A Super-Sized Portion of UncertaintyBy Christian A. Klein & Daniel Fisher
Article Date: 06-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Distributors are slowly recovering from the recession, but uncertainty on every front is making it difficult to plan.
Congratulations. If you are reading this, you survived the storm of the century and lived to tell the tale.
The equipment industry has just suffered through the worst business conditions anyone can remember. The recession, credit crisis, and housing market collapse have meant a depression for equipment distributors and manufacturers. A Global Insight report commissioned by Associated Equipment Distributors (AED) and the Association of Equipment Manufacturers (AEM) late last year quantified the devastation: Since 2007, the equipment industry has lost 37 percent of its workforce and business has fallen by 50 percent.
The good news is that the broader economy seems to be on the path to recovery. Certain key sectors are still weak (residential construction), and there are some clouds on the horizon (the commercial real estate market); but if business conditions are not improving, at least they have stopped getting worse.
Unfortunately, distributors trying to put their companies back on the road to profitability are confronting a major problem: The unprecedented level of uncertainty resulting from what’s happening (or not happening) in Washington, D.C.
Congressional foot-dragging on infrastructure legislation is adding to volatility in equipment markets. A tax code peppered with expiring provisions means you have no idea what your tax bill will look like. And, thanks to the new health care law and proposed labor and environmental policy changes, your costs of doing business are up in the air.
You can’t drive fast in the fog. AED is concerned that the fog being created by Washington will hold back the industry’s recovery. With that in mind, here’s a closer look at some of these problem areas, what AED is doing to try to restore some semblance of predictability, and what you can do to help!
Stabilizing Equipment Markets By Rebuilding Infrastructure
To us, it seems pretty obvious: To bring down unemployment, focus on helping the sectors of the economy where people are out of work. Construction unemployment is stuck at more than 20 percent and is pulling up the overall jobless rate. But rather than doing everything they can to help the construction industry recover, the Obama administration and Congress are making things worse.
The multiyear authorization laws for all major federal infrastructure programs have expired. Without these spending blueprints, states have no idea what investment resources they will have at their disposal and cannot plan major new projects. Because they do not know how much work they will have, contractors are not investing new equipment or hiring new workers. That means equipment distributors are suffering.
Nowhere is the uncertainty more apparent than with the highway program. SAFETEA-LU, the 2005 surface transportation law, expired at the end of September 2009. The main holdup is how to pay for the next multiyear bill. The current user fee revenue streams into the Highway Trust Fund (HTF) are insufficient to support even the $41 billion per year that Congress appropriated for FY 2010, let alone support the big investment increases the nation needs to remain globally competitive.
Reluctance on Capitol Hill to raise the gas tax or deficit spend to pay for a new highway law has left the program in limbo (the current extension runs through the end 2010). But that has not stopped some from proposing big highway increases. House Transportation & Infrastructure Committee leaders have drafted a bipartisan proposal that would provide $337.4 billion for highways over five years (an average of about $67 billion per year. That’s the best case scenario.
The worst case scenario is that Congress does nothing to reauthorize the road program and stops providing regular infusions of general fund cash to keep the highway spending at the $41 billion level. If that happens, annual federal highway investment could fall to less than $35 billion per year.
Given estimates that each dollar spent on roads creates 6.4 cents in equipment market opportunity (sales, rental, product support), the $30 billion difference between the best and worst case scenarios outlined above means close to $2 billion in market uncertainty for AED members.
There is a similar problem with water infrastructure. Authorization for the Clean Water and Safe Drinking Water State Revolving Funds (which respectively support sewer and drinking water investment), expired years ago. A bill approved by the Senate Environment & Public Works Committee last year would authorize $14.7 billion for the Drinking Water SRF and $20 billion for the Clean Water SRF over the next five years. Average annual funding for both programs would increase to close to $7 billion per year, up from the approximately $3.5 billion the two programs got this year (not including the additional stimulus dollars).
Assuming that the best case future scenario is the Senate bill and the worst case is the status quo, $3.5 billion per year in water infrastructure investment is in play. A 2008 AED study determined that each dollar invested in water infrastructure creates 12 cents of equipment market opportunity. For equipment distributors, the bottom line market value of the uncertainty surrounding federal water programs is about $420 million per year.
Last but not least is airport construction funding. Congress just enacted the 13th short-term extension of VISION 100, the most recent Federal Aviation Administration (FAA) authorization law. Despite enormous needs, Airport Improvement Program (AIP) funding, which supports airport construction, has effectively been flat for the last seven years (at around $3.5 billion). The FAA bills separately passed by the House and Senate this Congress would increase AIP funding to more than $4 billion per year. The bottom line market impact of the funding difference on equipment distributors is probably around $30 billion per year, not as substantial as on the highway or water fronts. But the uncertainty surrounding the future of FAA funding is likely making it difficult for projects to get underway.
Despite the uncertain future for meaningful infrastructure investment, AED is continuing to make the case to lawmakers that the best way to get the industry going again and restore stability to the equipment markets is through multiyear highway, water, and airport reauthorization bills. Whether through AED’s partnership with AEM in the Start Us Up USA! campaign, as a member of highway coalitions (Transportation Construction Coalition and the U.S. Chamber’s American’s for Transportation Mobility), or as a strong supporter of the water infrastructure groups (Clean Water Council and the Water Infrastructure Network), AED is leading the charge to return certainty to the equipment markets through long-term investment in our nation’s highways, bridges, airports, and underground infrastructure.
Nothing’s Certain But Death and Taxes – Or Maybe Not
In 1789, Benjamin Franklin could not have put it better than when he said, “In the world nothing can be certain except death and taxes.” Even in 2010, death and taxes are still the only part of life you can absolutely count on. What is not certain, however, is what taxes you will actually be required pay and how much they will cost you.
AED’s 2010 Government Affairs Survey clearly showed that distributors view the uncertain tax situation as the biggest threat to the industry, and with good reason. At the end of the year, many of President George W. Bush’s 2001 and 2003 tax cuts expire and it is unclear whether Congress will extend them. Not only is there the risk that capital gains and marginal tax rates will increase, but Congress must extend more than 65 provisions in the tax code or they will disappear in 2011.
If ever there were an area that needs certainty it is the estate tax. The estate tax could go from zero in 2010 to 55 percent with a $1 million exemption if Congress does not act this year. Most Republicans and several moderate Democrats do not want the estate tax to return to pre-2001 levels next year. Sens. Blanche Lincoln (D-AK) and Jon Kyl (R-AZ) are expected to offer legislation that would permanently cap the top estate tax rate at 35 percent with a $5 million per-person exemption (indexed for inflation). Although AED continues to support full repeal, the Lincoln-Kyl proposal is a reasonable solution to end the uncertainty surrounding the estate tax once and for all.
Additionally, there are the various proposals by the administration and Congress to impose new taxes on businesses to fund other spending proposals and reduce the deficit. Opponents of the “last in, first out” (LIFO) tax and accounting method are still trying to repeal it. LIFO is used by many AED members to manage the impact of inflation. In the president’s 2011 budget proposal, the administration once again proposed repealing LIFO. In addition to costing AED members close to $1 billion in retroactive tax liability, LIFO repeal would deny equipment distributors an important tax tool. AED continues to play a leadership role to save LIFO as a steering committee member of the LIFO Coalition.
There is also talk on Capitol Hill of expanding the application of payroll taxes to active shareholders of S-corporations that are primarily engaged in “the performance of services.” Not surprising, it is unclear what types of businesses would be affected. Also, a new 3 percent withholding tax on government contractors is set to go into effect in 2012. Efforts to repeal the tax have gained traction in recent Congresses, but have only succeeded in delaying implementation, not repealing the law.
The health care bill signed into law in March also contains numerous new taxes on companies. Beginning in 2013, the net investment income (interest, dividends, capital gain, rents, royalties and passive income) of those with income over $200,000 ($250,000 for joint filers) will be subject to an additional 3.8 percent Medicare tax. Additionally, in the same year an additional 0.9 percent Medicare tax will apply to earned income in excess of $200,000 ($250,000 for joint filers). And taxes placed on insurance companies will likely be absorbed by employers through higher premiums and other fees.
Adding to the uncertainty is the fact that nobody in Washington seems to actually know how the health care law will be implemented. There will not be any certainty until the Internal Revenue Service (IRS), the Department of Health and Human Services (HHS), and other agencies begin issuing regulations.
State of “Labor” Union
Following the 2008 elections, when Democrats took control of both chambers of Congress and the White House, the business community expected a frustrating couple of years on the labor front. Nevertheless, thanks to an outpouring of grassroots opposition, Congress shelved top labor priorities. However, early successes in blocking the labor agenda on the Hill could quickly turn to losses in the coming months.
The Employee Free Choice Act (EFCA or “card check) has been a top labor legislative priority for many years. The legislation would eliminate the right to secret ballots in union elections, effectively allowing unions to organize by petition and exposing workers to unprecedented intimidation. The bill would also require binding arbitration in some cases for initial union contracts, meaning that government bureaucrats (not business owners or employees) would have the final say on terms and conditions of employment. AED and others have succeeded in blocking the legislation from becoming law. However, changes could be on the way.
What often happens when an administration is unable to accomplish its goals legislatively, is that it turns to other means. In March, President Obama gave in to union pressure and circumvented the Senate by recently appointing Craig Becker to serve on the National Labor Relations Board (NLRB). Becker, a former attorney for the AFL-CIO and the Service Employees International Union (SEIU) who faced bipartisan opposition in the Senate, has written and spoken extensively that he believes the goals of EFCA could be accomplished by the NLRB without congressional action. Becker has not been a member of the NLRB long enough to do much damage; although, as he settles in and more cases come before him, major change could be on the way.
The White House also has a plan in the works, supported by labor unions, that would change the way federal contracts are awarded, increase contractors’ costs of doing business, and favor unionized companies. The “High Road Contracting Policy” would disqualify companies with labor, environmental, and other violations from being awarded government contracts. Businesses that offer better compensation, health coverage, employer-funded retirement plan, and paid sick days would be given a preference when bidding on federal contracts.
In addition to the labor proposals, the Occupational Safety and Health Administration (OSHA) is reconsidering many laws that could impact how companies operate. Chief among these are ergonomics regulations and a new rulemaking revisiting the definition of work-related musculoskeletal disorders (WMSDs). And this is just the tip of the iceberg in terms of the regulations and executive orders the administration plans to unveil in the area of workplace safety.
Don’t Get Discouraged; Get Active!
With all the challenges facing the industry, it would be easy to get discouraged. But the fact that you are still in business is testament to your determination and resilience. So why not channel some of your energy into helping AED restore certainty for the industry?
With 2010 being an election year, equipment distributors have a unique opportunity to shape the debate and establish candidate priorities. Coordinate an ImPACt meeting to deliver an AED Political Action Committee check to a House or Senate candidate. Attend a fundraiser. Invite your lawmakers for a facility visit. Schedule a meeting with your member of Congress in Washington or at their district office. And communicate, communicate, communicate! The easiest way is by visiting www.AEDaction.org to send pre-written messages to Congress, the president, and executive branch officials on hot issues.
Let your elected representatives in Washington know that the uncertainty they are creating is making it hard for you to return to profitability and put people back to work. Let them know that you cannot drive fast in the fog!
As always, AED’s Washington office is standing by to help you become an advocate for your industry. Just get
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