NACD: When politicians wrestle, small business gets trampled

17 May 2013 10:00  [Source: ICB]

A battle royal is brewing in Congress as President Obama, Senate Democrats and House Republicans lock horns over the fiscal year 2014 budget, but casualties of this combat will be chiefly among spectators

While budget proposal details differ wildly between Democrats and Republicans, the fundamental distinction is that Republicans want to move federal spending toward a balanced budget with program cuts and no tax increases, while Democrats want to protect existing entitlements and raise taxes to reduce annual government deficits. As the old saying goes, "When elephants wrestle, the grass gets trampled".

In the budget battle, US small businesses are the grass that could get pounded as lawmakers look to cut spending and/or increase revenues.

For US chemicals distributors, there are potential policy changes in taxes and energy policy that could prove costly.

Chief among them is the threat to the inventory and tax accounting principle known as "last in, first out" or LIFO.

Essentially, use of LIFO in accounting for inventory valuation - instead of the "first in, first out" (FIFO) strategy - allows many NACD member companies to defer taxable income, which, of course, improves margins and operating capital. But some in Congress would like to eliminate LIFO and oblige all US firms using it to switch to FIFO (which almost all other national taxing authorities prescribe).

According to NACD's John Shanahan, vice president of legislative affairs, if member firms were forced to switch from LIFO to FIFO, "all their older assets would suddenly be off the books, so it ends up being a very large, one-time tax increase".

Distributors dependent on LIFO would be penalized for decisions that were made perhaps years ago when their accounting systems were set up.

Another tax technique popular with NACD firms and other small businesses is the S-corporation pass-through of income. Under this approach, the business is a corporation, but its income is allowed to pass through to its owners and then taxed at lower personal income rates rather than at higher business rates.

Shanahan says that the White House, ever on the hunt for additional revenue, wants to sharply restrict or eliminate the S-corp - now the most common form of corporate entity, numbering more than three million - arguing that it is being used by many larger companies to dodge higher taxes.

On the energy side, the federal government appears to be gearing up to impose perhaps crippling regulatory criteria on hydraulic fracturing ("fracking"), the oil- and gas-well process that, along with horizontal drilling, has brought about newly abundant domestic US shale gas and shale oil resources.

Ten federal agencies have launched as many as 14 separate regulatory initiatives aimed at determining the environmental impact of fracking and whether federal regulation or restriction of the technique is necessary.

How likely is it that 10 government departments will decide there is no problem and they have no role in the matter?

"Fracking is an important part of our business because we sell into that market," Shanahan noted, "for example with products such as specialty blends that prevent pipe corrosion."

Also critical to chemical distributors in an indirect way is the fate of the long-delayed Keystone XL pipeline that would bring Canadian crude to Midwest and Gulf Coast refineries.

If built, the Keystone pipeline also could carry a lot of the oil that is flowing in increasing volumes from the US upper West - oil that is now being moved to refineries in railroad tank cars in direct competition with cargoes shipped by chemical distributors and raising rail freight charges.

If the pipeline is built, a lot of tank car capacity will be freed-up, meaning lower freight costs for chemical distributors.

There is broad bipartisan support in Congress for the privately funded Keystone project, but Obama is under fierce pressure from his environmental constituency to kill the deal.

Shanahan notes that he and other NACD officials, along with multiple trade groups, are pressing Congress to do the right thing by small businesses in all of these tax and energy areas.

"I'm hopeful," he said, "but when it comes to politics, nothing is easy or certain."

The budget battle outcome is uncertain, but most observers hold that an eventual compromise will involve additional revenues of some sort. The only real question is, which taxpayers are going to get trampled?

By: Joe Kamalick
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