I don’t know about anyone else, but I am flat-out sick of this jobless recovery, where the deep recession has lasted for more than two long years. I think it’s high time for some Jimi Hendrix-playin-on-the-guitar, Bruce Springsteen-rockin-on-the-stage dose of economic juice.
Something is needed that will charge up all of US business, their employees, the many underemployed, and the many employee want-to-be’s, presently sitting on the employment sidelines. I think that is what this Double-Barreled Manufacturing Tax Credits initiative, particularly in combination with the Bonus Tax Depreciation initiative, just might do.
This proposal relates to manufacturing tax credits earned, computed both as a percentage of a business’s total quarterly manufactured sales of eligible property in each 2010 quarter, and also as a percentage of a business’s total cost of its eligible property placed in service in each 2010 quarter…..thus, Double-Barreled Manufacturing Tax Credits..... earned by both parties.
All businesses are eligible for these manufactured tax credits earned, but it is clearly targeted mainly at smaller US companies.
All the manufacturing of and R&D work on the eligible property must be performed in the US. Property manufactured in or sold to businesses located in Puerto Rico or other offshore tax havens would not be eligible.
Eligible property is all new property depreciable under MACRS that has a Recovery Period of seven years or less (i.e. Three-Year Property, Five-Year Property, and Seven-Year Property), all external computer software, all external computer software development costs, all external web site development costs and all manufacturing plant facility costs. This property must be sold to another US company or organization, with this property to be ultimately placed into service by businesses or by non-profit organizations in the US.
However, the amounts of these manufacturing tax credits actually earned by the above manufacturing sellers and buyers in a 2010 quarter cannot exceed a certain maximum dollar amount per new job added multiplied by the increase in US full-time jobs, exclusive of those jobs from business acquisitions, in the quarter the eligible property is sold or placed in service.
To create a strong incentive for businesses to retain these new jobs for a reasonably long period of time, the number of US full-time employees of this business earning the manufacturing tax credit must either remain the same, or keep rising, exclusive of those from business acquisitions, in each quarter of each year from when the manufacturing tax credit is earned until the end of 2015. If the number of full-time employees drops below the 2010 quarter-end in which the manufacturing tax credited was earned, then recapture of this manufacturing tax credit would result. If this drop in payroll count occurs in the first three years, a 100% recapture will result; if this payroll count drop occurs after the first three years but before 2016, a pro-rata time portion of this tax credit would be recaptured.
This maximum dollar amount per new job added (manufacturing/ jobs tax credit) in each 2010 quarter should be based on the following company size:
Average Annual Revenues
Less than $25 mil.....................$22,000
$25 mil to $50 mil...............$21,500
$50 mil to $75 mil...............$21,000
$75 mil to $100 mil.................$20,500
$100 mil to $250 mil...............$20,000
$250 mil to $500 mil...............$19,500
$500 mil to $1 bil....................$19,000
$1 bil to $5 bil..........................$18,500
More than $5 bil.......................$18,000
And because some companies are very labor intensive and not capital intensive, these labor intensive companies should be rewarded for adding new employees. Thus, the minimum manufacturing/ jobs tax credit is set at $5,000 times the number of net additions to US full-time jobs in the 2010 quarters.
I gave the smaller companies much higher manufacturing tax credit incentives than the larger companies. I dropped the percentage tax credit over time throughout 2010 to maximize earlier in the year hiring of new workers. I set the buyer manufacturing tax credit incentives at double the seller tax credit incentives. And then by making these manufacturing tax credits refundable, a company generating a loss in 2010 will still get a tax refund.
Thus, there will be super-charged incentives to both the manufacturing seller and to the purchasing buyer to close the deal, place the property in service, and to do all of this as quickly in 2010 as possible.
Perhaps a manufacturing tax credit percentage scheme something like the following might be one to juice up the economy and quickly add to US job hiring:
………………………………………...………...Manufacturing Tax Credit %
Average Annual Revenues…..............For Each Quarter of 2010
…………………………………………….........1Q……...2Q……...3Q……....4Q
Less than $25 mil…....Seller………...6.0%......5.5%.....5.0%......4.5%
$25 mil to $50 mil…...Seller………...5.5%......5.0%.....4.5%......4.0%
$50 mil to 75 mil...Seller..........5.0%.....4.5%......4.0%.....3.5%
$75 mil to $100 mil….Seller………...4.5%......4.0%.....3.5%......3.0%
$100 mil to $250 mil...Seller………..4.0%......3.5%.....3.0%.....2.5%
$250 mil to $500 mil...Seller………..3.5%......3.0%.....2.5%.....2.0%
$500 mil to $1 bil…….Seller………....3.0%......2.5%.....2.0%.....1.5%
$1 bil to $5 bil...........Seller..............2.5%......2.0%.....1.5%.....1.0%
More than $5 bil……...Seller………....2.0%......1.5%.....1.0%......0.5%
Less than $25 mil……Purchaser….12.0%.....11.0%...10.0%.....9.0%
$25 to $50 mil.....Purchaser..11.0%....10.0%....9.0%......8.0%
$50 mil to $75 mil….Purchaser...10.0%.....9.0%.....8.0%......7.0%
$75 mil to $100 mil..Purchaser.....9.0%......8.0%.....7.0%......6.0%
$100 mil to $250 mil..Purchaser…8.0%......7.0%.....6.0%......5.0%
$250 mil to $500 mil..Purchaser…7.0%......6.0%.....5.0%......4.0%
$500 mil to $1 bil…….Purchaser….6.0%......5.0%.....4.0%......3.0%
$1 bil to $5 bil...........Purchaser.....5.0%......4.0%.....3.0%......2.0%
More than $5 bil……….Purchaser…4.0%......3.0%.....2.0%.......1.0%
To illustrate, if a business with average annual consolidated worldwide revenues of $70 mil, generates sales of eligible property in the 1Q 2010 for a total of $2,000,000, its manufacturing tax credit, before minimum payroll count increase testing, is 5.0% X $2,000,000, or $100,000. If this business’s US full-time payroll count increased by five or more during the 1Q 2010 (i.e. $21,000 X 5 = $105,000), the entire $100,000 manufacturing tax credit would be earned. If instead, only two employees were added during the 1Q 2010, the earned manufacturing tax credit would be $42,000, or 2 X $21,000.
For another illustration, if a business with average annual sales of $45 mil, places in service in the 2Q 2010 eligible property with a total cost of $3,000,000, its manufacturing tax credit, before payroll count testing is 10.0% X $3,000,000, or $300,000. If this business’s US full-time payroll count increased by fourteen or more during the 2Q 2010 (i.e. $21,500 X 14 = $301,000), the entire $300,000 manufacturing tax credit would be earned. If instead, only ten employees were added during the 2Q 2010, the earned manufacturing tax credit would be $215,000, or 10 X $21,500.
A business can double dip and earn manufacturing tax credits on both the purchase side and on the sales side. This is another beauty of the Double-Barreled Manufacturing Tax Credit. And this same business can leverage its increase in payroll to also get accelerated tax deductions from Job Creation Proposal #1 on Bonus Tax Depreciation. Thus there’s a potential three-fer economic benefit to some businesses from the leveraging of the same new hires.
For the seller, the manufacturing tax credit ends up being effectively a very attractive gross margin enhancer.
To maximize the economic juice, I wouldn’t make this manufacturing tax credit taxable for federal income tax purposes to either the seller or to the buyer. On the other hand, states might elect to include both sides of the manufacturing tax credit in a business’s state taxable income, and thus this action would increase state tax coffers, which certainly are in dire need of an upward jolt.
In order to get the manufacturing tax credit, the manufacturer/seller doesn’t have to sell directly to the business putting the equipment or software in service. The manufacturer could also sell to a middle-man, such as a wholesaler, dealer or retailer. However, sales to consumers would not be eligible for the manufacturing tax credit. Sales to all non-profit organizations, including sales to federal, state and local governments, as well as sales to hospitals, schools and universities, would all be eligible. I think it would be very helpful to the overall US economy for these non-profit organizations to improve their productive asset infrastructures, and thus I think it would be wise to incentivize manufacturer/sellers to help these non-profit organizations best achieve this very desirable result.
In a similar vein, in order to get the manufacturing tax credit, the business purchaser doesn’t have to be buying directly from the manufacturer/seller. The business purchaser that places the equipment or software in service in his business, could be buying directly from a wholesaler or from a retailer like Costco, Sam’s, Best Buy, Home Depot, Lowe’s, or companies like automobile, truck or other dealers, and still be eligible for the manufacturing tax credit.
To maximize economic juice, I wouldn’t require the purchaser to reduce the tax basis of the equipment or software acquired for the amount of the manufacturing tax credit.
Both purchaser and seller will get a highly desirable increase in their reported GAAP earnings from manufacturing tax credits earned, which in the aggregate will be quite substantial.
With the deep recession of the past two years, many businesses have put off the direly-needed upgrade of their technology infrastructure, which would make them much more productive and much more competitive. This Double-Barreled Manufacturing Tax Credit initiative might have just enough additional oomph to trigger wholescale upgrades of technology all throughout US businesses. I can see Silicon Valley and the rest of US high tech licking their chops over something like this. And the Rust Belt and the rest of manufacturing would also benefit greatly from this. Its newly-hired, highly-charged-up, talented manufacturing work force could really drive up innovation all throughout US manufacturing.
On the downside, there will probably be a CBO-scored cost for this initiative. But given the moribund US economy, I think that this highly stimulative initiative is definitely worth its cost. I’d have the CBO score it. I think the CBO cost should be much less than $50 bil, but if the cost to the US government over the next ten years is north of $50 bil, it is easy to reduce this cost by either changing the Percentage scheme, or by fine tuning down a bit the average $20,000 maximum tax credit for one job created metric.
In an unusual twist, in paying for this, I would use mostly funding vehicles that also are effective stimulants to the near-term US economy, as I will explain in my future Job Creation Funding #s.
The reason the double barreled manufacturing tax credit works so much better than a pure jobs tax credit is that embedded in it, is also a jobs tax credit. And in addition, you are making the US economy much more productive with all of the new equipment and new computer software being utilized by all kinds of US businesses. And it’s much more exciting to businesses than the pure jobs tax credit.
When you combine this Daily Double of Job Creation Juice (Bonus Tax Depreciation and this Double-Barreled Manufacturing Tax Credits), you get a lot more aggregate bang for your buck than you would get if you just added up the economic juice and job creation impact of each one separately.
There should be a very nice near-term pickup in sorely-needed US hiring from both initiatives, which will be particularly powerful when these two are applied in unison.
Also, there should be a huge near-term pickup in US business development and purchases of highly innovative manufacturing equipment and also the development and installation of leading-edge high technology infrastructure in businesses all over the country. Thus, these initiatives will help the US achieve its goal of being an Economic Powerhouse on the world scene.
Some additional benefits of this Daily Double of Job Creation Juice are:
*****Benefits primarily Main Street rather than Wall Street
*****Adds nice numbers to the severely depleted US middle class
*****Increases significantly and quickly the number of US citizens receiving employer-based health care insurance
*****Lowers the cost to the US Government of the new health care legislation by causing many less to be uninsured
*****Improves substantially the severely distressed state government coffers by both dramatically increasing state taxable income of businesses, particularly assuming that states decide to disallow tax deductions for bonus tax depreciation, but include all manufacturing tax credits, in state taxable income of businesses, and also by the positive state individual income tax inflow from the many payroll additions
*****With the major technology and manufacturing equipment infrastructure upgrades, coupled with additions to their work forces, businesses should be better positioned to expand their export sales
There will be a lot of financing needed by businesses for these two Job Creation initiatives (the Double-Barreled Manufacturing Tax Credits and the Tax Bonus Depreciation Tied to Payroll Count Increases). On the positive side, both of these Job Creation initiatives will, in the aggregate, improve markedly the balance sheet, income statement and cash flow statement of most businesses taking advantage of these initiatives. Thus, with this improved financial strength, it should be a bit easier for most companies to obtain financing here. And then there’s always the SBA, Small Community Bank Incentives, TARP, maybe some US government loan guarantees, and perhaps even what I really would like to see....some financing provided by the establishment of a new US Federal Government Infrastructure Bank.
The total CBO score for these two initiatives (remember, the first one has ZERO cost) is miniscule as compared with the benefits received from the major juice that will be added to the US economy and the resultant quick and sustainable job creation.
