November – December 2014 Commentary

job migration to Canada illustration
Illustration by James Yang

Corporate Tax Rate – Treat The Cause

The Obama administration recently went on the offensive in a bid to curtail American corporations from lowering their taxes by merging or acquiring overseas companies. But the actions, which serve more as guidelines rather than laws, are at best a stopgap measure to larger Congressional reform. As it stands, the U.S. corporate tax rate is 35 percent — one of the highest such levies in the world.

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Commonly called inversion deals, the practice works when U.S. firms buy a foreign entity and then adopts its home country domicile, or the combined business establishes a holding company in a country with a lower tax rate. For example, Ireland — which has drawn a sizeable share of inversion activity of late — has a 12.5 percent corporate tax rate.

While inversion activity has been popular among large pharmaceutical firms, in part due to new taxes on medical devices that are a component of Obamacare, Fiat and Chrysler Chairman and CEO Sergio Marchionne cited the U.S. corporate tax rate as the main reason for establishing the combined company’s headquarters in the United Kingdom earlier this year.

Although Congress has talked about a business tax overhaul, there’s been little action ahead of the November elections, and there’s no sign that the Obama administration will work with Republicans to lower the corporate tax rate. The American public, however, appears to favor reform.

According to a recent Wall Street Journal/NBC poll, 59 percent of registered voters said Congress should discourage companies from moving out of the U.S. or setting up inversion deals to avoid paying higher taxes, while 32 percent of respondents said public companies have a duty to their shareholders to explore and adopt all tax savings.

Under the White House plans, the new rules would make it harder for inverted companies to get access to their offshore cash without paying taxes. Other moves would make it more difficult for U.S. companies to move subsidiaries overseas as well as skirt ownership standards in inverting.

Detroit was the tech epicenter. It was the Silicon Valley before Silicon Valley. This was where innovation was happening.  — Joshua Kampel, president, Techonomy

All of these maneuvers are like using a cotton swab to stop persistent nosebleeds when surgery would repair the problem. Rather than develop a new set of rules that may or may not be enforced by the courts, the Obama administration and Congress should work together to lower the overall corporate tax rate to keep domestic companies in place and attract new businesses from around the world.

Oil And Gas – Boost Road Funding

The natural gas and crude oil boom sweeping the United States, propelled in large part by new advances in hydraulic fracturing, has yet to affect Michigan in a meaningful way. If energy producers and state officials work more closely together to add or increase production at Michigan’s 12,000 wells, it would lead to additional tax revenue, more jobs, and cheaper prices at the pump as well as inside homes and businesses.

According to the U.S. Energy Information Administration, individual states generated $5.2 billion in oil severance taxes in the second quarter of 2014, up from $1.7 billion in the third quarter of 2005. The winners were North Dakota, Texas, Oklahoma, Colorado, and California. By boosting energy production, Michigan could reduce its dependence on foreign oil and add a much-needed revenue boost to repair and replace our crumbling highways, bridges, and roads.

According to the Michigan Oil and Gas Producers Education Foundation, the industry accounts for 10,000 sector-related jobs, generates more than $47 million in annual severance taxes and fees, and pays private mineral owners more than $80 million in royalties every year. Producers also pay millions of dollars in annual property taxes.

In turn, Michigan offers the largest underground working storage capacity of any state, and is a natural gas storehouse for northeastern states. By boosting its standing in the energy sector, Michigan could go a long way toward finding a revenue source to fund delayed infrastructure upgrades while adding more jobs and boosting economic activity.

Cigars – Up In Smoke

The U.S. Food and Drug Administration and its proposed rules that would regulate tobacco more stringently should concern anyone who enjoys a premium cigar. The federal agency seeks to modify the Family Tobacco Prevention and Control Act of 2009 — which was originally passed to regulate cigarettes — to include premium cigars, pipe tobacco, electronic cigarettes, nicotine gels, and water pipes.

Shop owners around the country are crying foul, given the added legislation would serve to boost premium cigar prices to two or three times the current levels. What’s more, sellers of hand-rolled cigars would be treated under pharmaceutical designations (dating back to 2007), meaning hefty fees would be imposed to test new blends. Under this scenario, there could be as long as a two-year wait before the federal agency approves each new blend.

In addition, sellers would have to add health-warning labels on each package of cigars, and stores would no longer be able to provide free samples to customers. That would put the premium cigar industry at a competitive disadvantage as it relates to wine and coffee producers, where there are no restrictions on the practice of providing free samples, save for checking a person’s age.

Given that premium cigars account for 1 percent of the tobacco industry, it’s unclear what the FDA is trying to accomplish if the proposed rules go into effect. There are no studies indicating that cigar-smoking causes cancer or other diseases. And some of the most famous cigar smokers in history have survived for many years — Winston Churchill lived to be 89 years old. The proposed rules also could lead to a protracted legal challenge, given the Constitution prescribes that Congress write administrative laws, not executive branch agencies.

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