This morning, a report released under the Hamilton Project banner of “Innovative Approaches to Tax Reform,” proposes the “Elimination of Fossil Fuel Subsidies.”  Unfortunately, the paper ignores sound tax policy and takes aim at a package of long-standing tax provisions that enable oil and gas companies to explore and develop new domestic sources of energy.

Indeed, Manufacturers take umbrage to a number of assumptions in this paper. So let’s start at the top. The report argues that the so-called “subsidies” provided to the industry for domestic production “have a very small impact on production” and thus eliminating these (so-called) subsides would have “a very small impact on production, their removal will not materially increase retail fuel prices, reduce employment or weaken U.S. energy security.” This belies so many real-world facts that we just had to respond.

First, the provisions in question are not subsidies. They represent sound tax policy that, among other things, allow energy companies to deduct ordinary and necessary business expenses and recover their capital costs. In contrast, subsidies are direct payments from the government to entities. This is clearly not what the paper is talking about.

One thing on which manufacturers can agree with the author is the need to enact a “simpler, more efficient tax code” – this is true especially in today’s world where the U.S. has the highest corporate tax rate. This leads to the second fact that is ignored in this report… that oil and gas companies with a global market and worldwide consumers have to look at worldwide production opportunities and U.S. production projects have to compete with opportunities elsewhere. With this reality, good tax policy matters in attracting development and production–and jobs– in the U.S. Despite the author’s assertion that “none of the current tax expenditures for fossil fuels targets novel techniques or … promotes innovation,” horizontal drilling and the sophisticated techniques used in hydraulic fracturing are two innovations that are fairly recent, were costly to develop and have resulted in the development of game-changing resources that are still emerging. And these projects are a boon to local domestic economies where they are ongoing.

Continuing along with our fact-checking, how did the author conclude that oil and gas production is not manufacturing as a basis for his argument that the domestic manufacturing tax deduction for oil and gas should be eliminated? Merriam Webster defines manufacture as: “1) something made from raw materials by hand or by machinery; 2a) the process of making wares by hand or by machinery especially when carried out with division of labor, b) a productive industry using mechanical power and machinery; 3) the act or process of producing something.” That pretty much sums it up, by all accounts oil and gas production is manufacturing by its very nature. Perhaps a refinery tour is in order!

Finally, the report is a wolf in sheep’s clothing as it is apparent that the author seeks to use the tax code to advance an environmental agenda. Throughout the report the author refers to the environmental benefits of a reduction in carbon emissions resulting from a reduction in production and consumption. Manufacturers, like all concerned citizens are concerned about the environment. However, if the author wants to have an environmental debate and address what he proposes as environmental impacts, then that debate should not be engaged under the guise of tax reform.

Manufacturers strongly support comprehensive tax reform, one that lowers the corporate rate to one that is competitive, includes a territorial system of taxation, that includes a permanent and strengthened R&D credit, includes permanent lower rates for small businesses and that includes a robust capital cost recovery system. With these principles as a starting point manufacturers want to engage in a tax reform discussion but if the starting point is from the position taken by this author, then this debate may remain long-awaited.

Even as Washington’s attention careens from one fiscal showdown to the next—which is reasonable with $85 billion in spending cuts due to go into effect in just a few days coming on the heels of December’s Fiscal Cliff–many manufacturers also await what could be an avalanche of regulations to implement the infamous Dodd-Frank Wall Street Reform Act that could prove to bury these derivatives end-users in excessive costs and regulatory burdens to “fix” aspects of the financial crisis that they neither caused nor contributed to.

For the past two and a half years since the passage of this voluminous statute, a number of unintended consequences of the 850 page statute have come to light as derivatives end-users—who use derivatives as a way to manage commercial risk and NOT for speculative purposes—come to recognize how their day to day business practice might be caught up in a slew of regulations from an array of regulators. These rulemakings have the potential to undo best practices, efficiencies and risk management strategies to improve business functions.

To combat this, for the past several years the NAM has served as a steering committee member of the Coalition for Derivatives End-Users working with a coalition of business associations and hundreds of end-user companies to mitigate the impact on end-users of Dodd-Frank’s implementation. The NAM drove an effort during the lame duck Congressional session to seek passage of two bills critical to manufacturers that use derivatives to manage risk.  The effort has served as a springboard for the Coalition’s activity this year.

Already this year, the Coalition has met with the staff, the Chairman of the CFTC as well as several of the Commissioners seeking relief from two of the most time sensitive concerns facing end-users including: the upcoming deadline of April 10th when, without no-action relief from the CFTC, end-users will need to begin reporting their inter-affiliate trades to a swap data repository within 48 hours of the trade; and, a June 10th deadline financial institutions are required to begin clearing trades – a deadline that will impact end-users who use centralized hedging centers to centralize inter-affiliate trades and use that hedging center to conduct external trades unless the CFTC provides exemptive relief to these centralized hedging units of non-financial end-users. The Coalition is working this week to submit requests for these relief actions to the CFTC.

Simultaneously, we continue our legislative effort and already this year the two priority end-user bills – one providing a clear end-user exemption from margin requirements and one exempting inter-affiliate trades from being treated in the same manner as external, market facing trades and rectifying the centralized hedging center issue described above. Those bills, H.R. 634 and H.R. 677, were introduced earlier this month in the House by bipartisan groups of members of both the House Agriculture and House Financial Services Committees–and we hope there will be companion legislation introduced in the Senate in the near term.

The NAM continues to lead both legislative and regulatory solutions to address the challenges facing end-users. Company participation in these efforts is critical to make the case for action and the NAM will continue to coordinate opportunities for members to weigh in on these matters.

The NAM joined the Coalition for Derivatives End-Users today in applauding the determination by the U.S. Treasury Department late last week that foreign exchange (FX) swaps should not to be regulated as “swaps” under the Dodd-Frank Wall Street Reform Act. The NAM and the Coalition called on Treasury to make this final determination two years ago in comments stating that as FX swaps and forwards “do not materially contribute to systemic risk” that they should be granted an exemption from additional regulation. This determination is a clear acknowledgement that over-regulating in this area would be detrimental to end-users’ efforts to manage risk through FX swaps and forward.

Manufacturers have long used derivatives to hedge business risk and the granting of an exemption for these swaps by Treasury is a positive step forward. We hope that other agencies will follow suit and ensure that as they continue to implement Dodd-Frank –particularly in the areas of margin requirements, inter-affiliate trades and cross-border rules –they do not create new costs and regulatory burdens on end-users.  We appreciate Treasury’s granting of an exemption for FX swaps and forwards.

Anyone paying attention to political discourse over the past several years knows that manufacturing is the poster child for the economic recovery that all of Washington – and all of America – is hoping for. Hardly a Congressional debate – or campaign ad – fails to mention the need for additional American manufacturing to help boost our nation’s economic fortunes and return us to the days of strong economic growth. Yet in the same breath, all too often, comes the observation, from far too many, that part of what needs to happen to bring a resurgence in American manufacturing is the implementation of a plan to get our nation’s debt and deficits under control and somehow a key piece of that mantra has become the need to raise taxes on “high income earners” who pay taxes at the top two marginal tax rates.

This position belies the fact that study after study has shown that nearly 1 million small businesses fall into this category, and these are the very businesses that have been successful, surviving the economic storm of the past several years. These are the businesses, including nearly two-thirds of manufacturers organized as a flow-through entity and pay taxes on their business income at individual marginal rates, who are the source of growth, hiring, and investing. Additionally, and central to this whole debate, is the reality that allowing the top two rate cuts enacted in the 2001 and 2003 tax bills to expire would only raise enough money to operate the federal government for about a week – certainly in no way enough additional revenue to put a serious dent in the nation’s deficits.

What manufacturers have been saying for some time now is that in order to bring about Manufacturing Renaissance, we need to make America the best place in the world to manufacture goods. Among other things, this includes a tax code that is simple, fair and most critically – permanent. We applaud elected officials from both sides who have taken up the mantle of the need for comprehensive tax reform. One of these, Pennsylvania Senator Pat Toomey addressed some of these issues in an op-ed today urging Congress to not raise income taxes. In order for manufacturers to succeed they need to have capital on hand to invest and compete and grow. For the nearly two-thirds of manufacturers organized as a flow-through, increasing marginal rates has a direct impact in their ability to have the capital to make these investments.

Once this election season comes to a close we are hopeful that both parties will come together and recognize that what is most needed now is an injection of stability for a shaky economy and extend today’s tax rates for at least a year and during that time undertake a serious comprehensive effort to reform entitlements, revamp our antiquated tax code and change the debt trajectory of our nation. This effort is what is needed to fix the systemic problems facing our nation, not raising taxes on small and medium sized businesses.

The NAM commends the House Small Business Committee for its hearing tomorrow on the impact on small businesses of the tax cliff at the end of 2012 – manufacturers believe it’s critical to extend the current tax code to allow time to get to the what should be the main event: tax reform with the result of a tax code that is simpler, fairer and more competitive.

This hearing should highlight the fact that the lower rates enacted in 2001 and 2003 have played a key role in helping the nearly two-thirds of manufacturers operating as S-corporations or other pass through entities–most of which are small and medium-sized manufacturers (SMMs)–retain and create high-paying manufacturing jobs. As we’ve said time and again, raising taxes on these SMMs would be counterproductive, particularly as we face persistently high unemployment rates and stagnant economic growth.

Unfortunately, the debate about extending the 2001-2003 tax relief during the past year too often overlooks the potential impact on SMMs of not extending all the tax relief. According to 2008 IRS data, the average net taxable income for SMMs is $384,000 –extending some but not all of the current individual income tax rates will have a direct and negative impact on many manufacturers. Manufacturing is a capital intensive industry and the capital that is needed to grow and expand operations, increase product lines, hire additional workers most often comes directly from the owners.

Manufacturers are concerned about the fiscal cliff and are paying attention to the debate in Washington. A March NAM/Industry Week Survey of Manufacturers found that 56 percent of respondents believed that the tax increases slated to go into effect in January 2013 would negatively impact business investment and job retention/creation. Even more alarming in the most recent survey (released today!) more than 78 percent of respondents cited uncertainty regarding the fiscal abyss as their chief concern. In addition, the number of manufacturers with a negative outlook on the future of their business has doubled in the past three months. As we’ve said all year, Congress must act to extend the 2001 and 2003 tax rates and prevent tax hikes on smaller manufacturers.

CBO released its Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022 today that highlights what Manufacturers have been saying all year, letting the country go off of the “fiscal cliff” is not the way to address our nation’s fiscal problems. In fact, according to CBO, doing so, will very likely “lead to economic conditions in 2013 that will probably be considered a recession and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.” This point underscores something that NAM’s President Jay Timmons has been saying for a while. The moniker “fiscal cliff” is wrong because going over a cliff assumes there is a bottom once you go over. In this scenario, it’s much worse – we don’t know where the bottom will be, when we will hit it, or even if there is a bottom..

The CBO’s update lays out the problem in stark terms and manufacturers hopes this gets policy makers moving.  Allowing all of the changes pending in law – the expiration of the 2001 and 2003 tax relief, the first tranche of sequestration, the AMT patch lapsing, steep reductions in Medicare reimbursement rates – to go into effect will create a perfect storm for economic disruption beginning January 1, 2013.  On the bright side, CBO estimates that if these changes don’t go into effect, “(t)he economy would be stronger in 2013: Real GDP would grow by 1.7 percent between the fourth quarter of 2012 and the fourth quarter of 2013, and the unemployment rate would be about 8 percent by the end of 2013.”

For those who continue to believe that allowing the “cliff” to hit would reduce the deficit and that alone is enough reason to stay on course – we point to CBO’s own data in rebuttal. CBO states that, “in the last few years of the 10-year projection period, continued growth in spending for retirement and health care programs will cause mandatory outlays to grow faster than the economy reaching 14.4 percent of GDP in 2022, compared with 13.2 percent in 2012.”

In fact, rather than a call to keep heading towards  the abyss, CBO’s update should make clear to Congress that the time is now to veer from the calamitous course we are on and extend current tax policies for a year. This allows Congress the time to address comprehensive tax reform and a plan to address the real drivers of our nation’s deficit – entitlements.

Carolyn Lee is senior director of Tax Policy, National Association of Manufacturers.

Up until now the main focus driving the discussion on the for tax reform has centered around the dubious distinction of America’s number top ranking as the nation with the world’s highest corporate tax rate – and for good reason, as that “distinction” is a significant hurdle in our bid to be continually competitive in a worldwide race for investment. However, every so often the topic turns to one of the biggest challenges for policymakers in the discussion of tax reform – flow-through or pass-through businesses, (ie. companies that are organized in a way that the tax burden flows through to the business owners’ individual tax returns). Tomorrow, the Senate Finance Committee will take this issue head on in a hearing appropriately entitled, “Tax Reform: Examining the Taxation of Business Entities”.

According to IRS data the number of flow-through businesses more than tripled from 1980 to 2008 totaling nearly 31 million today. How to treat these businesses in the context of tax reform is especially critical to manufacturers as nearly two-thirds of manufacturers are organized as a flow-through business. For these companies it’s essential that any tax reform plan include permanent lower individual marginal rates.

Most of the focus lately on the topic of individual marginal rates has centered on what to do with the soon expiring 2001 and 2003 rate cuts for the top two brackets. To the NAM there should be no debate here – all of the 2001 and 2003 tax relief should be extended for at least a year to provide time for Congress to finally turn to, and complete, comprehensive tax reform. The discussion about individual marginal rates is also particularly relevant for the NAM in the debate about tax reform because IRS data tells us that in 2008 the average net taxable income for these small and medium sized manufacturers (SMMs) is $384,000 so maintaining competitive marginal tax rates for all brackets is key if we want these SMMs to continue to compete and be successful.

While some may view this as a hefty sum – one which underscores the argument that those in the top brackets should face increased taxes so that they pay more of “their fair share”, it actually represents the opposite truth. In fact, raising taxes on these very business owners will reduce their ability to reinvest in their companies, to hire more, to expand or improve their products and to continue to survive in an ever changing and global marketplace.

The bottom line is that just as for their larger corporate counterparts, for SMMs the rate matters. As the Senate Finance Committee kicks off their hearing tomorrow we sure hope they are paying attention to the need take care of those 31 million job creators who will be closely monitoring the discussion.

 If it’s summer in Washington DC then apparently it must be time for a tax fight, except this time we already know what lays beyond the clouds on the horizon – a steep cliff, one which the economy could fall off of if our nation’s leaders don’t agree to a different path. As anticipated, the car we are all riding in just picked up speed toward that cliff earlier today when the President in a White House speech advocated for increasing marginal tax rates on some Americans.

This proposal comes despite the mounting evidence that this is the wrong approach – one which will hurt small businesses and our fragile economic recovery. According to the Congressional Joint Committee on Taxation in a report last month, allowing marginal rates to go up to the pre-2001 levels on those taxpayers in the top two brackets would result in tax increases on nearly 53 percent of all flow-through business income.

As the President stated in his remarks earlier today, “the folks who create most new jobs in America are America’s small business owners.” With nearly 70 percent of manufacturers organized as a flow-through business, these proposed tax hikes will very likely have a dampening effect on the growth and strength of the manufacturing sector. In fact, 64 percent of manufacturers have cited a negative business climate and uncertainty as their chief concern in planning for the future.

Instead of supporting tax increases on business owners, the NAM supports the proposal to be considered by the U.S. House later this month which would extend today’s lower tax rates for one year and enact a mechanism for Congress to use an expedited path to consider comprehensive tax reform during 2013. Manufacturers have long called for comprehensive tax reform with the goal of a permanent, simplified and competitive tax code. Knowing that cliff is coming up fast, now is the time for the White House and Congress agree to extend current law for another year and chart the course toward tax reform for once and for all.

Senate Finance Committee Chairman Max Baucus (D-MT) today outlined what he called his four goals for tax reform: jobs from broad-based growth; competitiveness; innovation; and, opportunity. These are goals Manufactures share.  NAM has long been calling for comprehensive tax reform that will ensure that our tax code is no longer an impediment to business and success, and one that is a far cry from the byzantine, labyrinth that is our tax code today.

Like Chairman Baucus, the NAM believes the code should be modernized, simplified and more stable. Today too many provisions regularly need to be extended. What’s more, in today’s global economy, the U.S. must have a tax code that includes a globally competitive corporate tax rate of 25% or lower and which recognizes that some products must be produced outside of the U.S. to serve the 95% of consumers that do not live within our borders. In order to ensure that American companies remain competitive we need a territorial system of taxation that encourages companies to bring foreign income back to the U.S. Additionally, we need a permanent, expanded and simplified R&D Credit to, as Chairman Baucus noted, “bolster… innovation. Innovative companies create jobs.”

One item that the Chairman didn’t address specifically but is a key goal for the NAM in tax reform is permanent lower rates for individuals – nearly 70 percent of manufacturers operate as “flow-through” busiensses with the owners paying business taxes through their individual tax returns. We would be greatly remiss to not recognize the impact of these manufacturers in the context of comprehensive tax reform.

As the Chairman said, “tax reform is a once-in-a-generation opportunity. We can cement America’s preeminence.” Manufacturers wholeheartedly agree that the right kind of tax reform can do just that and we look forward to continuing to work with the Senate Finance Committee and the House Ways and Means Committee as they continue to lay the groundwork for this effort.

A little while ago, a letter from 204 businesses and trade associations representing companies all across the country sent a letter to the Congress urging them to take immediate “action to stabilize funding interest rate rules for private-sector pension plans” to adjust for current economic conditions which are driving up pension funding obligations and in opposition to pension premium increases.

Pension plan funding obligations are inversely tied to interest rates so when interest rates are low – like they are today – then pension obligations are high.  Since the financial collapse the FED has adopted a policy of keeping interest rates low in an effort to stimulate the economy.

One negative side effect of this policy is the impact on a company’s pension obligations. The Senate a few months ago passed a provision that would fix the funding rules to all a more historically accurate measure for funding obligations using a 10 percent corridor around the 25 year average.

This provision was part of the highway transportation bill which is now in conference. We are hopeful that the Conferees will adopt this provision and make it permanent rather than time limited as provided for in the Senate bill.

This provision makes sense and if made permanent will go a long way toward helping provide businesses more certainty from which to plan for this commitment. Improved planning will mean more certainty which will in turn help make our companies better able to compete in today’s economy. We urge Congress to adopt this common sense solution.