On Senate Floor, Portman Discusses Tax on Manufacturing in Democrats’ “Inflation Reduction Act"
WASHINGTON, DC – Last night, U.S. Senator Rob Portman (R-OH) delivered remarks on the Senate floor outlining the harmful consequences of the tax on manufacturing, or “book tax,” in the Democrats’ new reckless tax and spending proposal. Portman discussed his concerns with the new tax hike, including the fact that it undermine business investment and job creation and raise prices for working families already facing skyrocketing inflation.
Senator Portman delivered remarks on the Senate floor last year when the Democrats’ were considering their original Build Back Better proposal, and will continue to discuss the harmful effects of the Democrats’ inflationary tax and spend policies that will only hurt Ohio families.
A transcript of his remarks can be found below and a video can be found here.
“I come to the floor this evening to talk about the Democrats' latest reconciliation proposal. This is the tax-and-spend legislation you've probably heard about. It's called the Inflation Reduction Act, but don't be fooled by the name. It doesn't actually decrease the inflationary pressure we all feel at the gas pump, at the grocery store, clothes shopping. It actually makes it worse. Sad that we've been down this road before. Early last year the Democrats passed a massive $1.9 trillion package of supposedly focused on COVID, but most of it had nothing to do with COVID, but provided a lot of stimulus. It was the largest spending package ever in the history of Congress, and at the time it passed a lot of us said, ‘Wow the economy coming out of that first stage of COVID is already picking up steam.’
“In fact, the nonpartisan congressional budget office was telling us that by mid-year last year we'd be back to where we were pre-pandemic, pretty strong economic growth. Yet, the Democrats are insisting on another $1.9 trillion, almost $2 trillion of spending. Remember, we had just passed a $900 billion spending bill to help with COVID, which was bipartisan, by the way. I was part of putting that together. So when it came to this new one, we said ‘Whoa, don't do this.’ It's going to overheat the economy, overstimulate the economy, particularly because inflation is about demand mismatching supply, and this is exactly what was happening, is you had demand growing and supply constricted, partly because of COVID, partly because of policy decisions being made. So we warned that this much stimulus in the economy was going to lead to inflation, and very sadly we were right.
“It wasn't just Republicans who said that. Some prominent Democrat officials said that, including some who had been senior economic advisers in the Obama administration in the Clinton administration, including Larry Summers, who was quite prescient when he said, ‘Gosh we shouldn't do this because it will heat up the economy and cause a lot of inflation.’ Democrats didn't pay any attention to those concerns then. They went ahead and passed that legislation. Remember today, we're looking at inflation that is the highest it's been in 40 years. Here we are today, about to do some of the same exact things, more spending and more taxes. It's $700 billion more in spending and about $326 billion taxes, new taxes on the economy. It will not reduce inflation.
“In fact, the nonpartisan Penn Wharton Budget Model predicts it will increase inflation over the next two years, and over time it will be about even, but it won't decrease inflation. In fact, over the first couple years they say it will increase it. The burden of the $326 billion in the tax increases is not just going to companies. It never does. It gets passed along. In this case, it falls, of course, to workers and to consumers. According to the nonpartisan Joint Committee on Taxation that we have to rely on up here, it's a nonpartisan group that it's us the analysis of these tax bills, it will hurt Americans in nearly every income bracket.
“In fact, they say more than half of the $300 billion in new taxes will fall on folks making less than $400,000 a year. Why? Because again, you're taxing a company, but the company passes that along to its workers and to its customers. And they're saying that more than half of that burden will fall on taxpayers who make less than $400,000 a year.
“Why do I say that? Because that's the cutoff president Biden has always put in place, saying no tax increases will affect anybody who makes less than $400,000 a year. This one does. Again, based on the Joint Committee on Taxation. As part of these tax hikes, manufacturing is hit particularly hard. The Joint Committee says that about had 50 percent of the impact of the tax increase is going to be on manufacturing businesses. Now, this is interesting to me because we just passed a big bill, some call it the CHIPS bill, some call it the China bill, some call it the competition bill, but it’s a bill to focus on making our American companies more competitive, particularly our manufacturing companies and we're spending a lot of money, hundreds of billions of dollars to do that and here we're saying, ‘No we're going to increase taxes on those manufacturing businesses.’
“This proposed tax is very different from the existing corporate income tax which is based on income that these businesses actually report to the Internal Revenue Service when they file their taxes. That income has been defined by Congress over the years. It doesn't use that as the measure of income. Instead it looks at a company's financial statements and comes up with a new definition of income called the adjusted financial statement income. This type of financial reporting is far broader, because these statements were designed for very different reasons. Taxable incomes that the IRS. Is in charge of as opposed to financial statement income is meant to raise revenue and provides in our tax code all kinds of tax preferences, incentives, disincentives for certain activity like being able to deduct the cost of new equipment. That's something we want to encourage, so we allow companies to do that. Like being able to take a tax credit, let’s say for energy efficiency.
“We want to encourage companies to do that. So, that's in the tax part as opposed to the book income part. The financial statement income is not determined by elected representatives. In another words, Congress doesn't determine how you calculate that tax. The financial statement income is actually determined by something called the Financial Accounting Standards Board which is a private nonprofit recognized by the U.S. Securities and Exchange Commission as the accounting standard setter for public companies.
“Now, that works fine for determining accounting standards, but this change effectively puts these people in control of what the corporate tax base is even though they're not elected representatives, they're not even working for the government. They're nonprofit. Because the corporate income taxes and this book minimum tax are calculated using these very different types of information. The 15 percent minimum tax which is a book tax minimum tax can actually end up being larger for companies than the 21 percent income tax. Again, because it calculates it differently.
“It's an example of Congress avoiding its responsibilities, frankly. If we think that we should charge companies more taxation, let's look at the tax code and let's get rid of some of the tax preferences if people think they don't work. Let's change the tax code. Let's not come up with another way to calculate what the tax ought to be. Determined again by standards that are done by this nonprofit group called the Financial Accounting Standards Board. Instead of examining the tax code we created and the deductions and credits that exist, it simply hands the reigns over to the board. Most accountants recognize this is a dangerous path.
“This is why when it was proposed last year, 264 accounting academics wrote to Congress to warn us not to do it. They warned of the dangers of politicizing this accounting board, how that would lower the quality of financial accounting. They warned this would change company decision making it to make companies less efficient because companies are now going to manage toward the financial statement not toward the income tax. They also warned that it would add needless and significant complexity to the tax code.
“Well, of course, you've got to calculate now income on two bases very, very different measurement and factors considered. To their credit, actually, the American Institute of Certified Public Accountants who actually stand to benefit from the complexity wrote us recently a letter saying, ‘Please don't do this.’ This is the CPA Organization in the whole country, again, people who benefit from complexity, but they're saying this is just bad policy. Why would you determine a company's taxation based on the book income. That's not what that is for.
“We should listen to these warnings and we should also learn from history. We tried this type of tax in the form of the 1986 tax reform. We actually tried this as a country. And you know what? It lasted two or three years and then it was repealed. Why? Because it didn't work. The exact warnings that we just talked about ended up being true. The Assistant Secretary of Treasury for Tax Policy told the House Ways and Means Committee when it was repealed that the book tax they had then was, ‘having a detrimental effect on the quality of financial reporting.’
“The complexity was complained about. The fact that this was not fair, not an appropriate way to measure a company's income. Now more than 30 years later Democrats seem to have forgotten history and are about to repeat the same mistake. The line you will likely hear from colleagues on this side of the aisle is that this tax is just designed to make big companies pay their fair share of taxes because it only applies to companies that have more than a billion dollars in net income.
“Well that's fine. But guess who pays the tax. It's not corporations who bear the brunt. In reality, the taxes on cooperate income such as this new book minimum tax, falls on workers and it falls on consumers. There are lots of workers and consumers who are connected with these companies. Last year there were over 200 companies listed on the Fortune 500 as having over a billion dollars or more and by the way, they employ over 18 million Americans, you're talking about 18 million people who will be affected by this and these big companies also have a lot of consumers well beyond those 18 million. So it is the millions of people who are employees and who are customers-these businesses who bear the brunt of these tax increases as it is passed down to them in the form of lower wages, lower benefits and higher prices for goods and services, exactly the wrong thing in this inflationary spiral we are living in now where everything costs more.
“Why would we want to add additional costs by saying we’re going to tax these companies that are going to pass it along to their workers and to the consumers with higher prices. It doesn't matter whether you are taxing income or income on financial statements, corporate income tax falls on these workers. Don't take my word for it. Again, the Joint Committee on Taxation just last year said that they expect about 25 percent of corporate taxes to fall on workers. This means lower wages again as this recession looms and as inflation hits the highest level since 1981, 40 years plus. By the way, we just went through our second quarter of negative economic growth. Traditionally that means a recession. That's how we define one.
“The administration refuses to call it a recession. I will just tell you, for people who live in my home state of Ohio, particularly people on fixed income, lower-middle-income workers, they’re feeling it. For them, it’s a recession. In addition to the Joint Committee saying that the corporate taxes fall on workers, the Congressional Budget Office, again, nonpartisan group up here in Congress, have said that employees and workers bear more like 70 percent of the burden of corporate income taxes. There's a long list of analyses in between.
“In 2017, the Organization for Economic Cooperation and Development, or OECD, reviewed many of the available economic studies around the world that have been done and found that the best studies fall within the range of 30 to 70 percent. Let me say that again – overwhelmingly, economic studies support the idea that workers bear between 30 and 70 percent of the corporate tax hikes. Going after workers' wages is one heck of a strategy to bring down inflation. People are already hurting because wages are here, inflation is here, so wages have not kept up with inflation. This will make it worse.
“Germany, by the way, did an analysis of corporate taxes recently and found that the burden fell hardest on low-skilled, young, and female employees, not the highest earners. The most important of these tax law changes is limiting what's called bonus depreciation. That is something that you would get as a company if you were in the regular income tax system but not under this new book tax calculation. What is bonus depreciation? It allows companies to deduct the cost of investments of new equipment in the year they are made. Under the book tax, they spread that deduction over the lifetime of the investment. In both cases they are deducting the cost of it, but whether they can do it immediately under bonus depreciation, whether they have to do it over the course of many years, matters a lot for investment decisions.
“Being able to deduct the costs of these investments immediately provides a big incentive for people to invest and that's what happened. This is not a loophole. I've heard this word, it's a loophole. We're just closing loopholes. This is not a loophole. This is a deliberate tax policy that we have put in place to help encourage companies to invest more in equipment and plants, and therefore help the workers, therefore make America more competitive. And actually over time increase the tax revenue that comes into our coffers. It is really important to encourage investment and economic growth, but particularly important for manufacturers. That's why the Joint Committee on Taxation found that half of the burden of this new tax will fall on manufacturers because bonus depreciation is so important to them.
“This isn't unique to us. Every single developed country in the world offers a policy like bonus depreciation. Why? Because it works. And because if they don't and other countries do, they can't compete. The United Kingdom’s is far more generous than ours, for example, for the purchase of equipment. Across the assets that use this sort of what’s called ‘cost recovery,’ we're actually well below the average in the OECD, which is a group of about 40 highly developed countries, like ours. We rank 21st now out of 38 for these types of incentives. This will make us even less competitive, meaning it's going to be even better for manufacturers to invest in other countries that have better incentives rather than here in the United States of America. We want them to invest here.
“Again, we just passed legislation to provide more incentives to invest here and now we're doing the opposite through this book tax increase. Bonus depreciation has traditionally had bipartisan support and this sudden shift to call bonus depreciation a loophole is a misrepresentation of what bonus depreciation does, why we have it, and how important it is for our manufacturers to compete. We expanded bonus depreciation the in 2017 Tax Cut and Jobs Act and then in 2018, the next year, in 2019, the next year after that, we had two of the best years ever for manufacturing investment, growing by 4.5 percent and then 5.7 percent respectively. A lot of that growth going on prior to that time was going on overseas, particularly in China. And we brought investment back in the United States.
“This is why, according to the Joint Committee on Taxation, the manufacturing industry is so hard hit by this. According to the National Association of Manufacturers, in 2023, this tax increase would shrink GDP, that's our economic growth, by about $68 billion, would result in 218,000 fewer jobs and would have a labor-income decrease of about $17 billion. This is the National Association of Manufacturers telling us this week, please don't do this. This is going to result in a job loss of over 200,000 jobs. We want to have more manufacturing jobs, not less. The workers hit hardest are those who work in manufacturing because this tax hike on physical assets will disproportionately hit manufacturing jobs. My home state of Ohio has got a lot of manufacturing jobs, we’re a big manufacturer, we’re proud of that. We’ve got a lot of factories, we like to make things so it particularly hits states like mine.
“But remember, it's not just wages we are talking about. No, workers get hit at both ends. As workers, wages and benefits but also as consumers, when they get paid and when they try to spend their money. Families facing record inflation today will now face even higher prices as the cost of corporate taxes get passed down to the consumer. Again, I'm not just going on some gut feeling, although it makes sense, doesn't it? If you tax an entity, it gets passed along in terms of the cost of the goods. I'm talking about though what economists are saying is going to happen when we increase taxes on American businesses. In a key study last year performed by economists at the business schools at the University of Chicago and Northwestern, found that about 31 percent of corporate taxes fall on consumers, through higher retail prices, and they warn that policymakers have been underestimating significantly how much of these taxes fall on consumers, on the people that buy these products that these companies make. Democrats are ignoring this evidence.
“Pushing ahead with partisan legislation without any Republican support that will make inflation worse, that will hurt workers, that will raise prices. And, again, it doesn't stop there. I can talk about how corporate taxes discourage investment, both domestic and foreign in the United States, according to economists from the World Bank and from Harvard. I can talk about how contrary to everything Democrats claim, corporate taxes make income inequality actually worse, increasing the income of the top earners and lowering the income of low and middle-income workers. This is based on a 2020 study by the economists at the University of Michigan. I can talk about the opposite side of the equation how lowering taxes for businesses of all sizes, as we did in 2017, supports economic growth.
“Going into the pandemic, we had 19 straight months of wage gains of 3 percent or more, most of that wage gain was going to lower and middle-income workers. We had the lowest poverty rate in the history of the country. We had good things going on because you had this economic growth, you had companies paying higher wages. In the years in-between the Tax Cuts and Jobs Act and the coronavirus pandemic, again, we not only saw just an end to these corporate inversions where companies were going overseas, we saw jobs and investments coming back to the United States and we kept inflation very low. That’s a far cry from the estimate we got last week from the National Association of Manufacturers which, again, predicts this book tax will result in a $68 billion hit to our economy with over 200,000 fewer jobs.
“Prior to the pandemic, pro-growth policies led to a really strong economy, with steady growth, low inflation, and real wage increases of 3 percent or higher. Instead of spending and tax hikes that are only going to add to this inflation, let's have a true Inflation Reduction Act that lowers costs to consumers by increasing supply through regulatory relief, through other pro-growth policies that were working so well before the pandemic. Let's do what we know we have to do to get inflation down. It's a mismatch between demand and supply. We can, through positive pro-growth policies, increase that supply and get inflation down and ensure that American families have a better shot at their American dream. Instead, here we go again with the Inflation Reduction Act that will actually be the Inflation Increase Act. Thank you, Madam President.”