Commentary, NC Budget and Tax Center

Republican tax plan could fuel offshoring and automation, killing manufacturing jobs

In the dog days of summer in 2003, people in Kannapolis and neighboring towns northeast of Charlotte got news that over four thousand people working for Pillowtex were losing their jobs. Several hundred more in Concord got the same news, along with other communities outside of North Carolina. It was the largest single-day layoff in North Carolina history, and an event that had a lot to do with the enactment of NAFTA.

Some of that painful episode, and many like it across North Carolina, could be repeated if current Republican tax plans become law.

Two provisions of Republican tax plans currently being considered in Congress could accelerate offshoring and automation, the two chief reasons that manufacturing employment in the United States has been on the decline for more than a generation.

First, a proposal currently being debated would create new incentives to keep or move manufacturing overseas. The shift to a “territorial” tax system would allow multinational corporations pay little or no corporate taxes on profits realized outside the U.S., a move which could fuel another wave of offshoring, cut the legs out from underneath purely domestic manufacturers, and ultimately kill manufacturing jobs. The existing tax code already allows companies to avoid taxation by keeping profits outside of the United States, but some current proposals could make the problem even worse.

Companies looking to avoid the U.S. corporate income tax could move or keep their manufacturing operations out of the country, raising the specter of another wave of offshoring like that which followed the implementation of the NAFTA. Some versions of the bill include language meant to limit companies’ ability to engage in this type of behavior, but many experts think the provisions are not nearly strong enough.

While this provision has not received a great deal of media attention yet, it worries both academic experts and leaders from manufacturing states that understand the threat it poses. The Congressional Research Service has raised this concern citing both economic theory and empirical evidence that adopting a territorial system in the United State could push investment out of the country.

Republican Senator Ron Johnson from Wisconsin has also expressed his misgivings, saying that “with a territorial system, there will be a real incentive to keep manufacturing overseas.” Senator Johnson’s perspective is all the more striking given that he often favors lower taxes but has thus far refused to support the current tax plan because it lavishes so many tax advantages on multinational corporations to the detriment of local manufacturing firms.

All of that should be worrisome enough to manufacturing communities in North Carolina that have still not recovered from previous waves of offshoring, but the trouble might not stop there.

Another arcane provision, known as “full expensing” could accelerate the process of replacing people with machines on shop floors. Automation is nothing new in manufacturing, and has allowed the United States to remain competitive in many sectors even when going up against low wages abroad, but the simple fact is that it costs jobs in the short-run.

Full expensing allows companies to deduct the full value of new machinery in the year in which the investment is made, rather than spreading the deduction over years as the equipment depreciates in value. This accounting trick would make the tax advantages of buying equipment far greater, creating even more pressure to invest in machines instead of people, potentially accelerating the pace of automation in manufacturing and other industries.

Territorial taxation and full expensing are not the only worrisome tax ideas on offer in Washington these days, but they should be particularly alarming to communities in North Carolina that rely on manufacturing.

We should be looking to strengthen domestic manufacturing, but this specific spread of tax cuts for multinational corporations isn’t the answer. Several pieces of the current tax plan could simply add weight to the forces that have slammed manufacturing communities for decades, and we know how that turns out.

NC Budget and Tax Center

The top 3 reasons why the Senate Tax Plan is bad for North Carolina

The U.S. Senate is planning to vote on its proposed tax bill next week. In this season of giving, a time when communities are coming together and donating their time and resources to ensure that everyone has food on the table and a roof over their heads, the proposed Senate tax plan would do just the opposite – asking low- and middle-income families to foot the bill for enormous tax cuts to high-income households and corporations.

Below is an infographic from the Budget & Tax Center that shows the top 3 reasons why this tax plan would be bad for North Carolina.

Luis A. Toledo is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

One in six North Carolinians struggle with hunger; GOP tax plan threatens to make it worse

Over the last few years, North Carolina has remained one of the hungriest places in the US. With one in six people defined as “food-insecure,” North Carolina is the 10th hungriest state in the nation.

Plans to cut federal taxes in a way that will grow the deficit, like the one to be voted on by the Senate upon return from Thanksgiving break, are likely to put many of the programs that address hunger at risk in the next year.

Homes that are food insecure often have to make sacrifices on the quality or the amount of food they consume, just so everyone can have enough. Many of these families worry that food will run out or are concerned about being able to provide a balanced meal for growing children. In some instances, family member skip meals in order to make food stretch.

Programs like SNAP (Supplemental Nutritional Assistance Program, formally known as Food Stamps) are critical in helping families put food on the table. In 2016, more than 1.5 million North Carolinians participated in SNAP. Although SNAP has proven to be one of the most effective ways to fight poverty, it is at very real risk.

The tax bill currently being debated by the Senate could have a devastating impact on hungry North Carolinians by adding $1.5 trillion to the national deficit. The Center on Budget and Policy Priorities estimates that in order to pay for the tax cuts over the next decade, SNAP spending will be reduced by $140 billion. And while some states may be able to continue to support people through robust safety nets, North Carolina will not.

Over the past few years, state legislators have continued to make decisions that harm people in need of help. In 2015, policymakers in Raleigh passed a bill that kicked up to 100,000 North Carolinians off of SNAP by allowing a harsh and unnecessary three-month time limit to return. In addition to specifically targeting people in need of food assistance, by continuing to pass tax cuts that benefit the wealthy at the state level, policymakers have failed to invest in programs that support a majority of North Carolinians.

In a nation of so much and in a state that has seen growing wealth yet stagnant wages, it’s unconscionable that families would not have enough food to put on the table. The reality is that many struggling North Carolinians are working hard, yet falling short. Last year, nearly half of all SNAP recipients were in working families and almost 70 percent were in families with children. Surely, our elected officials can do better than to punish these struggling families.

Brian Kennedy II is a Public Policy Fellow with the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

Senate tax plan would eliminate health insurance coverage for millions to pay for tax cuts for richest Americans

The Senate tax bill released last week follows the same framework proposed by the U.S. House and the Trump Administration: delivering large tax cuts to the richest Americans while paving the way for cuts to schools, health care and the infrastructure that helps communities thrive.

Now, in what is perhaps the most disturbing recent development, Senate leaders have added a more explicit attack on the health care of at least 13 million Americans by placing a proposed repeal the individual mandate in the tax bill.

This is from the Center on Budget & Policy Priorities:

“The savings from eliminating the mandate would come entirely from reducing health coverage. For example, the federal government would spend less on premium tax credits because fewer people would sign up for marketplace coverage, less on Medicaid because fewer people would enroll, and less on the tax exclusion for employer-sponsored health insurance because fewer employees would enroll in job-based coverage.

These savings are what let Senate leaders make their full corporate rate cut permanent. Without repeal of the individual mandate, the long-term costs of the corporate rate cut ($171 billion in 2027 alone) would have exceeded the savings from the bill’s offsetting revenue raisers, even after Senate Republicans modified their bill to have its individual income tax cuts expire after 2025. This math problem seems to have been a key part of the motivation for adding individual mandate repeal to the bill. With savings of $53 billion in 2027, the provision pays for making about one-third (about 4.7 percentage points) of the corporate rate cut permanent. Other provisions in the bill would cover the rest of the cost.”

Late yesterday, the national AARP issued the following statement:

“The amendment to repeal the individual health coverage requirement will leave millions of Americans uninsured, destabilize the health insurance market, and lead to spikes in the cost of premiums.

The Congressional Budget Office recently confirmed that repealing the individual health coverage requirement would lead to 13 million Americans losing their health coverage, including 2 million Americans who would lose employer-sponsored coverage.

AARP urges Congress to reject this amendment, which also undermines the bipartisan health bill offered last month by Senators Lamar Alexander (R-TN) and Patty Murray (D-WA) that is intended to reduce premium spikes and stabilize the individual health insurance market.”

This is a developing story — stay tuned for updates.

NC Budget and Tax Center

13% of NC households would face a tax increase under Senate GOP tax plan

A new report finds that the Senate tax plan, which was just introduced on Nov. 9, would raise taxes on some families while giving the largest share of tax cuts to wealthy Americans and foreign investors. According to the Institute on Taxation and Economic Policy, of those tax cuts that would benefit households in the U.S., more than a quarter would go to the richest 1 percent and half would go to the richest 5 percent.

The middle fifth of income earners in America, households that are literally America’s middle-class, would get just about a tenth of the tax cuts.

In North Carolina, analysis shows that 50 percent of the federal tax cuts would go to the richest 5 percent of residents, and 13 percent of households would face a tax increase, once the bill is fully implemented. Importantly, as the report states, “One might think that the richest Americans would receive the largest tax cuts simply because they have most of the income. But even when measured as a share of income, the tax cuts for the richest five percent of Americans are more generous than the tax cuts for other income groups.”

In North Carolina we also find that, between 2019 and 2027, many middle-income households would see an increase in their tax load under the Senate proposal.

Over the next 10 years, middle-income households–those with incomes between 48,000 and 82,000–in our state would be affected the most: Their share of the tax increases in the plan would nearly double, going from 7 percent in 2019 to 13 percent in 2027. This contradicts what many Republican Congressional leaders have said regarding its effort to target the middle class with tax cuts.

We have previously written that the House and the Senate in Congress are currently rushing tax legislation to pass it right around Thanksgiving and ensure President Trump has a bill on his desk around the holidays. Based on this latest analysis, it is clear that rushing to pass these flawed proposals will be no gift to everyday North Carolinians.

Luis A. Toledo is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.