Are Tax Breaks The Right Move For Manufacturing?

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The White House says restoring the U.S. manufacturing sector is an essential part of getting the economy back on track.

GOP candidate Rick Santorum wants to see tax breaks for manufacturing companies, and the Obama administration proposed something similar last week. But economists say tax breaks may not be the best way to help manufacturers right now.

Over the years, the steady loss of good factory jobs is a big reason why wages have stagnated for people who never went to college, says Dean Baker, co-director of the Center for Economic and Policy Research.

"The reality is that historically, and at the present still, [manufacturing] is a source of relatively good-paying jobs for people without college degrees," Baker says.

That's about 70 percent of the workforce.

The plan put forward by the Obama administration last month would cut the corporate tax rate from 35 percent to 28 percent for all companies, and reduce it even further for manufacturers. It would also close a lot of the loopholes and deductions they now enjoy.

Enlarge this image toggle caption Anne Shybunko/Courtsey of GSE Dynamics Anne Shybunko/Courtsey of GSE Dynamics

The aim is to help companies such as GSE Dynamics on Long Island, N.Y., a maker of parts for the Navy and the Air Force. The company is small, with just 48 employees. Owner and President Anne Shybunko says a big concern is maintaining an adequate flow of capital to keep the company going.

"Access to money is always an issue with me, so I have to be very clear on what jobs I take," Shybunko says.

Shybunko says taxes aren't her biggest challenge; there are others, like health care costs, finding skilled workers and just the general expense of doing business in New York. But she says a tax cut would definitely help her bottom line.

"You put more money into the hands of the small-business owner, we can hopefully use that money to buy more capital equipment, increase our capabilities, get more work in the door ... [and] obviously hire more people," she says.

Tax breaks for manufacturers might seem to be an idea that politicians on both sides of the aisle can agree on, but almost everyone thinks the administration's plan has little hope of passage this year. The problem is the elimination of the loopholes and deductions that manufacturers now get.

Dorothy Coleman of the National Association of Manufacturers says such a move would hurt as many companies as it would help.

"These are things that have been in the tax code for a long time, and all of a sudden to change the rules midstream is going ... [to] translate into a tax increase for these companies," Coleman says.

The Decline Of Manufacturing

Coleman also dislikes another idea put forward by the administration: a minimum tax on a company's overseas earnings. She says it would put U.S. companies at a disadvantage against foreign rivals.

Beyond that, some economists say there are practical problems with implementing a tax break for manufacturers, like deciding who qualifies. There are many companies, like food processors and movie makers, that produce products. Suddenly, they'd have a new incentive to call themselves manufacturers.

Baker says this is the wrong way to help the sector.

"To try to do it through the tax code — basically ... the people you end up helping are people who are good at gaming the tax code," he says.

Baker says the best way to help manufacturers would be to have a weaker dollar that would make U.S. goods more competitive abroad, but that's controversial and candidates shy away from even talking about it.

For manufacturers, the good news is that there's a steadily growing appreciation for what the loss of manufacturing jobs has meant for the economy. There is also a new desire in Washington to find ways to restore some of the sector's luster — even if there is no consensus yet about how to do that.