two members and still get the bill passed, this sent a clear signal that more negotiations need to occur before the bill comes to the floor.
While the bills are different, the Senate leadership is having many of the same problems that the House leadership encountered when they were trying to pass their own ACA repeal/replace bill. The leadership is facing discontent and pressure from both sides of the party - the more moderates and the most conservatives. This type of push and pull places them in a difficult position of trying to calculate which way to move the bill to get it enough support to pass.
For the more moderate members, particularly those facing upcoming elections in bluer states, concerns increased yesterday when the Congressional Budget Office (CBO) released its analysis of the BCRA estimating that it would increase the number of uninsured Americans by 22 million.
If the BCRA passes the Senate (it is anticipated that it will be modified this week and resubmitted to the CBO for analysis before the recess), instead of trying to reconcile the Senate and House bills into a single piece of legislation that would need to be voted on again by both chambers, the House leadership may decide to simply bring the Senate bill to a vote in the House. The chances of this occurring will be greater if the margin of passage in the Senate is particularly close - suggesting that there is little room for adjustment. Because we don't know what the Senate bill will ultimately look like, or whether it will actually be passed by the Senate, it is too soon to predict whether there will be sufficient support to pass it in the House or if it will face the same push back (particularly from the Freedom Caucus) that the original House bill encountered.