Big Break For Small Manufacturers

October 15, 2004
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WASHINGTON, D.C. — The battle has been won, and now small manufacturing firms will be getting some very large tax relief.

The $143 billion tax bill passed by the Senate last week includes tax cuts worth $76.5 billion for the nation's manufacturers, including the smallest of the small.

"It's just huge," said Matthew Coffey, president of the National Tooling and Machining Association (NTMA) from his office in the nation's capitol last week.

But just a few months ago that outcome wasn't certain.

The House version of the bill excluded companies formed as Subchapter S corporations, limited liability corporations and partnerships from receiving any relief because a Republican committee chairman said these firms got tax benefits from the last cut.

But the Senate version included S corporations, LLCs and partnerships —  which account for the majority of small companies — along with corporate entities. Because most NTMA members are small companies, Coffey lobbied heavily for the Senate bill.

"That whole prior week I met with members of the Ways and Means Committee trying to convince them that the House was wrong on Subchapter S," he said.

Just days before the vote, the House had a change of heart and included small firms in its version. But the revised bill wasn't as generous to these companies as the Senate version was, as it limited small firms to tax breaks that ranged from 1 percent to 3 percent while the Senate gave cuts that started at 3 percent and grew to 9 percent.

"Our colleagues on the Senate side really weighed in and got their provision adopted by the conference. It came out that we, Sub Ss, are being treated equal to public companies, the C corporations," said Coffey.

"So it's just domestic manufacturers now. The distinction is no longer there," he added.

The bill gives manufacturers a taxable income deduction of 3 percent in 2005 and 2006, 6 percent in 2007 through 2009, and then 9 percent in 2010 and beyond.

The taxable income deduction is based solely on domestic activity, meaning the cuts only apply to production done in the United States. The amount a taxpayer can deduct is capped at half of the wages he or she pays that year, a move designed to encourage domestic hiring.

"The significant thing here is the tax cut is not achieved by lowering the tax rate, but by reducing the amount of taxable income. That means the taxpayer sees the benefit regardless of what rate is applied to the tax and that really helps the Sub S," said Coffey.

"If they had done it on a rate basis, it would only mean that if you paid the top rate you'd get the deduction."

Earnings and losses from a Subchapter S company are filed on individual returns. The bill allows individuals in all tax brackets to take the deduction.

"This really helps the small guy. I never again want companies to complain about the dues to this organization," said Coffey laughing.

At the state level, Michigan lawmakers are expected to start a nine-day lame duck session after the election and one issue they might take up is a restructuring of the state tax system.

Gov. Jennifer Granholm said she had concerns about the current system, especially the effect of the Single Business Tax on the manufacturing sector, and asked lawmakers to look into making changes.

"Nothing has been proposed. Nothing is on the table," said Becky Bechler of Public Affairs Associates, a Lansing lobbyist that represents KentCounty, at a county committee meeting last week.

County Commissioner Jack Horton, a former state lawmaker, said legislators should conduct business during a lame duck session. But they should stick to working on existing legislation rather than take up something new. Lame duck sessions, he said, have a tendency to produce bad bills.

Bechler said the governor hasn't made the restructuring an urgent matter and agreed with Horton that the issue should wait until the new legislative session convenes.

"A change of this significance," she said, "needs more than nine days."

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