Capital Formation Newsletter
September-October, 2007, Vol. 32, N0. 5

ACCF Association Council Holds Fall Meeting

2007 ACCF Association Council Members

ACCF Op-Ed in Investor’s Business Daily

Economic Policy in the 110th Congress Is Focus of ACCF Policy Evening

(PDF Version)

ACCF Association Council Holds Fall Meeting

ACCF Association Council members met on September 11 to discuss capital formation policy issues of importance to their industries and to hear noted journalist David Wessel, deputy bureau chief of The Wall Street Journal and author of the Journal’s weekly “Capital” column, comment on the current economic outlook. The morning session of the meeting featured a roundtable discussion of priority capital formation policy issues on Association Council members’ agendas as the first session of the 110th Congress draws to a close. ACCF president Mark Bloomfield opened the meeting with an assessment of “What Will Get Done in This Congress? What Will Be Left to the Next President?” Jeffrey D. DeBoer, president and chief executive officer, The Real Estate Roundtable, and Lisa S. McGreevy, executive vice president and chief operating officer, Managed Funds Association, discussed the impact of the

David Wessel, deputy bureau chief of The Wall Street Journal, speaks at ACCF Association Council meeting.

Speaking on the sixth anniversary of 9/11, Mr. Wessel reflected on how frightening that period had been. “It’s hard to think about that day without remembering how many people died then and since,” he said. “I thought U.S. productivity growth would slow and the U.S. would be a fundamentally different society following the attack, but ultimately the experience was a reminder of just how resilient our economy is -- a very good thought to keep in mind.”

From the left, ACCF Association Council members Stephen M. Renna, senior vice president and counsel, The Real Estate Roundtable, and Thomas R. Kuhn, president, Edison Electric Institute, talk with ACCF president and CEO Mark Bloomfield.

Mr. Wessel addressed some of the major themes he sees affecting the economy today, beginning with how today’s credit crisis may change things. Recession flags are flying, he warned, adding that the credit crisis will force itself into the 2008 campaigns. The dilemma at the Federal Reserve is evident, he said, and the current economic situation is a real test for Fed Chairman Ben Bernanke. The Fed was established to deal with banking panics in 1913, but things are very different today. “We are learning as we go,” he said. These episodes invite us to ask whether we have the right balance between too -- much and not -- enough regulation, Mr. Wessel said. Citing the recent problems with tainted foods and hazardous toys as examples, he added that much of the public and many politicians

think the U.S. has gone too far with deregulation and we are at a point now where the pendulum could swing back toward greater regulation.

The cost of health care is another hot button issue for policymakers and their constituents. Massachusetts and California lawmakers are attempting to deal with healthcare policy in their states, but Mr. Wessel said he doesn’t think a state-by- state approach to the health care problem will work. “A Democratic president would probably be more likely to tackle health care than tax reform,” he said.

“Mark Bloomfield mentioned in his introduction that a fundamental question in any tax reform plan is how to balance growth, efficiency and equity,” Mr. Wessel said. However, the economic context has changed in the U.S. as the income gap between rich and poor has widened, social mores have changed, labor unions have weakened, and there is a willingness to pay “stars” more. He added that there is a backlash in the U.S. against globalization, which is not seen as paying off for the middle class as policymakers thought it would. “These issues have led to an unhealthy dynamic and policymakers haven’t found a good way to deal with it yet,” Mr. Wessel noted.

The next President and Congress will be faced with an array of difficult issues to resolve. For example, tax rates on dividends, capital gains, and estates must be addressed in the near future. Any solution will need to be packaged with an eye to “fairness,” which might involve raising the top marginal individual tax rate. The political consensus has also shifted on climate policy. Although the debate on the issue hasn’t yet fully matured, the problem has been acknowledged and something will be done, Mr. Wessel concluded.

2007 ACCF Association Council Members

Advanced Medical Technology Association
Air Transport Association
Alliance of Automobile Manufacturers, Inc.
The Aluminum Association, Inc.
American Benefits Council
American Beverage Association
American Forest & Paper Association
American Gas Association
American Petroleum Institute
American Wholesale Marketers Association
AMT - The Association For Manufacturing Technology
Associated Equipment Distributors
Center for Energy and Economic Development
Edison Electric Institute
Equipment Leasing and Finance Association
Family Company Group
Financial Services Roundtable
Independent Petroleum Association of America
Investment Company Institute
Managed Funds Association
Metals Service Center Institute
National Association of Broadcasters
National Association of Manufacturers
National Association of Real Estate Investment Trusts
National Cable and Telecommunications Association
National Marine Manufacturers Association
National Mining Association
National Petrochemical and Refiners Association
National Rural Electric Cooperative Association
North American Association of Food Equipment Manufacturers
Nuclear Energy Institute
Portland Cement Association
The Real Estate Roundtable
Securities Industry and Financial Markets Association
Small Business and Entrepreneurship Council

ACCF Op-Ed in Investor’s Business Daily

Tax Code Changes Are In Order To Deal With $1 Tril Energy Bill

Investor's Business Daily
By Margo Thorning
October 11, 2007

Energy security and prices in the U.S. remain a paramount national issue. The need to enhance electricity supplies and distribution is evidenced time and again with strained grids and rolling blackouts every summer.

The cascading blackout from the Midwest to New York City in August 2003 was a wake-up call in the need to improve our energy infrastructure. Improving our ability to supply energy for transport and increasing energy efficiency in industry also are key public policy goals.

This is no easy task. At the same time our energy supply is stressed, the U.S. population is increasing dramatically, from 282 million in 2000 to 335 million in 2020, a gain of 19%. In California alone, the population is projected to increase from 34 million in 2000 to 44 million in 2020. Of course, more people means more energy use for home heating and cooling, job growth and transportation.

Further complicating the challenge is a political environment that is demanding any new production in energy supply be cleaner and more efficient to help reduce growth in CO2 emissions.

To satisfy all of our future energy needs — increased supply, cost-reduction and environmental efficiency — the U.S. must foster investment-friendly economic policy when it comes to energy. Unfortunately, we fall far short on this front when compared with our international counterparts.

A report prepared by Ernst & Young for the American Council for Capital Formation finds that the U.S. generally has less favorable tax depreciation rules than many other countries for electricity generation, transmission and distribution, as well as for pollution control and petroleum refining. This includes a number of U.S. trading partners, including Canada, Mexico, Germany, India and China.

The U.S. has slower cost-recovery during the first five and 10 years after the investment than the comparison countries. For example, U.S. investments in electric generation fueled by natural gas, nuclear and coal recover less than 38% of the original investment during the first five years and only 68% during the first 10 years compared with 80% and 97%, respectively, in Canada.

In addition, the U.S. has the second-highest corporate tax rate among OECD countries. This fact, combined with the generally less favorable tax-depreciation rules, means that the differences in actual tax rates are even greater. The effective U.S. tax rate on investments in electric generation fueled by natural gas, nuclear and coal is 27% to 31% compared with 14% in Canada.

Thus, the cost of capital for new investment for U.S. firms is significantly higher than for companies in other countries. High capital costs mean less investment in energy security, energy efficiency and reduced CO2 emissions. Higher energy prices are the result, with "knock-on" effects on jobs and economic growth.

These findings are consistent in studies of all energy assets. If we wish to seriously address our energy and environmental challenges, Congress should look seriously at reforming the U.S. tax code. Representative Jim Matheson, D-Utah, has a keen understanding of the importance of this issue.

"This should be a wake-up call to anyone concerned with advancing our country's competitive position in the world," he has said. "The high after-tax cost of capital in the U.S. diminishes our ability to be a leader in a changing global energy environment."

To meet our current and future needs for electricity generation, the U.S. has to invest close to $1 trillion in energy infrastructure — including generation, transmission and distribution lines — by 2020.

Interestingly, despite the poor cost-recovery on energy investments, the U.S. has been a global leader in reduction of energy intensity — far better than Europe. Imagine if tax policy and cost recovery on energy investments were more comparable with other nations. Energy intensity and the intensity of greenhouse gas emissions could see a dramatic drop.

Some may worry that changing tax policy on energy investments will result in revenue loss. While true in the short term, over the long run the government gets its money back due to higher tax liability after the energy investments are fully depreciated.

To achieve energy efficiency, cost reduction and CO2 reductions, tax policy must be made more attractive in order to keep capital investment strong in the U.S. Our great market-based economy needs to be unfettered by improving depreciation allowances and reducing the effective tax rates on new investment.

Thorning is senior vice president and chief economist of the American Council for Capital Formation.

Economic Policy in the 110th Congress Is Focus of ACCF Policy Evening

On September 18 the American Council for Capital Formation brought together leading members of Congress, the media and the pri-vate sector to explore Economic Policy in the 110th Congress - What’s Doable and What Will Have to Wait until the Next President. Among the participants in the 154th Policy Evening were: 1) Mark Bloomfield, ACCF president & CEO, and Congressman Thaddeus G. McCotter (R-MI), chairman of the Republican House Policy Committee; 2) Jeffrey D. DeBoer, president & CEO, The Real Estate Roundtable, and Senator Norm Coleman (R-MN); 3) Elizabeth Shogren, reporter, National Desk, National Public Radio, Charles H. Fritts, vice president, Government Relations, American Gas Association, and Dr. Margo Thorning, ACCF senior vice president and chief economist; 4) Mr. Bloomfield, Sarah Lueck, congressional reporter, The Wall Street Journal, and Megan Mulligan, associate editor, The Hill; 5) Senator Bob Corker (R-TN); and 6) Ronald D. Clements, managing director, Governmental Affairs and senior director, Tax Policy, Edison Electric Institute, Dr. Thorning, Rae Cronmiller, environmental counsel, National Rural Electric Cooperative Association (in back-ground), Andy Blocker, vice president, Government Relations, New York Stock Exchange, and Senator Benjamin L. Cardin (D-MD).