President Trump signed a massive $1.5 trillion tax bill into law on December 22. One of the promises of the new law was to make America a destination for manufacturing, and to encourage businesses to relocate overseas production back to the United States.
So how have these tax changes affected American manufacturing so far?
Overall, the reaction of the American public to the tax law has been mixed. Of 2,000 registered voters, 43% supported it, while 39% opposed it.
Part of this disparity is because not all industries will benefit equally from the changes.
According to a new economic analysis by the Penn Wharton Budget Model at the University of Pennsylvania, the biggest winners will be real estate and financial firms.
Economists predict that the law will reduce the average effective tax rate across industries to 9% next year, down from 21%.
But despite this, analysts expect a more muted effect on the manufacturing industry. This is because many manufacturing firms already pay a lower effective tax rate than businesses in other industries.
For example, analysts expect financial firms to see a 16-point reduction in their effective tax rates. Manufacturers’ rates, meanwhile, will fall by less than 7 points.
The Best Of Intentions, But…
Other analysts are predicting that the law will have the unintended consequence of encouraging corporations to invest in overseas manufacturing, rather than in domestic production firms.
According to research economist Gavin Ekins of the Tax Foundation, the more tangible overseas assets a company has, the less tax the company will pay on foreign earnings. That company could also potentially pay less tax overall if it chooses to locate a plant outside the United States.
“There is a small incentive to locate your tangible depreciable assets overseas because of this,” said Ekins.
Manufacturers Speak Out
How are other manufacturing firm owners reacting to these changes?
According to a National Association of Manufacturers survey, 95% of respondents said they’re optimistic about their company’s outlook. This is the highest is the survey’s 20-year history.
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Steve Staub, president of Staub Manufacturing Solutions, is one of those 95% who’s pleased about the change in tax law. “We’re excited about it,” he said. “…As a pass-through small business, it makes such a big difference on the amount of taxes, the money you can reinvest in the company. We can increase capital spending, hire more workers, increase wages, grow the business.”
The Boeing Co. also expressed optimism about the law. According to the firm, the lower tax rate is closer to what Boeing’s global competition already enjoys.
And Aerospace Industries Association CEO David F. Melcher said, “[The] legislation will unleash our industry’s global competitiveness and potential to create jobs for the American people.”
Not All Good News
All of these positive feelings for the law do come with a caveat, though. That’s because every industry will see its gains shrink over time.
The effective tax rate for manufacturers is expected to drop to 10.9% in 2018. However, by 2027, it will likely rebound back to 15.8%.
In addition, the ability to immediately deduct the full cost of some capital equipment will expire at the end of 2022.
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