Kerry Proposal Aids Manufacturing

April 12, 2004
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KALAMAZOO — A noted local economist called a component of the tax plan proposed by Sen. John Kerry ingenious.

But at the same time he felt it wouldn’t work.

The piece of the Massachusetts senator’s proposal that George Erickcek found creative was Kerry’s intention to eliminate a tax break that allows U.S. firms to defer tax payments on profits earned overseas.

These companies deposit those dollars in foreign banks to avoid this nation’s 35 percent corporate tax rate. Congress estimated that stash of money to be worth $600 billion.

In return for losing the tax break, Kerry would give these companies a tax holiday for a year. During that time the all-but-crowned Democratic presidential nominee would let firms bring those profits into the country and tax those dollars at a 10 percent rate.

Kerry hopes that influx of money would entice companies to invest domestically, create jobs, and at least slow the outsourcing tide that has washed over West Michigan with particular destructiveness.

Kerry said those dollars total roughly $12 billion and that pot of money would allow him to lower the corporate tax rate from 35 percent to 33.25 percent for all companies.

“I think that the forces driving companies to consider offshore locations are much greater than can be issued by this type of program. It’s pretty ingenious,” said Erickcek, senior regional analyst for the W.E. Upjohn Institute for Employment Research.

“But when businesses like Electrolux or Johnson Controls look at relocating their production facilities to Mexico or elsewhere, there are long-term strategies that probably cannot be highly influenced by this type of incentive,” he added.

Erickcek noted that an $80 million incentive offered by the state and others couldn’t keep Electrolux in Greenville.

He felt outsourcing was more of an employee-cost problem that pitted $15 an hour against $1.57 per hour, a gap that tax incentives couldn’t close.

“It’s more than a gimmick,” he said of Kerry’s tax provision. “But I don’t think it’s going to be that effective.”

Erickcek said economists look for two things in a tax policy; whether it can balance out the business cycle and whether it will create a structural deficit at the federal level. The Bush administration tax policy appears to have done both.

“Indeed we have seen some growth over the last two years and it’s possible some of that is attributed to President Bush’s push to cut taxes,” he said.

“Here the concern is, the current administration’s tax policy has created a situation where we are facing a structural deficit.”

A deficit, by itself, isn’t necessarily a bad thing if it’s small and short term. But Erickcek said if it grows annually and lasts for years, it becomes structural and is seen as a worry that could hinder the nation’s ability to provide services and could raise interest rates.

“I think the structural side of the current administration’s tax policy is a concern to economists,” he said. “Now, given that environment, John Kerry’s proposal, in some respects, is kind of a ‘current administration – light.’”

Here are other highlights of the Kerry tax policy:

  • A 25 percent tax credit for small businesses that pay for their employees’ health care.

  • A payroll tax credit for each new job added by a company in an industry challenged by jobs going overseas.

  • A higher tax rate for U.S. companies that close plants to move overseas and then bring those products back into the country.

  • Continue the tax cuts for the lower and middle-income classes, but eliminate the cuts for those whose annual income exceeds $200,000.

“What is interesting about his plan is that it’s a plan that is not necessarily geared to getting us out of the business cycle; it’s a plan that also simply is reducing taxes because lower taxes are a good thing,” said Erickcek.

“The other thing that John Kerry’s tax plan has that I think will play well in Michigan, and especially in West Michigan, is its focus on manufacturing and his desire to re-fund the Manufacturing Extension Partnership.”

Erickcek said economists have evaluated the MEP program as being effective in helping medium-sized manufacturers adopt new technology, an effort that he felt should be stressed during a time when globalization is threatening the livelihood of these businesses.

In MEP, federal funds are used to pay the engineering and business departments of public universities to assist manufacturers with technology, which helps to make these companies more productive and competitive.

“Unfortunately the current administration, as I understand it, has earmarked that program for some substantial cuts. Since it is a program that has been shown to be effective, focusing on it is something beneficial for the heartland, I think, ” said Erickcek.

“As a matter of fact, it’s a program that is highly used by The Right Place Program.”

Erickcek felt a major difference between the Bush tax policy and the one proposed by Kerry is that the senator’s proposal wouldn’t create as big a deficit as the president’s has because Kerry’s plan has tax breaks targeted for the lower and middle-classes only.

He also noted that both policies help parents get their kids through college.

But he believes Kerry’s plan leans in a direction that could provide West Michigan with more help than the Bush policy.

“Some of Kerry’s programs seemed to be tilted toward manufacturing more than the current administration,” he said, “so for areas with manufacturing, that is a plus.”

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