LIFO Repeal Update
We rely on the LIFO Coalition for Repeal Updates. The LIFO Coalition is an ad hoc group of more than 115 trade associations representing hundreds of thousands of businesses. It was formed in 2006 to oppose proposals by the U.S. Congress to repeal or restrict the use of the LIFO inventory accounting method under U.S. tax laws. Members of the coalition represent a wide variety of businesses, including manufacturers, wholesaler-distributors, retailers and energy producers.
Jade West, the Executive Secretariat of the LIFO Coalition provided us the following updates in early February, 2010:
As you all have no doubt heard, the President has again included a proposal to fully repeal LIFO in the Budget he submitted to Congress this week. Although we held out a slim hope that he would not do so, we are not surprised, and had anticipated having to fight again this year to prevent repeal. Of interest in this year’s proposal, repeal is estimated to raise $59.1 billion in new revenue, down a little from the original estimate in last year’s Budget ($61.2 billion), and down significantly from last year’s revised revenue estimate of $78 billion.
It’s important to remind everyone that Congress does not vote on the President’s Budget – it is a blueprint of the President’s budget priorities, but Congress will subsequently introduce and act on its own Budget Resolution. We are not likely to see a Congressional Budget Resolution for several weeks, and final action on it is months away. Also, remember that Congress did not include LIFO repeal in its Fiscal Year 2009 Budget, nor was any repeal legislation introduced in either House of Congress in 2009. It is our mission to achieve that same outcome in 2010.
We have our work cut out for us this year, and the involvement of all Coalition members will again be needed to prevent repeal. As you know, LIFO Coalition members – both direct member companies and members of our member associations – made a concerted effort last summer to take the case for retaining LIFO to the offices of Members of Congress in their state and district offices as well as here on Capitol Hill. Our effort succeeded last year, and we will start our campaign this year having already persuaded a number of crucial Senators and Representatives of the appropriateness of LIFO and of the economic risk of repeal. We will be in touch with everyone in the next few weeks as we determine our best strategy going forward.
In the interim:
Congressional Committees generally hold hearings on the President’s budget in advance of introducing their own proposal, and LIFO has already been a topic of discussion in the early hearings. Specifically, Treasury Secretary Geithner testified yesterday before the House Ways and Means Committee, and a bipartisan trio of committee members questioned the Secretary about LIFO. Congressmen Mike Thompson (D-CA), Geoff Davis (R-KY) and John Yarmuth (D-KY) all raised the issue. Congressman Thompson argued that the accounting method works well for many U.S. businesses, and if repeal is enacted, many small businesses will take a big tax hit. He strongly urged the Secretary to revisit the issue, and added that international companies will have a large advantage over domestic companies in the marketplace if LIFO is repealed.
Republican Geoff Davis agreed that keeping LIFO in place is necessary for the creation of manufacturing jobs. He asked Secretary Geithner if there is a compelling reason to repeal the provision, to which the Secretary replied only that the repeal is “reasonable policy.”
Finally, BNA (Bureau of National Affairs) ran a story covering the hearing yesterday, which is included below:
Tax Policy:
House Members Raise Bipartisan Questions
Over Obama's Call to End LIFO Accounting
House Ways and Means members crossed party lines in Feb. 3 budget hearings to criticize the Obama administration's proposal to raise an additional $59 billion in tax revenues by eliminating firms' ability to use the last-in, first-out accounting method.
“If we do this, if we end it, what's going to happen is U.S. small businesses are going to take a big tax hit and their competitors overseas are going to have a terrific advantage over us in the marketplace,” Rep. Mike Thompson (D-Calif.) told Treasury Secretary Timothy Geithner. “There're some industries that have to hold their inventory for a long time; this is a fair and reasonable way to recognize that and I would strongly urge you to go back and revisit that.”
The practice can reduce a business's tax liability, particularly in times of rising inflation, because it takes into account the higher costs of replacing inventories. The LIFO method is especially important to companies that maintain large inventories over a period of years, such as wineries and distilleries that need to age their inventories. As a result, shifting to a first-in, first-out accounting practice would have the effect of giving those producers income on which they would have to pay taxes, even though the products they have put into inventory may not be available for sale for several years.
Rep. Geoff Davis (R-Ky.) said the proposal not only hurts distillers, but also the aerospace industry and other business fields that sit on inventory for many years.
“If we want to create jobs in manufacturing, the repeal of LIFO creates many challenges,” Davis said, noting that Congress already rejected the same proposal from Obama in his fiscal year 2010 budget (41 DTR G-7, 3/5/09).
“You brought it back to us. You told me there was a difference of opinion on that, but we had very broad bipartisan support to keep it,” Davis told Geithner.
Similarly, Reps. Devin Nunes (R-Calif.) and John Yarmuth (D-Ky.) also questioned how repealing LIFO would aid the administration's goal of boosting small business activity and creating jobs.
Geithner said the administration still believes the change would be a “reasonable policy,” but he promised to work with Congress on the idea.
“I know not everybody agrees. That's how this process works. We get to sit down and look at these proposals and figure out what's going to make the most sense,” Geithner told the committee.
By Brett Ferguson
