- Report Published -
|House Document No. 11|
PUBLICATION YEAR 2012
|Executive Summary: Plan for Repatriating Manufacturing Jobs and Evaluating Possible Tax Incentives Pursuant to House Joint Resolution 735 of the 2011 Session|
|Manufacturing Development Commission|
|HJR 735 (Regular Session, 2011)|
|Note: This executive summary of the Manufacturing Development Commission's work pursuant to House Joint Resolution 735 of the 2011 Session is submitted in lieu of a final report. |
In addition to this executive summary, the Manufacturing Development Commission has prepared a separate executive summary of the interim activity and work of the Commission pursuant to subdivision 8 of § 30-276.
The Manufacturing Development Commission is established by Chapter 41 (§ 30-275 et seq.) of Title 30 of the Code of Virginia. The Commission is charged with assessing manufacturing needs and formulating legislative and regulatory remedies to ensure the future of the manufacturing sector in Virginia.
The Commission's legislative members are Senators Frank W. Wagner, W. Roscoe Reynolds, and Ralph K. Smith and Delegates Harry R. "Bob" Purkey, Watkins M. Abbitt, Jr., Kathy J. Byron, Daniel W. Marshall, III, and Albert C. Pollard, Jr. The citizen members are Brett A. Vassey, David R. Lohr, Jerry Robertson, and Scott Tilley. The terms of Joyce W. Waugh, Robert L. Williams, and Sean D. Kerlee as citizen members ended in November, and the Commission appreciates their dedication and contributions. Secretary of Commerce and Trade James Cheng serves as an ex officio member. Senator Wagner chairs the Commission.
HOUSE JOINT RESOLUTION 735: PLAN FOR REPATRIATING MANUFACTURING JOBS AND EVALUATING POSSIBLE TAX INCENTIVES
The primary focus of the Commission's work over the past year has been conducting a study, pursuant to House Joint Resolution (HJR) 735 of the 2011 Session. Delegate Joe May introduced HJR 735, which directs the Commission to develop a plan for repatriating manufacturing jobs and evaluating possible tax incentives.
Delegate May recounted at the Commission's May 17 meeting how a conversation with U.S. Representative Wolf encouraged him to carry legislation to complement federal efforts to recapture jobs that had been lost to offshore competition. Moreover, he has been involved in recent relocations of manufacturing operations from Eastern Europe and Mexico to locations in Virginia. He has witnessed that Virginia can compete successfully with other nations in attracting manufacturing facilities. Advantages of domestic manufacturing include lower transportation costs, security, and eliminating the expenses of sending managers overseas for extended periods to oversee operations. Virginia's improved workforce training efforts were identified as a major asset. Delegate May acknowledged that Virginia may not be able to effectively compete for low-skill manufacturing jobs, but observed that Virginia's best chances for success were in areas that require a level of workforce training that exceeds the high school level but does not reach the college level.
HJR 735 directs the Commission, in its development of a plan for repatriating manufacturing jobs and evaluating possible tax incentives, to solicit and evaluate proposals to align, reorganize, and create incentives and manufacturing-related programs. The Commission is further directed to ensure that the proposed plan is mutually beneficial to the manufacturing sector and the Commonwealth's economic development programs and that the provisions are not redundant.
The Commission was directed to consider the proposed Bring Jobs Back to America Act, H.R. 516 (112th Congress), in its development of the plan. The element of the Act that relates most closely to the Commission's task is § 6, which directs the Secretary of the Treasury to conduct a study on the feasibility and potential impact of new tax provisions to encourage U.S. companies to return jobs to the United States. The Treasury Secretary's study is to include a review of the past effectiveness of § 956 of the Internal Revenue Code and the potential effectiveness of other tax provisions encouraging the repatriation of foreign earnings. The issue of manufacturing repatriation has been linked to the issue of repatriating corporate profits held by foreign subsidiaries of U.S. corporations. The U.S. corporate income tax rate of 35 percent is among the highest overall corporate rate for industrialized countries. For 2009, the combined federal and state/provincial tax rate in Organisation for Economic Co-operation and Development (OECD) nations ranged from a high of 39.54 percent in Japan to a low of 12.5 percent in Ireland. The average was 26.6 percent in 2009, down one percent from 2008. The U.S. combined rate was second highest at 39.25 percent. U.S. tax policy also discourages repatriation of foreign earnings through its imposition of tax on a worldwide basis. The U.S. is one of nine of the 30 OECD countries that tax the foreign business profits of their corporations.
To avoid the comparatively high federal tax rate on corporate profits, U.S. companies reportedly have attributed profits to subsidiaries in countries with lower corporate rates. Tax law allows American companies to defer paying taxes on foreign profits so long as the profits are invested outside the United States. Some business leaders contend that a lower tax rate on these earnings would bring back some of these foreign earnings to this country, and these earnings could be invested in jobs, capital assets, and research and development. While some economists advocate a repatriation of foreign earnings through a temporary reduction in the tax rate, others point out that the repatriation tax holiday in the 2004 Homeland Investment Act (HIA) did not increase domestic investment or employment and note that every extra dollar of repatriated cash was associated with an increase of $0.60-$0.92 in payouts to shareholders, largely in the form of share repurchases. Provisions in the HIA that were intended to prevent the use of repatriated funds on share repurchases were undermined by the fungibility of money.
As part of developing its repatriation plan, the Commission is also directed to determine the appropriateness of incorporating the priorities established in the Virginia Industrial Innovation Strategy and the recommendations proposed by the Joint Legislative Audit and Review Commission's 2007 report on the Impact of Regulations on Virginia’s Manufacturing Sector and the Virginia Economic Development Partnership's Manufacturing Impact and Economic Diversification Plan (FY 2007-2011). Staff provided the Commission with an overview of the major elements of the findings of each of these documents.
Thomas M. Culligan, a member of Representative Frank Wolf's staff, provided members at the May 17 meeting with an overview of the Bring Jobs Back to America Act. The Act seeks to rebuild the American manufacturing base by developing a national job repatriation strategy focused on returning manufacturing and call center jobs to America that have been outsourced to China and other countries. The Act has six major parts:
1. Creating a comprehensive national manufacturing strategy.
2. Establishing repatriation task forces to promote repatriation of jobs or facilities to a U.S. location.
3. Establishing the American Economic Security Commission.
4. Making projects that facilitate the relocation of a foreign source of employment or the growth of the U.S. manufacturing or customer service sector eligible for funding under the Public Works and Economic Development Act of 1965.
5. Directing a study of tax provisions to encourage the repatriation of jobs.
6. Amending federal patent law.
The Commission received an update on the status of federal repatriation legislation at its August 4 meeting. The first major development was the insertion by Representative Wolf of six provisions relating to manufacturing repatriation in the report of the House Appropriations' Subcommittee on Commerce, Justice, Science, and Related Agencies for the fiscal year ending September 30, 2012. These provisions, among other things, provide $5 million in grants to facilitate the relocation of services, manufacturing, or research and development activities to economically distressed regions the U.S. The second major development at the federal level was the announcement on June 10, 2011, of the formation of a bipartisan partnership between Representative Wolf and Senator Mark Warner to support the America Recruits Act of 2011. One feature of the America Recruits Act, called the Inbound Investment Program, is intended to help states lure manufacturers back from overseas. Under this Program, states may compete for $100 million in grants. States that receive the grants will use the funds to offer eligible employers a $5,000 loan for every new high-value job they establish at a new facility employing at least 50 people in a rural or economically distressed area. The loans would not have to be repaid if the jobs continue for at least five years.
At the Commission's August meeting, the Virginia Economic Development Partnership (VEDP) provided an overview of state efforts and strategies to have firms relocate to the Commonwealth. Paul Grossman, Director of International Trade and Investment at VEDP, distinguished foreign direct investment in the United States, which refers to the investment by a foreign company in this country, from repatriation (also known as re-shoring, onshoring, or in-sourcing), which refers to the return of financial assets from a foreign country to the country of origin. Mr. Grossman observed that there is evidence of the beginning of a shift toward the repatriation of manufacturing operations to the U.S. This trend has been attributed in part to rising labor costs in China. While repatriation decisions are motivated by net profit concerns, foreign direct investment in the U.S. is more likely to be driven by firms seeking to grow U.S. market share. Such foreign investment often leads to the development of new supply chain connections. Many of the factors that drive decisions to re-shore or make new foreign investment are beyond the Commonwealth's control. Such factors include federal tax policy, the need to be present in other markets, and shipping costs.
Sandra McNinch, General Counsel to the VEDP, mentioned several issues relating to the Commonwealth's attractiveness to foreign investment. Chief among these issues is the ability to deliver the right workforce. Measures to improve Virginia's workforce include establishing a seamless and effective delivery system, increasing funding for noncredit instruction through community colleges, and increasing support for career coaching at the high school level in order to promote manufacturing as a viable career choice. Another area where the Commonwealth could improve its attractiveness is tax policy. The effectiveness of tax credits and other incentive programs is being studied by the Joint Legislative Audit and Review Commission pursuant to Senate Joint Resolution 329. Ms. McNinch observed the need for balanced local tax policies that acknowledge the impact of the machinery and tools tax and the business, professional, and occupational license (BPOL) tax while recognizing the need for reasonable alternative sources of local revenue. The stability of tax structures and rates remains an important factor. A third area affecting Virginia's attractiveness to foreign investment is its infrastructure. Investments could leverage the Commonwealth's strategic location and expand access to strategic assets. Members were urged to support investments in prepared site development for major projects.
In implementing HJR 735's directive that the Commission "solicit and evaluate proposals to align, reorganize, and create incentives and manufacturing-related programs to repatriate manufacturing jobs and consider possible tax incentives," Brett Vassey, president and chief executive officer of the Virginia Manufacturers Association (VMA), and Mark George of MeadWestvaco Corporation provided the Commission with a comprehensive list of suggestions. Mr. Vassey noted that there are hundreds of solid proposals that the legislature and Congress could pursue in order to reduce the cost of domestic manufacturing, improve the productivity of domestic manufacturing, and create incentives that make Virginia the premiere location for U.S. technology-intensive manufacturing. The federal government should formulate a national strategy, and the Commonwealth should implement "game changing" policies to be part of the next global manufacturing renaissance. Mr. George noted that manufacturers move operations offshore primarily because of regulatory and tax policies. Mr. George disputed the assertion that the cost and quality of labor are the primary reason for the offshoring of manufacturing. His suggestions for steps to encourage the repatriation of manufacturing focused on taxation, energy, and workforce development.
At its December meeting, the Commission accepted the following proposals:
• Congressional efforts to encourage and facilitate the repatriation of manufacturing jobs should be supported. The Commission supports Congressional enactment of the Bring Jobs Back to America Act, H.R. 516 (112th Congress), introduced by Representative Frank Wolf. If the federal government enacts such legislation, the Commonwealth should be prepared to take advantage of any opportunities afforded to states.
• Certain elements of a repatriation initiative, including a policy regarding the federal corporate tax rate and a tax holiday for corporations repatriating foreign profits to this country, should be developed at the national level.
• The Commission supports the concept of a federal corporate tax holiday on profits that are earned overseas by American corporations and brought into this country, provided that such a tax holiday is implemented in a manner that results in the creation of manufacturing jobs in this country.
• While decisions to repatriate manufacturing operations to this country are driven primarily by such factors as the comparative costs of conducting business in various countries, access to markets, geopolitical stability, foreign exchange rates, availability of a qualified workforce, and national tax policies, states can influence corporate decisions by fostering the development of an environment for manufacturing that is attractive to firms considering repatriation.
• Actions to make Virginia more attractive to manufacturers should not provide incentives or advantages to repatriating manufacturers that are not available to existing, relocating, or new manufacturers.
• In order to ensure that Virginia can compete with foreign sites for sophisticated manufacturing, the Commonwealth should not impose property taxes on capital-intensive machinery and tools.
• New investments should be exempted from local machinery and tools taxes.
• Virginia should (i) expand funding for non-credit workforce training through its Community College System, (ii) increase the focus on science, technology, engineering, and mathematics in the K-12 curriculum, and (iii) expand efforts to inform students that in the current economy a career in manufacturing is an attractive alternative to the uncertain employment prospects for college graduates with liberal arts degrees.
• The General Assembly should continue to provide support for the Port of Virginia.
• Virginia's aerospace industry warrants continued support by the General Assembly.
• The Virginia Economic Development Partnership (VEDP) should prepare a model business retention plan for localities as outlined in its Manufacturing Impact and Economic Diversification Plan (2007), and this plan should be made available to localities so that they may better coordinate existing business outreach efforts throughout the Commonwealth.
• The Commonwealth should implement the State Energy Plan and take other steps to keep Virginia competitive with other states by keeping energy costs low and removing obstacles to the establishment of additional co-generation facilities.
At its December meeting, the Commission was briefed on several potential legislative measures to advance suggestions that had been made during the course of the HJR 735 study. The members agreed that a dozen were sufficiently meritorious that bills to implement them should be drafted and reviewed at the Commission's next meeting. The recommended measures:
1. Request the Joint Legislative Audit and Review Commission, by resolution, to determine why the manufacturing sector pays a disproportionately large share of the state's corporate income and other taxes and to identify measures that may be implemented to eliminate this disparity.
2. Request the Department of Taxation, by resolution, to study the consequences and costs of permitting manufacturers to offset their local machinery and tools tax payments against other state taxes paid, as is done with Michigan's refundable credit of 35 percent of property taxes paid by manufacturers against the state income tax.
3. Provide that the assessed value of machinery and tools for local tax purposes be limited to the depreciated value of the machinery and tools consistent with Internal Revenue Service rules.
4. Exempt new investments from the local machinery and tools tax.
5. Provide for a lowering of the corporate income tax rate from six percent to five percent for those corporations that increase their employment by such an amount that the increase in personal income tax payable by their new employees offsets the reduction (from six percent to five percent) in the amount of the employing corporation's corporate tax liability.
6. Increase, from two-thirds to 100 percent of the federal deduction under § 199 of the Internal Revenue Code, the amount that manufacturers may deduct for domestic production activities.
7. Exempt manufacturers from liability for local BPOL tax with respect to activities involving the retail sale of products at a store located at the site of the products' manufacture.
8. Request the Commission on Electric Utility Regulation, by resolution, to study the feasibility of requiring a state agency to conduct a cost-benefit analysis of the economic impact on the manufacturing sector of proposed legislation changing the laws governing the regulation of the electric energy industry, which analysis shall be completed prior to enactment of such legislation.
9. Encourage combined heat and power projects for high energy users, which may include local tax exemptions such as are provided to producers of electricity from landfill gas.
10. Reduce the cost of environmental permitting by requiring the regulatory board to automatically issue a permit for a project involving facilities that replace existing permitted facilities when the new facilities generate less pollution than the facilities being replaced.
11. Prohibit state water quality regulations that are more stringent than federal requirements.
12. Require the Standards of Learning to provide that credits for career and technical education may be used in lieu of SOLs in areas other than English, mathematics, and science (for example, replacing the history/social science SOL).
In addition to the foregoing 12 recommendations, Commission members identified the following three measures that they would like the Commission to endorse as part of its manufacturing repatriation plan:
• Delegate Marshall's recommendation for incentives for landfill gas;
• Delegate Byron's recommendation to remove barriers to use of the single sales factor in corporate income taxation; and
• Delegate Pollard's recommendation for a performance evaluation of Virginia's manufacturing assistance programs.
The Commission declined to recommend two proposals. The first called for an expansion of Virginia's investment tax credit. Virginia's qualified equity and subordinated debt investment tax credit program provides a tax credit equal to 50 percent of a taxpayer's qualified business investments in the form of equity or subordinated debt in a pre-qualified small business venture per year. The members elected to delay proceeding until it is determined if the administration was recommending an expansion as part of the 2012-2014 biennial budget. The second called for an increase the annual cap on the total amount of research and development tax credits. The Commission determined that changing the program was premature, as the rules for the program are still being developed.
The Commission had planned to take action with respect to its legislative proposals at its meeting on January 10, 2012, but a quorum was not present. The members who were in attendance agreed that it may be appropriate to address the legislation when it is presented before the standing committees of the General Assembly.
Summaries of the Commission's meetings in the 2011-2012 interim, including materials provided by speakers, may be found on the Commission's website at http://dls.virginia.gov/commissions/mdc.htm?x=mtg.