How Manufacturers Can Make Good On Tax Reform

Tax reform is giving U.S. manufacturing the shot it needs to compete more effectively, but this is no time for missteps. Manufacturers must now execute to make good on the tremendous opportunities that are arising from tax reform.

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Steve MurphySteve Murphy

The manufacturing industry generates trillions of dollars in economic output and employs millions of workers — more than any other industry sector. In the past, manufacturers in the U.S. have struggled to compete under a tax system with high tax rates and arcane international tax rules.

But manufacturers are finally getting a reprieve. The Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017 is great news for U.S. businesses and specifically for manufacturers.

Three Ways Manufacturers Benefit from Tax Reform

Specifically, there are three ways tax reform benefits manufacturers:

The first is through reduced corporate tax rates. Prior to tax reform, the U.S.'s 35 percent statutory corporate tax rate was the highest among the 35 major developed economies that are part of the Organization for Economic Cooperation and Development. Under the new law, the corporate tax rate is now lowered to a flat 21 percent from the previous rate, representing a 40 percent rate reduction.

The second is through a one-time repatriation tax holiday. The repatriation provision in the bill allows companies with funds abroad to ability to bring back profits at a lower tax rate than before. The ability to bring funds from overseas back to the U.S. would allow manufacturers to invest in property, plants and equipment.

It should be noted that these changes are likely to benefit small- to medium-sized businesses overall, as they typically have more constraints on their resources and costs of capital. This will be to the benefit of many manufacturers that have cash that has been “stranded” overseas.

There is past precedent that shows the economic stimulus power of repatriation: in 2005, following implementation of the Homeland Investment Act which allowed companies to repatriate foreign earnings at a one-time flat rate of 5.25 percent, an estimated $300 billion was repatriated, or more than half of foreign earnings by U.S. multinationals, according to PNC Financial Services Group, Inc.

The third is through increased demand for manufactured goods. The bill lowers personal income taxes for middle and upper middle-class households, which is likely to stimulate demand for durable goods from automobiles to consumer products such as appliances, benefiting discrete manufacturers and distributors as well as retailers of manufactured goods.

Will Tax Reform Make American Manufacturing Great Again?

Manufacturers are optimistic about the future. When executives at more than 500 U.S. goods-production outfits were polled by the National Association of Manufacturers in September 2017, 65 percent believed comprehensive tax reform would allow them to increase capital investments into new equipment and facilities. More than 64 percent said they'd be able to expand their business operations, and 57 percent said they'd bring on more workers.

Up until now, the high U.S. corporate tax rate has encouraged companies to manufacture overseas. Lower corporate tax rates combined with the ability to bring funds from overseas back to the U.S. is allowing manufacturers to invest in property, plants and equipment, provide new flexibility and options for moving manufacturing operations to the U.S. from overseas.

The math is that simple in many cases — it’s now a more attractive option to make things in the U.S. Being able to write off property, plant and equipment investments so that you lower your tax exposure, being able to bring money back if it’s been stranded overseas without paying a tax penalty and knowing that when you do earn money as a corporation here, you’re able to keep 80 percent of it as opposed to 55 percent — those are all very significant benefits.

The caveat is that stateside labor costs are high, and if you’re going to put people to work in the U.S., manufacturers need to have a highly-productive factory. This means manufacturers will need to make the necessary investments in new equipment and automation, skills training and software systems to refine business processes.

Setting Strategies to Gain the Most Benefit

While tax reform is a boon for U.S. manufacturing, it may have some unexpected consequences that manufacturers should take into account so they can devise strategies accordingly.

Plan People Investments. Post tax reform, many companies announced they are hiring and/or opening up new offices. For manufacturers already struggling to maintain a skilled workforce, a hiring boom that offers jobseekers a plethora of options may make it even more difficult for manufacturers to retain skilled workers. Manufacturers may want to follow in the footsteps of companies such as AT&T, Starbucks and Walmart, which are giving employees stock and bonuses, or companies such as Wells Fargo, Southwest Airlines and US Bank, which are investing in philanthropic and community initiatives — all strategies providing monetary and non-monetary incentives to recruit and retain employees.

Human capital must be in lock step with capital investments to fuel business expansion. Manufacturers should concentrate on skills training and expanding workforce development initiatives. Following tax reform, Boeing announced it has committed $100 million toward workforce development, training and education.

Lock Down Resources. Many manufacturers will invest in infrastructure and modernization. For many businesses this will mean upgrades and replatforming of software and infrastructure. Considering that there are only a finite/scarce amount of skilled/experienced software and infrastructure implementation personnel, manufacturers might experience a scenario where this specialized labor market becomes very tight very quickly. Manufacturers considering projects in 2018 should attempt to lock down resources as quickly as possible to avoid being left out in the cold.

Be Fixated on Fast ROI. It’s been said that “a rising tide floats all boats,” and in this case the influx of capital may result in the manufacturing competitive field “levelling up.” Never before has it been more vital to put investments to work and to do so quickly to ensure that when the expense is incurred, the payoff and return on that investment follows. Manufacturers need to look carefully at implementation requirements to understand what’s needed to be successful from a people, process, cultural and change management perspective.

Tax reform is giving U.S. manufacturing the shot it needs to compete more effectively, but this is no time for missteps. Manufacturers must now execute to make good on the tremendous opportunities that are arising from tax reform.

Steve Murphy is CEO of Epicor Software Corporation.

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