Tax-Bill: Better for U.S. or China?

There is debate over whether some tax incentives coming in the New Year for U.S. small businesses leave the glass half-full, or half-empty.

Thanks to the “100%” expensing policy in the newly-adopted tax deal, in 2011 business owners across the country can invest in big-ticket items and completely write them off come tax time, which is being applauded as very good news by many U.S. entrepreneurs. But some made-in-the-USA advocates are labeling a piece, or lack thereof, in the legislation as bad news: the policy doesn’t specify that businesses purchase such items from American manufacturers.

Raymond Keating, chief economist at the Small Business & Entrepreneurship Council, said small businesses will most certainly take advantage of the policy, which will allow them to write off investments in anything from vehicles to machinery. In many cases, he predicted, the incentive will turn many small companies’ investment plans from long-term into buy-today.

“They will probably just push them up and change the timing,” Keating said. “This is a positive, but it would be a much bigger positive if it was permanent,” he said of the policy.

The deal itself allows businesses in general to avoid major tax-bill increases, but just like the expense policy, it isn’t permanent. Small businesses will have to plan accordingly, and think of the long-run costs for the decisions they are making in 2011, he said.

“What if a big tax increase goes into effect after 2012?” Keating said. “The temporary nature restrains the positive aspects of this. The provisions in the ’01 and ’03 tax breaks were positives, but they did expire at some point. Businesses have to restrain their activity.”

Global manufacturing expert Mitch Free, founder and CEO of MFG.com, said, yes, on the one hand much of the equipment small businesses will purchase on account of the tax incentives will likely be from foreign countries. But on the other hand, he said, this notion isn’t bad news for the U.S. economy overall.

“A lot of money is made off of the infrastructure of even foreign equipment,” Free said. “I am a private pilot, and I purchased a foreign plane last year. But, when I think about what it does in America—I buy fuel here, do all maintenance here, and I’m sure the sales people in America made a profit. There is a huge ripple effect, whether or not it is made in America.”

There is also a ton of used equipment available on the market right now, Free said, because so many U.S. manufacturers went out of business.

“The tax credit might be less effective, because the used equipment is really out there for pennies on the dollar now,” he said.

Julie Reiser, co-founder and president of Made in USA Certified, Inc., said with no added carrots to do so, she does not see businesses purchasing their write-offable items in the U.S., and that lawmakers did a disservice to the U.S. manufacturing sector and economy by overlooking the issue when they passed the new bill.

“The problem is that our companies can’t compete with manufacturers in China that can under-price them,” Reiser said. “Businesses that are strapped for cash and looking to cut corners, their values will quickly go out the door to save money. That’s human nature, and it will happen again and again until somebody puts their foot down and says, ‘Enough.’”

Imposing a clause to require businesses purchase from U.S. manufacturers in order to get the writeoff would have been a huge economic booster, and would have helped the unemployment rate, she said. For every one manufacturing job in the country, Reiser said there are four additional jobs associated with it.

“Our manufacturers are dying on the vine,” she said. “We’ve got to protect our own. Our government has to take a stand against these big corporations and stick up for the little guy. If that were in the bill it would have been a tremendous boom for our manufacturers. It would have created more jobs and generated money and pride.

“It could have really been a great thing, and I am very disappointed it’s not in there.”

Government was right not to impose a clause on businesses stating they must buy equipment from U.S. manufacturers, Keating said, noting such a clause would cause backlash against the White House. In the end, it is all a question of free trade and whether or not it is supported.

“That would open up a whole can of worms on trade issues and protectionism. You don’t want to go down that path,” he said. “You want consumers and businesses to have as many options as they can.”