Capital Formation Newsletter
May-June, 2007, Vol. 32, N0. 3

Pro-Capital Formation Tax Cuts Key to Revenue and Jobs Growth

U.S. Cost Recovery Lags Trading Partners

ACCF Hosts 150th Economic Policy Evening

ACCF Evening Focuses on “New Democrats”

GasBags - By Bill Archer and Charles Stenholm

(PDF Version)

Pro-Capital Formation Tax Cuts Key to Revenue and Jobs Growth

Former Federal Reserve Chairman Alan Greenspan has always credited the 2001 and 2003 tax cuts with promoting job creation and enhancing revenues to the Treasury ,”Senator Charles Grassley (R-IA), the Ranking GOP member of the Finance Committee, told ACCF supporters at the May 9 ACCF Capital Formation Forum.“ I want to thank the American Council for Capital Formation for the leadership it provided on the 2001 and 2003 tax bills and other pro-capital formation tax policies to improve the U.S.economy,” Senator Grassley said.

Congress must not cut back on the incentives in the 2001 and 2003 tax bills, he warned, adding that he is not worried that these measures might be trimmed back in the Senate. “I am concerned about what some on the House Ways and Means Committee might do. If we start messing with these bills, we run the risk of killing the goose that laid the golden eggs.”

“It’s a fact of life that if you want to get something done in the Senate, you must work in a bipartisan fashion. Chairman Max Baucus and I meet each week to set the agenda of the Finance Committee and we did the same thing when I was Chairman of the Committee,” Senator Grassley said.

Assessing the prospects for enactment of pro-capital formation tax policy measures in this Congress, Senator Grassley said that most of this year’s action is likely to deal with social policy, not tax policy. An example is the minimum wage increase package. The minimum wage bill needs to include incentives for small business to offset the anticipated negative impact on that sector from increasing the minimum wage. “I hope we can get more benefits for small business into the package but I don't know if it can be done. The Senate package of incentives was ‘peanuts,’ and the House only offered ‘peanut shells,’” he said. (Speaking on May 9, Senator Grassley noted that the minimum wage package had been included in the Iraq war funding bill, which was vetoed by President Bush.)

“The ‘pay-go’ environment requires a lot of offsets to pay for the social policies the Democrats want.If the offsets I proposed when I was Chairman of the Finance Committee made business people worry, then the Democrats ’ ideas will really bother them. I prefer to cut spending but the Democrats seem to ignore the spending side,” Senator Grassley said. “Those who want limited government will have to fight hard for it.Americans really need a primer on the relationship between taxation and economic growth,” he added.

Among the other tax policy issues currently of interest in the 110th Congress is reform of the alternative minimum tax (AMT). However, Senator Grassley said he believes it will be very difficult to put together the $55 billion needed for a one-year offset to pay for AMT reform.He mentioned that an energy bill, mostly an extension of existing policy, is another area of possible action this year.He also thinks an increase in the cigarette tax to fund child health care programs is possible. Senator Grassley added that he and Senator Ron Wyden (D-OR)are working together on health care legislation that could provide revenue to finance insurance for the uninsured.

U.S.Cost Recovery Lags Trading Partners

The U.S tax code fails to provide a favorable investment climate for future infrastructure that will be vital to national energy security and environmental protection, according to a new study prepared by Ernst &Young on behalf of the American Council for Capital Formation. The ACCF study, unveiled by Senator Chuck Hagel (R-NE)and Congressman Jim Matheson (D-UT)at an ACCF forum on Capitol Hill on May 2, compares depreciation allowances and effective tax rates for various energy investments for the U.S. and eleven other countries. The U.S. consistently ranks near the bottom internationally when it comes to cost recovery on energy investments. U.S. companies also face much higher tax rates on the profit from their investments than do companies in countries like Canada, Mexico, China, India and Malaysia. Slow cost recovery and high tax rates on investment raise the cost of capital, meaning fewer new projects will be undertaken.

“The current federal tax code raises the cost of capital for U.S. firms, putting them at a competitive disadvantage and making it harder to provide solutions to our energy and environmental policy goals. This study is another example of the enormous changes needed in the current federal tax code to keep America competitive in the 21st Century marketplace,” said Senator Hagel said at the ACCF forum.

U.S.energy security and energy prices remain paramount national issues. Strained energy supplies will be exacerbated by continued growth in the U.S. population, which means increased demand for home heating and cooling, job growth and transportation. Complicating these challenges are increasing environmental requirements for cleaner, more efficient technology to produce energy while reducing growth in greenhouse gas emissions.

To meet these challenges, U.S. industry must make large investments over the next decade; electric utilities, for example, must invest up to $1 trillion by 2020 for new generating capacity, transmission, distribution, and environmental control technology and demand-side management. Unfortunately, the U.S. federal tax code fails to provide a positive investment climate, especially compared to the favorable tax provisions available to our international trading partners.

“Tax policy is an important piece of the puzzle as we consider a comprehensive energy policy in this Congress. I appreciate the effort behind this study and look forward to becoming more familiar with implications of tax policy on energy investment,” said Representative Matheson, who also spoke at the ACCF forum. Specifically, the ACCF study found:

• The United States generally has less favorable tax depreciation rules for electric generation, electric transmission and distribution, and petroleum refining than many other countries, including a number of the U.S.’s major trading partners.
  
  
• The U.S. generally has slower cost recovery during the first five and ten years after the investment than the comparison countries. For example, investments in electric generation fueled by natural gas, nuclear and coal recovers less than 38%of the original investment during the first five years and 68% during the first ten years in the U.S., compared to 80% and 97%, respectively in Canada.
  
  
• When the time value of money is taken into account, U.S. depreciation rates remain less favorable than most of the competitor countries. Again, an investment in electric generation fueled by natural gas, nuclear and coal has a net present value of depreciation over the entire recovery period of less than 66% of the original investment in the U.S. compared to 84% in Canada.
  
  
• Because the United States has the second highest statutory corporate marginal tax rate among OECD countries combined with generally less favorable tax depreciation rules, the differences in effective tax rates are even greater. The corporate effective tax rate on investments in electric generation fueled by natural gas, nuclear and coal is estimated at 27-31% in the U.S., compared to 14% in Canada. These findings are consistent across all of the energy assets studied, including different types of electric generation, electricity transmission and distribution, pollution control equipment, and petroleum refining.

ACCF Senior Vice President and Chief Economist Dr. Margo Thorning and Dr. Thomas S. Neubig, Principal, Ernst &Young, LLP, also spoke at the forum. The full study is available at http://www.accf.org/pdf/Energy-Depreciation-Comparison.pdf.

ACCF Hosts 150th Economic Policy Evening

The 110th Congress: What Should and Will It Do on the Economic Policy Front was the focus of the ACCF’s 150th Economic Policy Evening on May 2. Inaugurated in 1982, these evenings include influential policymakers from Congress, top journalists,and business and association leaders from many industries. Pictured above enjoying the May 2 session are: 1) ACCF president & CEO Mark Bloomfield and Rep. John Shadegg (R-AZ); 2) Hon.Dave McCurdy, president, Alliance of Automobile Manufacturers, James J. Mallozzi, senior vice president and head of Prudential Retirement’s Marketing, Product and Advisory Services, G.William Hoagland, vice president, Public Policy, Cigna Corporation, and Stephen J.Ubl, president and CEO, AdvaMed; 3) Senator Robert Bennett (R-UT), J. Stephen Larkin, president, The Aluminum Association, and David S. Broder, national political correspondent, The Washington Post; 4) Dr.Margo Thorning, ACCF senior vice president and chief economist, Joan M.Sweeney, chief operating officer, Allied Capital Corporation, and M.Thomas Davis, staff vice president,Strategic Planning, General Dynamics Corporation; 5) Morton Kondracke, executive editor, Roll Call, Rep.Artur Davis (D-AL), and Rep. Phil English (R-PA); 6) Zanny Minton Beddoes, U.S.economics editor, The Economist, Jeanne Lopatto, director, Government and International Affairs, Westinghouse Electric Company, and Mary Catherine Toker, vice president, Government Relations, General Mills, Inc.; and 7 ) Rep. Earl Pomeroy (D-ND).

ACCF Evening Focuses on “New Democrats”

The leading members of the House New Democrat Coalition, including two of the Coalition’s vice chairs, Representatives Ron Kind (WI) and Adam Smith (WA). Pictured at the ACCF evening, left to right: 1) Dr. Margo Thorning, ACCF senior vice president and chief economist, Mrs. Adam Smith, Representative Adam Smith (D-WA), and ACCF president and CEO Mark Bloomfield; 2) H. Josef Hebert, energy reporter, Associated Press, Red Cavaney, president and CEO, American Petroleum Institute, and Hon.Dan Glickman, chairman and CEO, Motion Picture Association of America; 3) Bernard Winograd, president and CEO, Prudential Investment Management, Representative Shelley Berkley (D-NV), and Stephen A.Wechsler, president and CEO, National Association of Real Estate Investment Trusts; 4) Representative Ron Klein (D-FL), Michael Barone, senior writer, U.S. News and World Report, and principal co-author, The Almanac of American Politics, and Jeffrey D. Rouch, vice president, Government Relations,Nationwide Insurance and Financial Services; 5) James C. May, president and CEO, Air Transport Association of America, Inc., Representative Ron Kind (D-WI), and Edmund L.Andrews, correspondent, The New York Times; and 6) Robert Guest, Washington correspondent, The Economist, Karl J. Ottosen, Ottosen Associates, and Christopher Payne, project manager, Government Affairs, Prudential Financial, Inc.