Equipment Industry Will Face Unparalleled Threats and Opportunities By Christian A. Klein and Matt Hallett
Article Date: 01-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.
Much will be decided in Washington in 2009, and of much importance.
It’s not unreasonable to say that what happens in Washington this year could affect your profitability for the next decade. Here’s a look at the enormous range of opportunities and threats that your AED Washington team expects to confront on Capitol Hill in the coming year.
To set the stage for 2009, one must acknowledge the ramifications of the ballots casts in November 2008. The Democrats built upon the success of 2006, increasing their majorities in both the House and Senate. Of course, the recapture of the White House was the crowning achievement. However, the ultimate prize beyond 1600 Pennsylvania Avenue, a filibuster-proof majority of 60 in the Senate, proved elusive. Despite this, Democrats officially run the show “Inside the Beltway,” which, depending on the issue, can be a boon or a burden to the equipment industry.
Possible $2 Billion-Plus
First, the good news. Historically, Democrats have been more receptive than GOP counterparts to increasing investment in the nation’s surface transportation and water infrastructure.
In the immediate term, the most pressing issue awaiting the 111th Congress is the dire state of the nation’s economy. It is no secret that the first bill presented to President Obama will likely be a large stimulus package aimed at revitalizing multiple economic sectors. The widely-discussed inclusion of additional funding for surface transportation and water infrastructure projects in the stimulus offers the opportunity for a rare cash infusion into the oft-depleted funds for infrastructure projects. Driving congressional interest in infrastructure investment is the realization of several points repeatedly trumpeted by AED: Job creation, easing congestion, and public safety are just a few of the positives being embraced by the Hill.
A 2008 study initiated by AED estimated that 6.4 cents of each dollar spent on highway construction by federal, state, and local governmental entities is used to buy and lease new equipment, and to pay for dealer-performed maintenance. Additionally, a separate study undertaken last year by AED and the National Utility Contractors Association showed that 12 percent of the average underground water utility project bid is attributable to equipment acquisition and maintenance costs. If the highway and water infrastructure stimulus numbers being kicked around in early December are to be believed, the stimulus bill could create more than $2 billion in new equipment market opportunity.
In other words, stimulus that includes increased surface transportation and water infrastructure investment would go a long way in aiding both the equipment industry and the economy as a whole.
The prospect of an early-term stimulus lends hope for additional opportunities for the equipment industry. As the economy began its downward spiral, AED was a leader in pointing to the nation’s slumping housing market as a primary culprit. The result was the passage of a home purchase tax credit to boost housing demand. While the tax credit has certainly helped ease the crisis, the ’09 stimulus package holds the potential for expanding the home purchase tax credit’s effectiveness, first by eliminating the income cap, and second, by removing the first-time homebuyer and payback requirements.
Finally, stimulus legislation offers a chance to extend the depreciation bonus and higher Section 179 expensing levels included in the Economic Stimulus Act (ESA) passed in the 110th Congress. The incentives are a valuable tool in combating the current economic down cycle. However, economic uncertainty has caused businesses to refrain from making new purchases, which has hurt dealers and manufacturers. Extending the depreciation bonus and higher Sec. 179 expensing levels through the end of 2009 would help reverse this dangerous trend and inoculate the economy against a more severe business purchasing downturn in the coming year. As with the debate over infrastructure stimulus and the home purchase tax credit, AED is playing a leading role in lobbying efforts on the ESA extension issue.
Highway Reauthorization’s Double Impact Potential
As previously discussed, surface transportation infrastructure is of the utmost importance to the equipment industry. The current federal highway program (authorized under the 2005 federal highway law, SAFETEA-LU) expires in 2009, providing the opportunity to reinvest, rethink, and retool the nation’s roadways. The current situation is bleak, to say the least. The nation’s highways are overused and underfunded. The Highway Trust Fund (HTF) (which provides funding for federal highway projects) is facing dire straits. In the longer term, due to a projected slowdown in HTF revenues, just keeping federal highway spending at current levels will push the HTF $40 billion into the red over the next decade. In other words, revenues going forward will be insufficient to sustain even the current level of spending.
At the same time, the nation has staggering infrastructure needs. Congestion costs the U.S. economy $78 billion per year in wasted time and fuel. And the U.S. Chamber Foundation predicts a $1 trillion gap over the next 10 years between what’s going to be spent on surface transportation infrastructure at all levels of government and what needs to be spent to improve conditions.
During the highway reauthorization Congress will face some stark choices: Increase user fees (for example, the gas tax) to provide new highway investment resources, introduce new funding mechanisms or sit idle and let highway spending fall. Additionally, Congress must decide whether to emulate the earmark-laden SAFETEA-LU or rethink allocation of resources via a need-based approach.
Clearly, this situation presents both enormous risks and opportunities for our industry. The risk is that a decline in highway spending will cause highway-related equipment markets to shrink, that the transportation crisis will get worse, and that our economy will suffer. The opportunity is to substantially grow – perhaps even double – the size of the highway program, thereby dramatically expanding equipment markets.
The growth in visibility of the plight of the nation’s surface transportation infrastructure (in part due to the tragic I-35W bridge collapse in Minneapolis in August 2007) has brought new allies into the fold calling for increased investment. And, it appears, Capitol Hill is willing to listen. The leading Democratic proponent for a bigger federal program is Representative Jim Oberstar (D-MN), the chairman of the House Transportation & Infrastructure Committee, who is advocating a $450 billion, multiyear highway bill.
So, if 6.4 cents of each highway dollar are spent on equipment, what’s 6.4 percent of $450 billion? That’s your stake in the outcome of this debate.
Water Infrastructure Presents “Untapped” Market Opportunities
Another major opportunity for this industry in Washington is water infrastructure, which consistently ranks as one of the most important markets for AED members’ products and services.
Last year, Congress reauthorized the Water Resources Development Act (WRDA) for the first time since 2000. Beyond authorizing over $23 billion in water infrastructure projects, the enactment of the law (over a presidential veto no less) revealed a new commitment on the Hill to water infrastructure. Sen. Barbara Boxer (D-CA), chairwoman of the Senate Committee on Environment and Public Works, has already stated that reauthorizing WRDA again in 2009 will be a priority. Also, a Government Accountability Office report on the possibility of a Clean Water Trust Fund is due out in early 2009, which could pave the way to sustainable future funding.
Additionally, there is hope that the Water Quality Financing Act will resurface in 2009 and become law. The law would dramatically increase federal sewer spending from less than $900 million in FY 2008 to $5 billion in FY 2011. The bill passed the House in the 110th Congress but became bogged down in the Senate.
But threats loom in the 111th Congress as well.
Expect Early Full Court Press by Unions
Unions contributed more than $53 million to House and Senate candidates in the 2008 election cycle. More than 90 percent of that money has gone to Democrats. The election results will also certainly embolden organized labor’s efforts to press its legislative agenda.
One of the unions’ top priorities is the Employee Free Choice Act, a.k.a. the “card check” bill, which would eliminate the right to a secret ballot in union organizing elections. Business groups, including AED, have assailed the legislation as contrary to fundamental democratic values. The bill will make it easier to organize unions, thereby allowing them to grow, and provide more campaign support to Democrats. Thus, a party line vote is expected in both chambers, with some moderates on either side of the aisle switching sides.
The Paycheck Fairness Act is also at the top of the union agenda. That bill would allow unlimited compensatory and punitive damages even for unintentional violations of the Equal Pay Act (which prohibits employment discrimination based on gender). The Act would also raise the bar for employers defending themselves in Equal Pay Act cases, thereby making it easier for employees to sue.
While both these measures fell short in the 110th Congress, all bets are off in 2009. This is especially apparent in light of the fact the future chief executive (Obama) co-sponsored both of these bills. In addition, workplace safety, ergonomics, expanding the Family and Medical Leave Act, and more will all be on the table.
Environmental Issues in the Spotlight
The debate over environmental issues also presents important challenges and opportunities for this industry.
Higher energy prices are almost a certainty, but the industry could benefit from new construction of clean coal and nuclear power plants. The global warming debate could lead to a gas tax increase, which could provide new highway investment resources. In regards to carbon emissions issues, leading equipment manufacturers are pushing for a free market-based, federal, cap and trade program, which will be one of several possible mechanisms being floated in the 111th Congress.
The Clean Water Restoration Act is another example of the type of legislation we may see more of next year. First introduced in 2008 but set for reintroduction in 2009, this bill would dramatically expand the Clean Water Act by extending federal jurisdiction to nonnavigable, noninterstate waters. This would effectively involve the Army Corps of Engineers and Environmental Protection Agency in every land use decision around the country. The impact on the viability and expediency of construction contracts could be major under such a broad swath of federal power.
Health Care and Small Businesses
Overhauling the nation’s health care options was a major issue on the campaign trail and will be a high priority item for the Obama administration. Enacting legislation to lower small business health insurance costs has consistently ranked as the No. 1 legislative priority for AED members. While 2009 will offer an excellent opportunity to support measures aimed at reducing health insurance premiums, the risk is that Congress will create a new and inefficient federal bureaucracy that will actually undermine the quality of health care in America.
Expiring Tax Cuts a Catalyst to Broad Tax Debate
Finally, let’s look at one of life’s certainties – taxes.
A constant thorn in the side of the equipment industry is the federal estate tax, a.k.a. the “death tax.” For a capital-intensive industry, which is dominated by family-owned companies, the death tax is a perfect storm. AED members have spent millions of dollars to set up and fund estate plans and insurance policies to protect their companies from the death tax. Under the 2001 tax law, the death tax will go away in 2010 and will return in 2011 with an exemption of $1 million and a top rate over 50 percent.
The tremendous uncertainty surrounding the death tax is making it impossible for equipment distributors to plan for the future. Our internal surveying shows that the vast majority of our members have maintained their death tax-related estate plans in anticipation of the tax’s eventual return, so our industry has seen little benefit from the tax’s so-called repeal.
As pernicious as the death tax is, it’s highly unlikely that the tax will be repealed completely any time soon. Although the issue has become less partisan in recent years, the majority of Democrats still oppose full repeal. Given that 2010 is fast approaching, Congress will have to deal with this issue soon, but action in 2009 remains more of a hope than an expectation.
The death tax issue is related to the larger problem of the expiration of the Bush tax cuts. For procedural reasons, the tax cuts enacted in 2001 will start to expire in 2010. This will mean the return of the marriage penalty, higher capital gains rates, higher personal income tax rates, and other tax law changes. It’s difficult to imagine that a Democratic Congress will extend the Bush tax cuts in their current form (although the current economic situation may lead to a re-evaluation). More likely, the imminent expiration of these taxes will be the catalyst to a broader debate over tax reform.
A preview of the tax reform debate was provided in the 110th Congress by Rep. Charlie Rangel (D-NY), the chairman of the House Ways & Means Committee (which has jurisdiction over tax issues). Rep. Rangel unveiled his “mother of all tax bills” to resolve problems with the alternative minimum tax, increase the standard deduction, and reduce corporate tax rates. However, one way that Rangel has proposed to pay for his tax overhaul bill is by repealing the last in, first out (LIFO) accounting method.
LIFO is a tax accounting method that inventory-intensive businesses use to manage the impact of inflation. Our member surveys show that between 40 and 50 percent of equipment distributors use LIFO, that AED-member LIFO reserves exceed $2.4 billion, and that repealing LIFO would cost AED members alone more than $850 million in retroactive tax liability. The good news is that LIFO is not seen as a partisan issue, and protecting the method should receive support from both sides of the aisle in 2009.
One final tax issue that presents a tremendous threat for us is the 3 percent government contract withholding tax set to go into effect in 2011.
Under a tax law, starting in 2011 all federal, state, and local government entities that spend more than $100 million on outside contractors will have to start withholding 3 percent of any payment they make to those contractors. The money will be sent to the federal treasury to be applied against the contractor’s tax liability for the coming year. This doesn’t just apply to construction contractors, but to any company or individual that does business with the government, including equipment distributors.
The good news is that no one in Washington thinks the new tax is a good idea. In the 110th Congress, legislation to repeal this onerous measure was cosponsored by a strong majority of the House of Representatives. Hopefully, this groundswell will blossom into a full repeal of the measure in 2009.
What Will You Do to Help AED Succeed on Your Behalf?
The threats and opportunities for 2009 loom large on the horizon, but we’re confident that with increased AED member activism and a steady hand in Washington, we’ll be well positioned to influence the debate. However, your personal participation in AED’s Government Affairs program will ultimately determine whether we are successful.
Here are some things you can do to help AED move the ball forward for the industry on Capitol Hill:
- Use AED’s online grassroots action center (www.AEDaction.org) to communicate with lawmakers on Capitol Hill
- Come to Washington, D.C., for AED’s Spring Government Affairs Conference April 29 and 30
- Support AED’s Washington Education Fund and join our Highway Infrastructure Taskforce
- Learn more about AED’s Political Action Committee (AED PAC) and the role it plays in our Washington program
- Get involved in your local group and help build the industry’s grassroots political presence
- More information is available at www.aednet.org/government.
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