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Ronald Reagan Presidential Library
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Collection: Baker, James A.: Files
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WITHDRAWAL SHEET
Ronald Reagan Library
Collection: Baker, James III: Files
Archivist: kdb/bcb
OA/Box:
FOIA ID: F97-066/4 [Cohen]
File Folder: [District of Columbia]
Date: 3/22/01
DOCUMENT
SUBJECT/TITLE
DATE
RESTRICTION
NO. & TYPE
1. billing
Billing for Christian Science Monitor, 1p.
2/19/85
B6
RESTRICTIONS
B-1 National security classified information [(b)(1) of the FOIA].
B-2 Release could disclose internal personnel rules and practices of an agency [(b)(2) of the FOIA].
B-3 Release would violate a Federal statute [(b)(3) of the FOIA].
B-4 Release would disclose trade secrets or confidential commercial or financial information [(b)(4) of the FOIA].
B-6 Release would constitute a clearly unwarranted invasion of personal privacy [(b)(6) of the FOIA].
B-7 Release would disclose information compiled for law enforcement purposes [(b)(7) of the FOIA].
B-7a Release could reasonably be expected to interfere with enforcement proceedings [(b)(7)(A) of the FOIA].
B-7b Release would deprive an individual of the right to a fair trial or impartial adjudication [(b)(7)(B) of the FOIA]
B-7c Release could reasonably be expected to cause unwarranted invasion or privacy [(b)(7)(C) of the FOIA].
B-7d Release could reasonably be expected to disclose the identity of a confidential source [(b)(7)(D) of the FOIA].
B-7e Release would disclose techniques or procedures for law enforcement investigations or prosecutions or would disclose guidelines which could reasonably be
expected to risk circumvention of the law [(b)(7)(E) of the FOIA].
B-7f Release could reasonably be expected to endanger the life or physical safety of any individual [(b)(7)(F) of the FOIA].
B-8 Release would disclose information concerning the regulation of financial institutions [(b)(8) of the FOIA].
B-9 Release would disclose geological or geophysical information concerning wells [(b)(9) of the FOIA].
C. Closed in accordance with restrictions contained in donor's deed of gift.
American Council of Life Insurance
1850 K Street, N.W.
Richard S. Schweiker
Washington, D.C. 20006
President
(202) 862-4300
December 27, 1984
The Honorable James A. Baker III
Chief of Staff and Assistant to
the President
The White House
Washington, D.C. 20500
Dear Jim:
I thought you would be interested in seeing a copy of the
attached letter I have sent to President Reagan. This is an issue
which is very important to the insurance industry and which, we
believe, could have a profound negative impact on the nation.
Sincerely,
Dick
Richard S. Schweiker
Enclosure
American Council of Life Insurance
1850 K Street, N.W.
Richard S. Schweiker
Washington, D.C. 20006
President
(202) 862-4300
December 27, 1984
The President
The White House
1600 Pennsylvania Avenue, N.W.
Washington, D.C. 20500
Dear Mr. President:
I am writing to express my concern over the suggestions contained
in the Treasury Department's report on "Tax Reform," that would
increase the taxes Americans pay by adding to their tax base the
increase in the value of individual life insurance policies and
annuities as well as the value of group life insurance and health
insurance provided by their employers.
America's existing employee benefit system provides the American
worker with the finest protection in the world. Emplover-sponsored
life and health insurance are almost universal and a large and
increasing percentage of workers is being covered by private pensions.
One key to the success of our system is a favorable tax policy --
the current one has encouraged both business and labor to support the
establishment and expansion of employee benefit plans. If we
change our current tax policy, we could do serious, perhaps
irreparable, harm to the system.
Taxing employee benefits would mean raising their cost to the
employee. Many employees -- primarily low and middle income wage
earners -- would ultimately have less protection than under the
current tax system because they would be unable or unwilling to pay
the additional taxes. Since the basic needs these benefits meet would
still be there, I am convinced it would fall to government --
primarily the federal government -- to make up the shortfall.
Current employee benefit plans, together with Social Security and
related programs, allow the American worker to enjoy an unprecedented
degree of financial security. For example, a 1983 U.S. Labor
Department survey found that 96 percent of all workers in medium and
large firms were covered by group life insurance. For many workers
this coverage was a substantial portion of their life insurance.
-2-
Similarly, about 8 in 10 Americans under age 65 are covered by
employer-sponsored group health insurance policies. Here again it is
the employer-sponsored group mechanism that provides these workers
with access to life and health protection that might otherwise be
unaffordable or unavailable.
To dismantle our private benefits system at this point in history
and ultimately be forced to replace it with a government program
strikes me as both bad social policy and bad economics. It also seems
to run counter to your long-standing philosophy of encouraging the
private sector to take a major role in helping to meet our country's
needs.
The Treasury's proposal to tax the "inside buildup" -- the
increase each year in the value of an individual life insurance policy
or annuity contract -- would have serious negative consequences.
Large numbers of people -- again, primarily low and middle income
workers -- would ultimately have less life insurance or annuities than
they would if current tax policy were continued. As would be the case
with employee benefits, the need these individuals and families have
for protection would not be lessened and lesser coverage would put the
government at risk to bear more of the burden.
Furthermore, the very nature of the annual increase in the value
of an insurance policy makes the idea of taxing it, as the Treasury
has proposed, unfair. The increases in value of the policies cannot
be realized unless the policy is surrendered for cash. To tax this
annual appreciation before the policy is cashed in would be like
taxing a homeowner on the appreciation of his residence each year even
though he may never sell it.
Another point I wish to call to your attention has to do with the
vital role the life insurance industry plays in capital formation in
our country. Two of the chief sources of investment funds in America
today are life insurance policies and pensions, including annuities.
Discouraging people from buying these products for their own financial
security by changing the tax treatment of such products would reduce
the amount of investment capital available in the land. The country
will need more capital for the foreseeable future than we are
currently accumulating. Changing tax policy in such a way as to
reduce the growth of capital formation through life insurance
companies could affect the economy seriously.
Mr. President, the life insurance business understands full well
the pressures for changing the tax system and the reasons advanced by
the Treasury for its proposed changes. However, we disagree very
strongly with the idea of taxing employee benefits or life insurance
-3-
or annuity contracts that individuals own. Such a change would be
counter-productive and it would cost the government and the taxpayer
far more in long-run expenditures than it would raise in taxes in the
short run.
I sincerely hope you will give consideration to our views.
With all good wishes,
Sincerely,
Dick Schweiker
Richard S. Schweiker
President
American Council of
Life Insurance
RONALD W. REAGAN LIBRARY
THIS FORM MARKS THE FILE LOCATION OF ITEM NUMBER
LISTED ON THE
WITHDRAWAL SHEET AT THE FRONT OF THIS FOLDER.
Chairman, George A. Strichman, Chairman of the Board, Colt
Vice Chairman (Machinery), David C. Garfield, President,
industries Inc
Ingersoll-Rand Company
Vice Chairman (at large), Donald P Kelly, President, Esmark, Inc
Vice Chairman (Paper), Paul H. Neill Senior Vice President,
Vice Chairman (Chemicals), Vincent L Gregory, Jr.,
International Paper Company
Chairman, Rohm and Haas Company
Vice Chairman (Retail), Ralph Lazarus, Chairman of the Executive
Vice Chairman (Farm Machinery), Robert A Hanson, President,
Committee, Federated Department Stores, Inc.
Deere & Company
Vice Chairman (Transportation), Hays T Watkins, Chairman &
Vice Chairman (Foods), R.D. Cook, Senior Executive Vice
Chief Executive Officer, CSX Corporation
President, Castle & Cooke, Inc.
COMMITTEE
December 28, 1984
FOR
EFFECTIVE
CAPITAL
RECOVERY
Mr. James A. Baker, III
Chief of Staff and Assistant
(formerly
to the President
Ad Hoc Committee
The White House
For An Effective
Investment Tax Credit)
1600 Pennsylvania Avenue, N.W.
Washington, D.C. 20500
Dear Mr. Baker:
I am writing to you on behalf of the Committee for
Effective Capital Recovery, a group representing over 600
businesses around the country, which have been working for more
than a decade to improve the incentives for savings and invest-
ment in our current tax system and thus to improve economic
growth and employment in the United States.
As you know, the Treasury Department recently made
public its long-anticipated tax reform plan. The Committee has
carefully reviewed the various proposals contained in the
Treasury report, and has studied the interaction and impact of
these provisions. In so doing, full consideration was given to
the positive aspects of the proposal, such as rate reduction
and indexation for inflation. However, on balance, we are of
the opinion that the recommendations to eliminate the invest-
ment tax credit, and to replace the Accelerated Cost Recovery
System (ACRS) with a severely scaled-back system of depreci-
ation, would be extremely detrimental to the nation's economy.
In analyzing the Treasury proposal, its effect on
economic growth, not on a particular company or industry's
taxes, is a paramount concern. Speaking now as the Chairman
of Colt Industries Inc., a company that currently pays a high
effective tax rate, I would like to point out that Colt's taxes
would actually decrease under the Treasury proposal. However,
we anticipate that the overall impact of the proposal on the
nation's economic growth generally, and on Colt's ability to
market its products, specifically, will be highly negative.
Thus, the potential positive impact of the proposed lower tax
rates will be negated by the reduced growth resulting from the
elimination of investment incentives -- and reduced income,
even if taxed at a lower rate, does nothing to increase profits.
1901 L Street, NW, Suite 303, Washington, D.C. 20036 (202) 223-3293
Mr. Baker
December 28, 1984
Page 2
We have reached the conclusion that the Treasury
proposal will be harmful to the economy based on a number of
factors. First, history has already taught us much in this
area. As the attached excerpt from the Committee's testimony
to Congress in the mid-1970's pointed out, the last two times
Congress negatively changed the investment tax credit, there
was a consequent severely damaging effect on the economy. Not
only was there a sharp drop in new orders for machine tools and
producer's capital goods, and a slowdown in employment in these
industries, but there was also a decrease in total corporate
federal tax revenues each time the credit was suspended or
repealed. (See charts attached to excerpt of earlier Congres-
sional Committee testimony.) This history provides an impor-
tant lesson that should not be ignored in the rush to reform
our tax system.
Second, from the information available to us, it
appears that the very suggestion that the investment tax credit
and ACRS might be repealed has already resulted in some con-
traction in business plans for investment. While Treasury has
recommended a supposedly revenue-neutral tax plan, the fact is
that cautious business managers cannot depend upon the tax
rates actually decreasing to 33 percent. They will, however,
take into consideration the negative proposals relating to
capital investment incentives when planning future invest-
ments. Thus, the tax reform debate itself may freeze corporate
spending plans.
The importance of stability in tax policy for the
economy cannot be overstated. Back in the mid-1970's when a
flexible investment credit was being proposed to respond to a
changing economy, a serious analytical study**/ found that it
was nearly impossible to optimally time the changes in the
credit with the needs of the economy. Each of the historical
changes in the credit was badly mistimed, coming about 10
quarters after the period during which they would have been
most beneficial. It concluded that a fixed rate investment tax
credit would have been much preferable to the changes actually
made. A fluctuating credit is less efficient and, at times,
*/ Statement of Committee for Effective Capital Recovery
(formerly Ad Hoc Committee For An Effective Investment Tax
Credit) before Senate Finance Committee, March 10, 1975, and
House Ways and Means Committee, July 28, 1975.
Policy Alternatives for the Investment Tax Credit by Roger
H. Gordon, Princeton University and Dale W. Jorgensen, Harvard
University (1975).
Mr. Baker
December 28, 1984
Page 3
will be greater in amount and therefore more costly in the
short run, than is necessary with a constant 10-percent credit.
After many years of this on-again, off-again tax
policy, Congress finally realized the importance of stability
when dealing with plant and equipment expenditures and adopted
a "permanent" investment tax credit. Subsequently, ACRS was
added as the centerpiece of our current system of corporate
taxation in this area.
Studies of the impact of tax changes on the economy
found that these capital investment incentives were among
the most significant factors leading to the recent economic
recovery. Since the depth of the 1981-82 recession, the rate
of growth in fixed business investment has been the highest of
any post-war recovery period. And productivity has increased
for the ninth consecutive quarter, the longest period of pro-
ductivity growth since 1966-68. In fact, 1984 is now expected
to produce the largest real gain in economic growth since 1955,
confirming the prediction of many economists that the country
is in a period of sustained prosperity.
Despite this evidence of the enormous importance of
the investment tax credit and ACRS, the Treasury Department
concluded that these provisions were of limited value and that
their elimination, combined with rate reductions, would more
effectively lead to increased economic growth. Yet every
independent study of the impact of the Treasury tax plan has
reached the opposite conclusion.
Wharton Econometrics, a national forecasting firm,
concluded that implementation of the Treasury tax reform pro-
posal would result in higher consumption, lower capital stock,
and, ultimately, decreased productivity. According to Wharton's
senior economists, "[i]n 10 years, U.S. workers will be 0.6%
less
productive
[a]nd the gap will widen over time."
The increased cost of capital and consequent decrease in pro-
ductivity would result directly from the elimination of the
investment tax credit and ACRS. Capital costs would increase
by 15 percent in 1986, rising to 20 percent for manufacturing
industries after 10 years.
The Wharton study concluded that the proposed rate
reduction in the corporate tax could not offset this negative
effect. It also found that the Treasury study would place the
United States in a less competitive posture overseas. This
finding was confirmed by a preliminary analysis of the plan by
the National Association of Manufacturers which concluded that
the Treasury plan will most likely have adverse effects on the
international competitiveness of American industry because
Mr. Baker
December 28, 1984
Page 4
depreciation schedules would once again be less favorable than
those available in other industrial countries.
In a similar vein, Data Resources, Inc. (DRI), also
a major economic forecasting firm, predicts slower economic
growth in the short run resulting from the Treasury Depart-
ment's tax reform proposal. Cited as one of the major reasons
for the slowdown was the elimination of the investment tax
credit and accelerated depreciation. According to DRI, invest-
ment in equipment and structures would decline and not recover
to their current baseline level until 1995. While total real
spending would eventually increase slightly, DRI seriously
questions whether the present economic climate is an appropri-
ate one for making such drastic tax changes. The major risk of
reducing per capita living standards due to sagging investments
suggests to DRI that Congress should deal with the deficit
before addressing tax reform.
These recent studies simply confirm some previous
studies which lead to the same conclusion. For instance, a
Washington University econometric analysis of the leading
Congressional tax proposals, which also called for eliminating
or changing the investment tax credit and ACRS (Bradley-
Gephardt FAIR tax and Kemp-Roth FAST tax), found that the
impact on the economy would be extremely adverse, despite the
fact that each plan proposed a 16 point reduction in the
corporate tax rate.
In a more general study of the impact of tax pro-
posals on capital investment, the well-known economist, Allen
Sinai, found that the current capital recovery provisions in
the tax code provide a much greater "bang for the buck" than
would a reduction in the corporate tax rate, that is, for each
dollar of revenue lost in the short run, ACRS and the credit
provide a greater economic benefit than a tax cut. For exam-
ple, ACRS provides $0.81 in business fixed investment for every
dollar of corporate tax lost, the investment tax credit pro-
vides $0.76, but a reduction in the corporate tax rate provides
only $0.19.
All of these various economic studies lead to the
same, inevitable conclusion -- ACRS and the investment tax
credit are vital and necessary components of any tax plan
intended to foster long-term, stable economic growth for this
nation. A precipitous move to eliminate these incentives to
capital investment could have a severely detrimental impact on
productivity, employment, and balance of trade, and thus on the
overall economic health of the country.
Mr. Baker
December 28, 1984
Page 5
Thus, the Committee strongly urges that any proposal
for tax reform maintain these crucial capital investment
incentives.
Sincerely,
Genge A Strichman
George A. Strichman
Chairman
Committee for Effective
Capital Recovery
Chairman of the Board
Colt Industries Inc.
EXCERPT FROM TESTIMONY OF
COMMITTEE FOR EFFECTIVE CAPITAL RECOVERY
(FORMERLY AD HOC COMMITTEE FOR AN
EFFECTIVE INVESTMENT TAX CREDIT)
BEFORE SENATE FINANCE COMMITTEE MARCH 10, 1975
AND HOUSE WAYS AND MEANS COMMITTEE JULY 28, 1975
HISTORIC EFFECTS OF CHANGES IN DEPRECIATION
PROVISIONS AND THE INVESTMENT CREDIT
There is no question that liberalized depreciation
provisions and the investment credit have proven in the past
to be effective in increasing employment and productivity,
thus combating inflation and enhancing real growth. This
fact can be illustrated in terms of capital investments,
employment and Federal revenues.
1. Effects of Changes in Capital Recovery
Provisions on Investment in Capital
Facilities, 1962-1972
Following enactment of the original investment
credit and adoption of the reduced guideline lives for de-
preciation in 1962, new orders for machine tools increased
rapidly by 251 percent--from $144 million in the last
quarter of 1961 to $514 million in the first quarter of
1966. New orders for producers capital goods increased
by 82 percent--from $3.9 billion in the fourth quarter
of 1961 to $16.2 billion in the third quarter of 1966.
The suspension of the investment credit in the
third quarter of 1966 was followed in the next two quar-
ters by a sharp drop in new orders for machine tools and
- 17 -
producers capital goods--$130 million and $2.8 billion,
respectively.
Restoration of the credit in the second quarter
of 1967 led to a rapid build up in orders--producers
capital goods increased 36 percent from $13.8 billion in
the first quarter of 1967 to $18.8 billion in the second
quarter of 1969. Machine tool orders in the same period
increased 70 percent from $328 million to $558 million.
The repeal of the credit in 1969 resulted in a drop
of $2.7 billion in new orders for producers capital goods
through the second quarter of 1970. Machine tool orders were
off $417 million, almost 75 percent, from the second quarter
of 1969 through. the end of 1970.
Following enactment of the new investment credit
and the Asset Depreciation Range (ADR) System in 1971, orders
for producers capital goods increased by $4.5 billion from
the second quarter of 1971 through the third quarter of 1972.
Machine tool orders rose by $103 million--almost 60 percent--
in the same period, from $182 million to $285 million. The
pattern is unmistakable.
2. Employment Effects, 1962-1972
Employment in capital goods and machine tool
manufacturing industries in 1962-1972 also parallels changes
in capital recovery tax provisions. Following enactment of
the investment credit and adoption of the shorter quideline
- 18 -
lives for depreciation in 1962, the number of employees in
producers durable goods industries increased rapidly by 23
percent from 6.1 million in 1962 to 7.5 million in 1966.
Suspension of the credit in the third quarter of 1966 slowed
employment increases to only 2 2/3 percent in 1967. Follow-
ing restoration of the credit in the second quarter of 1967,
employment increased to about 8 million in 1969.
with the repeal of the credit in 1969, employment
dropped by about 900,000 jobs--roughly 11 1/4 percent--in
1971. After enactment of the new credit and the ADR in 1971,
employment increased from 7.1 million to 7.8 million--about
10 percent--in 1973.
The number of employees in machine tool manu-
facturing rose by 41 percent or 34,000 from 1962 through
1967. Output and employment in this industry was adversely
affected by the cutback in the space program in 1968; between
1967 and 1969, employment dropped by 5 percent or 5,800 jobs.
Repeal of the investment credit in 1969 resulted in a much
steeper drop in jobs, from 110,600 in 1969 to 78,400 in 1971,
a decline of 29 percent. After enactment of the new credit and
the ADR in 1971, machine tool employment increased by 3,700
jobs or by 4.7 percent in 1972.
The above discussion covers the capital goods sector
only. Through the multiplier effect, the beneficial impact
- 19 -
of the credit on employment in the capital goods sector was
also reflected in higher employment throughout the economy.
3. Revenue Effects of Changes in Capital
Recovery Allowances, 1962-1972
The investment tax credit and the shortening of
tax lives have added an estimated $2.6 billion to Federal tax
collections from all sources since 1962. In every year that
the investment tax credit was in effect, Federal revenues
were above the level they would otherwise have been, amounting
to approximately $1 billion in 1972 alone.
Conversely, tax receipts fell each time the credit
was removed. Suspension of the credit in 1966-67 and its
repeal from 1969 until 1971 resulted in a $760 million decrease
in Federal tax revenues below what would otherwise have been
collected had the credit remained in effect.
These estimates follow from a calculation of the
amount by which tax changes altered the cost of capital
outlays resulting from enactment of the credit and
issuance of the guideline lives in 1962, removal of
the basis adjustment in 1964, suspension of the tax
credit for two quarters in 1966 and 1967, its restora-
tion in 1967, repeal in 1969 and reinstatement and
approval of the Asset Depreciation Range in 1971. Each
favorable change raised output, wages and profits, thereby
expanding the Federal tax base. Conversely, each tax law
- 20 -
change which increased the cost of capital outlays resulted
in a lower level of output, wages and profits than would
otherwise have occured.
CORPORATION INCOME TAXES:
FISCAL YEARS 1961-1973
40
INVESTMENT TAX
CREDIT IN EFFECT
NO INVESTMENT
TAX CREDIT
30
BILLIONS OF DOLLARS
20
- VANCE increased.
10
- - NO. &
- - is
1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973
SOURCE: NORMAN a. TURE. INC.
- 21 -
Table A. Estimated Change in Federal Revenues Resulting
From Tax Credit and Shorter Tax Lives, 1962-72
(Calendar Years)
Revenue Change
Year
(Millions of dollars)
1962
160
1963
330
1964
50
1965
110
1966
- 50
1967
140
1968
390
1969
-230
1970
-480
1971
440
1972
1,000
Total
2,620
-760
Net Change*
1870
*Note: Net change differs from sum of individual changes
shown due to rounding.
Source: Norman B. Ture, Inc.
The patterns of fluctuations in these key areas
demonstrate:
1. that the investment credit accomplishes
what its original proponents intended; and
2. that it can be fully effective in stimu-
lating needed, long-term growth only if its
basic previsions (particularly the rate of the
credit) are permanent features of the tax. code.
Chart 1.
PRODUCER'S CAPITAL GOODS: NET NEW ORDERS
(Quarterly in Billions of Dollars)
24
20
16
12
8
4
0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
No Investment Tax Credit
Investment Tax Credit in Effect
NATIONAL CONSTRUCTION INDUSTRY COUNCIL
2100 M Street, N.W.
Suite 600
Washington, D.C. 20037
(202) 296-7019
NCIC
MAILING ADDRESS: Post Office Box 19268
Washington, D.C. 20036
December 27, 1984
Mr. James A. Baker III
Chief of Staff
The White House
Washingon, D.C. 20500
Dear Mr. Baker:
I am writing to express the deep concern of the nation's
construction industry over certain portions of the Treasury
Department Report on Tax Reform for Fairness, Simplicity, and
Economic Growth.
The National Construction Industry Council (NCIC), which I
have the privilege of chairing, consists of the 25 major trade
associations and professional societies that together make up
America's construction industry. The combined membership of
these various NCIC groups and organizations includes more than
100,000 contractor firms and 150,000 design professionals. A
listing of NCIC member organizations is attached.
The construction industry's immense diversity, which is a
major part of its strength, can at times prevent recognition of
the tremendous contribution which it makes to our national
economy. Indeed, it is difficult to overstate the importance of
the construction industry for this country. The Commerce
Department estimates that total industry receipts in 1982
exceeded $312 billion, accounting for nearly 10% of the gross
national product. This compares to other industry contributions
of: 1) transportation and communication, 6.5%; 2) petro-chemical,
6%; and 3) banking, 5%. The total average industry employment
that year was over 4,360,000, which means that approximately one
out of every 20 jobs, ranging from design professionals and
managers to craftsmen and unskilled labor, both union and non-
union, is involved in construction.
Members of NCIC: Air Conditioning Contractors of America American Concrete Pavement Association American Consulting Engineers Council American
Rental Association American Road and Transportation Builders Association American Society of Civil Engineers American Subcontractors Association
Associated Builders and Contractors Associated Equipment Distributors Associated General Contractors of America Associated Landscape Contractors of
America Association of the Wall & Ceiling Industries-International Construction Industry Manufacturers Association Door and Hardware Institute
Mechanical Contractors Association of America Metal Building Dealers Association National Asphalt Pavement Association National Association of
Minority Contractors National Association of Plumbing-Heating-Cooling Contractors National Association of Surety Bond Producers National Association
of Women In Construction National Constructors Association National Electrical Contractors Association National Society of Professional Engineers
Portland Cement Association Prestressed Concrete Institute Sheet Metal and Air Conditioning Contractors National Association
-2-
The impact of America's construction industry is felt by
each and every citizen. Its health is a prerequisite to a vital
national economy. NCIC members, however, have raised the concern
that portions of the Treasury Proposal would SO depress
construction markets in this country that the very health and
stability of the industry itself would be jeopardized.
Furthermore, certain provisions of the Proposal would have a
significant adverse impact on the industry directly, forcing
sweeping changes in the way its companies do business that would
affect not only their economic viability at home but also their
ability to compete successfully overseas.
The following discussion of issues raised by the Treasury
Proposal is designed to convey the significance of specific tax
policies, both existing and proposed, for the construction
industry. This document was recently drafted by the NCIC
Committee on Taxes and will be reviewed by the entire Council in
late January when it will be offered for industry-wide adoption.
It is our hope that this information will be useful to you
over the next weeks and months as discussions continue within the
Administration and on Capitol Hill concerning reform of the
nation's tax system. NCIC is pleased to offer its further
assistance to you in any way that it can.
Despite our concerns over the sweeping changes proposed to
our nation's tax system we recognize that, as a major sector of
the U.S. business community, we must accept certain
responsibilities, even sacrifices, as this nation comes to grips
with its economic ills.
On behalf of the National Construction Industry Council, I
offer you our resources, as well as those of our membership, in
helping to review and analyze the issues raised in this letter in
greater detail. To this end, we are of course prepared and
available to meet with you or members of your staff at any time
that would be convenient for you. It is my sincere hope that we
can be of real assistance to you as we all work together toward a
stronger national economy.
Sincerely yours,
That Done, ).
G. Paul Jones, Jr.
Chairman
NATIONAL CONSTRUCTION INDUSTRY COUNCIL
2100 M Street, N.W.
Suite 600
Washington, D.C. 20037
(202) 296-7019
NCIC
MAILING ADDRESS: Post Office Box 19268
Washington, D.C. 20036
SUMMARY OF PROVISIONS AFFECTING CONSTRUCTION
ACCELERATED COST RECOVERY SYSTEM/INVESTMENT TAX CREDIT
The construction industry is deeply concerned about the
Treasury Proposal to substitute its Real Cost Recovery System
(RCRS) for the present combination of the Accelerated Cost
Recovery System (ACRS) and Investment Tax Credit (ITC). The ITC
and ACRS provisions in the Economic Recovery Tax Act of 1981
were the cornerstone of the capital formation policy of the Act,
enacted after years of Congressional review. This policy
recognizes the importance of fixed assets to the national
economy. The initial purchase of an asset is specifically
recognized by the ITC and the importance of recovering costs
over realistic periods in order to allow further capital asset
acquisition is reflected in ACRS. In addition, the technical
implementation of the provisions was carefully drafted to create
an easily administered system. The RCRS proposal does not
recognize the importance of capital formation and is signif-
icantly more burdensome to administer than the present ACRS and
ITC provisions.
The RCRS proposal essentially eliminates the capital forma-
tion policy which led to the enactment of the present ITC and
ACRS provisions. We do not believe this is in the public in-
terest. Changes of this magnitude will have long range effects
which are difficult to assess and cannot be easily reversed. It
is virtually impossible for the construction industry to make
long range plans while such proposals are under serious consid-
eration.
Most importantly there is a general fear in the construc-
tion industry that short term transitional rules on this and
other charges in the Treasury proposal could lead to wide scale
cancellation of infant projects. These cancellations would be
crippling to an already depressed domestic construction market.
The RCRS proposal is significantly more complicated than
present law and far more uncertain. Annual depreciation adjust-
ments for inflation will have to be made for all assets. The
limited ability of businesses to project inflation will make
planning a far more speculative process. Neither of these
problems is present under the ITC/ACRS structure, inasmuch as
Members of NCIC: Air Conditioning Contractors of America American Concrete Pavement Association American Consulting Engineers Council American
Rental Association American Road and Transportation Builders Association American Society of Civil Engineers American Subcontractors Association
Associated Builders and Contractors Associated Equipment Distributors - Associated General Contractors of America Associated Landscape Contractors of
America Association of the Wall & Ceiling Industries-International - Construction Industry Manufacturers Association Door and Hardware Institute
Mechanical Contractors Association of America Metal Building Dealers Association National Asphalt Pavement Association National Association of
Minority Contractors National Association of Plumbing-Heating-Cooling Contractors National Association of Surety Bond Producers National Association
of Women In Construction National Constructors Association National Electrical Contractors Association National Society of Professional Engineers
Portland Cement Association Prestressed Concrete Institute . Sheet Metal and Air Conditioning Contractors National Association
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credits and depreciation amounts are relatively simple to
compute and track during the entire recovery period.
COMPLETED CONTRACT METHOD OF ACCOUNTING
An issue of special concern to the construction industry in
the Treasury Proposal is the completed contract method of
accounting. The Treasury Department has proposed changing the
method as part of its treatment of multi-year production
activities. As part of the Deparment's new tax neutrality
policy, the method would be altered to match new changes in
basis computations for persons constructing their own struc-
tures. We believe that this proposal carries the Treasury's
neutrality theory beyond an acceptable limit. The tax reporting
method of an on-going business should not be made contingent on
the tax computation of a taxpayer building an asset by himself.
Whatever neutrality justification there may be for tax rules
applying to self-construction as opposed to contracting out to
acquire an asset, it does not apply to on-going businesses which
never own the assets they are building.
The completed contract method was last revised by Congress
in the Tax Equity and Fiscal Responsibility Act of 1982. The
Act set out specific directions for the Treasury to publish
regulations for modifying the method in order to better reflect
income where changes were deemed necessary. The proposed
changes to the completed contract method in the current Treasury
Proposal are virtually identical to those made in 1982. Congress
addressed many of Treasury's proposals at that time after
lengthy hearings, and provided a practical set of rules in
response to the theoretical proposals made by the Department.
The resubmission of this proposal as part of a new tax theory
for other types of taxpayers is, we feel, unjustified.
The construction industry has presented detailed testimony
concerning proposed changes in the completed contract method of
accounting on many occasions in the past, including statements
before Congressional panels and the Treasury Department. NCIC
would be pleased to make these statements available to you if a
more lengthy and specific discussion of the issue and its impact
on the construction industry would be useful.
ENERGY TAX CREDITS
Members of NCIC believe strongly that energy tax credits
must be retained in order to ensure a viable construction
industry, especially in the industrial, commercial, and residen-
tial markets. Indeed, they may be essential if energy conserva-
tion and avoidance of future energy shortages are to remain
national priorities.
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The increased demand resulting from energy tax credits,
particularly in the form of new commercial and industrial con-
struction, has led to economic and technological innovations
which will have a strong impact on our nation's energy indepen-
dence. One has only to look at strides being made in the field
of solar energy to appreciate this progress. These innovations,
and the assurance of their continued application, have been
boosted immeasurably by energy tax credits. The construction
industry feels that it would be a short-sighted error in
national policy to eliminate them at this time.
INTEREST ON TAX-EXEMPT BONDS
The proposed elimination of the tax-exempt status of
interest earned on bonds issued by state and local governments
for so-called "private purposes" poses a serious threat to the
construction industry as well as to the nation's current
economic recovery.
Under this proposal, "privatization," which has been used
to privately fund design, construction and, in some cases,
initial operation of such public facilities as jails, schools,
airports, hydropower plants, parking garages, stadia and
numerous other public facilities, would virtually disappear.
While there were certainly some tax abuses of the privatization
concept, the fact is that private risk capital has produced, and
is producing, needed local facilities, often with the added
feature of stimulating revenues to service the debt. Without
exemption from paying taxes until the local government becomes
owner of the project, there would no longer be an incentive for
"privatization.
An even more serious problem exists in public housing. In
1983, tax exempt bonds financed $5.3 billion worth of apartment
buildings and $12.7 billion worth of houses. These figures are
estimated to represent habitation for a quarter million
families. As recently as last November's election, voters
clearly supported (to the tune of $4.64 billion) bond issues
which, among other things, financed farm and home purchases,
neighborhood schools, local hazardous waste cleanup and senior
citizens' centers. For example, by a 3-to-1 margin Alaskan
voters agreed to back $700 million in revenue bonds to subsidize
veterans' home mortgages. State legislatures, the U.S.
Congress, and the Administration have recognized housing as
"public purpose." NCIC questions whether it is time to reverse
that position.
Further, repeal of the tax exemption on "nongovernmental-
purpose" municipal bonds interest will eliminate the Industrial
Development Bond (IDB) concept which has aided hundreds of
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municipal economic enhancement programs. IDB's have generated
industrial parks, office buildings, and manufacturing/processing
plants which expand the tax base and create employment. In
fact, IDB's presently constitute 75% of the municipal bond
market. A recent Heller/Roper Poll found that 24% of 1000
manufacturers contacted are planning to increase their borrowing
and 44% anticipate increasing their payrolls in 1985. It would
be interesting to know how these same manufacturers might now
respond to that poll in the face of the Treasury Department's
proposed repeal of the tax-exempt status of interest on
industrial development bonds.
REHABILITATION AND PRESERVATION INCENTIVES
The preservation industry is an important part of the U.S.
economy and the construction industry. Approximately $21
billion per year is reinvested in privately owned buildings
which are more than 50 years old. Older and historic commercial
properties are particularly important investments, capturing
almost half of all the reinvestment money in this country.
Combined with the over $2.2 billion in certified rehabilitation,
construction firms are involved in at least $5.1 billion in
commercial rehab annually. However, residential rehabilitation
is also a booming business: In some areas of the country, the
amount invested each year in existing buildings is 25% greater
than the amount spent on new housing construction.
Approximately 11,600 preservation projects have been
certified by the National Park Service alone since the tax
incentives were approved in 1977, over 85% of which have been in
response to the 1981 tax incentives. According to a National
Trust survey, more than 60% of smaller construction firms are
involved in rehabilitation work, almost half of which are
general or subcontractors. The average certified rehab project
size is in excess of $850,000. More than three-fifths of all
firms (more than 35,000 firms) with an annual volume up to
$500, did rehabilitative work according to a National Trust
survey. NCIC believes that we should not retreat from the
commitment to preservation and rehabilitation which has been
strongly supported by the nation since the 1976 tax act.
REAL ESTATE INVESTMENTS
From a purely real estate perspective, the Treasury pro-
posal would affect property values, financing opportunities, and
investment opportunities for many Americans -- and thus have a
direct and immediate negative impact on the construction
industry.
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For example, several proposals in the Treasury plan affect
the taxation of partnerships, a major avenue of real estate
investment in recent years. Since real estate, especially for
less affluent people, is often a low-yielding investment, many
real estate partnerships attract investors by offering the
opportunity to write off losses, rather than earn income.
Treasury's plan to limit the amount of losses a partnership
could claim for tax purposes and to limit to 35 members the size
of a partnership that could pass on its losses to its partners,
would effectively kill a large chunk of the tax-sheltered,
limited partnership business and place a severe clamp on future
growth in the construction industry.
The Treasury proposal would also diminish the value of
various tax deductions to homeowners and thus reduce the number
of new houses built. By diluting the value of home mortgage
interest deductions and the federal tax deduction for state and
local property taxes, the proposal could substantially increase
the annual cost of owning a typical single family home. Again,
this would have a direct and immediate negative effect on the
construction industry.
Other Treasury proposals would also negatively impact real
estate and the construction industry. The proposal to eliminate
all tax-exempt financing for first-time home buyers would affect
200, 000 mortgages a year; and the eliminiation of such tax-
exempt financing for modest-rent apartments could affect $ 6
billion to $8 billion worth of construction. In addition, if
the Treasury plan were implemented, the $6 billion to $7 billion
worth of new home mortgages currently financed via builder bonds
would have to come from somewhere else.
Each of these proposals alone could severely cripple the
real estate industry; together the effect could be devastating.
TAXATION OF FRINGE BENEFITS
Present law excludes certain statutory fringe benefits from
gross income, and generally beginning in 1985 taxes all other
fringe benefits at the excess of the fair market value over any
amounts paid by the employee for the benefits. These statutory
fringes were intended by Congress as tax incentives for
employers to provide compensation in particular ways, and their
use has substantially increased over the past ten years.
The Treasury Department Proposal would repeal the tax
exclusion of most statutory fringe benefits, and impose new
limits on the current exclusion of employer-provided health
care. The construction industry has consistently opposed
similar proposals in legislation before the House and Senate in
recent years, and reaffirms its support for retention of
existing statutory fringe benefits.
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Construction is a labor-intensive industry, and accordingly
is more vulnerable to changes in the tax treatment of employer-
provided benefits than many other business sectors. The impact
of proposed changes on workers themselves is immediate and
obvious -- the Bureau of Labor Statistics estimates that 82% of
full-time workers in the U.S. participate in employer-provided
pension programs, with fully 96% enjoying health and life
insurance protection through similar programs. Construction
employers must be concerned about any reduction in these basic
tax benefits which exist under current policy.
The proposed changes would affect construction firms in a
more direct manner as well. For example, new rules for calcu-
lating the value of self-funded health care benefits for the
purpose of determining taxable income for employees are not only
cumbersome, but must also be computed in advance of the payroll
period. The liabilities faced by employers who underestimate
those costs are of understandable concern to an industry which
relies on an often temporary, constantly changing labor force.
Employee relations groups within the various NCIC member organi-
zations are currently studying the impact of these and other
proposed changes, including the elimination of 401 (k) plans and
IRC Section 125 (cafeteria plans), in greater detail, and the
Council will forward their conclusions to you as soon as
possible.
INDEXING OF INTEREST INCOME
The Proposal indexes both business and personal interest
for tax purposes, excluding a fractional amount of interest
receipts from income and denying a deduction for a corresponding
fraction of interest payments. The construction industry would
feel these changes very quickly.
In the construction industry, particularly in the commer-
cial and industrial fields, financing during times of high
interest rates is often available only if the investor is able
to defer some portion of the tax on interest during the
construction period until the property's cash flow improves or
the property is sold. This has a direct impact on the number of
construction starts in this country, and has quite literally
helped the construction industry survive. Indexing interest
expense and income would clearly discourage the construction
investor, and result in an immediate slowdown in construction
starts. At a time when the construction industry is beginning
to rebound from years of economic hardship, NCIC feels that even
a program of partial indexing is counterproductive and
ill-advised.
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INTERNATIONAL TAX ISSUES
While construction in the United States has declined on
average by 3.4% per year since 1973 in real terms, construction
in foreign markets has expanded. To a great extent, the U.S.
construction industry has turned to the growing foreign market
to offset the decrease in domestic projet awards. In fact, the
400 largest U.S. firms have secured an average of 30% of their
total contract volume overseas in recent years. This trend is
expected to continue.
The success of the construction industry in foreign markets
has a direct impact on U.S. producers of equipment and supplies,
as well as on a wide variety of services. Construction industry
surveys indicate that on foreign projects undertaken by U.S.
companies and financed in the United States, approximately 50%
of the contract value represents goods and services procured in
this country. The U.S. export content is even higher on
projects in lesser developed countries.
The importance of foreign markets is even more apparent
when one realizes that, according to studies performed by the
Bechtel Corporation, approximately 30,000 U.S. jobs are created
for each $1 billion of manufactured exports.
A number of questions are raised by Treasury Proposal which
would directly affect the ability of the U.S. construction
industry to compete abroad. I would also like to take the
liberty of discussing several additional international tax
issues which, although not specifically addressed in the
Proposal, could well be raised at a later date.
IRC SECTION 911
Changes in Section 911 of the Internal Revenue Code
establishing the current $80,000 exclusion for income
earned by Americans working overseas were put into place as
part of the Economic Recovery Tax Act of 1981. Although
they have been in use only a short time, the new 911 provi-
sions seem to be having the intended effect of helping to
put U.S. contractors on a more equal footing with their
international competitors.
The U.S. construction industry, which has been
struggling for years to maintain its market overseas,
considers the 911 exclusion to be a vital element in its
efforts to remain competitive in these markets. The
exclusion provides no "windfall" earnings to U.S. personnel
or their companies, but allows U.S. firms to keep their
costs in line with those of its foreign counterparts.
-8-
IRC Section 911 has not been altered in the Treasury
Proposal, although a future attempt to do so on Capitol
Hill seems possible. Accordingly, it is appropriate to
include it as part of this discussion of international tax
issues in order to emphasize its importance to the
construction industry as well as, we believe, a future
improvement in the U.S. balance of trade in general.
Foreign Tax Credits
No single portion of the Treasury Proposal has caused
as much concern among construction firms active in overseas
markets as the institution of a per-country limit on the
foreign tax credit.
A substantial number of the international projects
undertaken by the U.S. construction industry occur in
developing countries with which the United States does not
have specific tax treaties. It is also within the develop-
ing world where competition between U.S. and non-U.S. firms
is often most intense. Virtually all of our competitors
operate under tax and regulatory arrangements which
encourage their continued presence and success in these
markets; American firms have few such advantages, which
heightens their reliance on foreign tax credit provisions
of the Internal Revenue Code for minimizing international
double taxation and providing the necessary neutrality of
treatment. The U.S. foreign tax credit mechanism is a
crucial element in our financial calculations on interna-
tional operations.
The construction industry has long argued that foreign
tax credits constitute the very cornerstone of its ability
to compete in the world marketplace. Given the enormous
size of many international projects, and corresponding
investment required, it is not unusual for construction
firms to be heavily committed in only a few countries at
any one time. Institution of a per-country limit on the
amount of foreign-paid taxes wheih can be credited against
the company's tax burden at home imposes a new and
potentially crippling financial burden for those countries
at a time when it is becoming more and more difficult to
compete on the basis of project cost. Changes in the
foreign tax credit as proposed do not further the cause of
tax simplification or fairness, and could well eliminate
many NCIC companies from some of the few remaining
construction markets in the world that are continuing to
grow and offer bright prospects for the future.
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Foreign Sales Corporations
Since 1972, a growing number of large U.S. companies,
including more and more construction firms, have been
exporting through Domestic International Sales Corporation
(DISC) subsidiaries. In response to pressure from abroad,
Congress acted this summer to terminate DISCs and replace
them with a new entity, the Foreign Sales Corporation
(FSC). Although differing in several important aspects
from the DISC, FSCs offer substantial tax benefits to U.S.
exporters. Among the estimated 5,000 FSCs expected to be
established by U.S. firms are many construction companies
which regard the mechanism as a potentially invaluable tool
for competing abroad.
The Treasury Proposal does not recommend changes in
the FSC regulations, which are scheduled to go into effect
on January 1, 1985. The construction industry considers
the FSC to be vulnerable on Capitol Hill during the 99th
Congress, however, and urges the support of the Administra-
tion in our efforts to preserve it until such time as its
impact on the U.S. balance of trade can be evaluated.
Technical Assistance Tax
For years the construction industry has been fighting
to eliminate the double taxation of technical assistance
services performed by U.S. contractors on overseas pro-
jects. Legislation permitting U.S. construction firms to
deduct foreign taxes on such services as a cost of doing
business was introduced in both the House and Senate during
the 98th Congress, with hearings held in both the Senate
Finance and House Ways and Means Committees. Although the
Deficit Reduction Act of 1984 did mandate a Treasury study
on the double taxation of technical assistance services,
that recently-completed study did not recommend a legisla-
tive remedy to the problem. The construction industry will
be responding to that study and will continue to seek a
legislative solution to this ongoing taxation problem for
its projects overseas. No provisions dealing with the taxa-
tion of technical assistance services were included in the
Treasury Proposal.
PRESENTING THE 1984 MEMBERS
OF THE NATIONAL CONSTRUCTION INDUSTRY COUNCIL
American Concrete Pavement Association
American Consulting Engineers Council
American Rental Association
American Road and Transportation Builders Association
American Society of Civil Engineers
American Subcontractors Association
Associated Builders and Contractors
Associated Equipment Distributors
Associated General Contractors of America
Associated Landscape Contractors of America
Association of the Wall and Ceiling Industries - International
Construction Industry Manufacturers Association
Door and Hardware Institute
Mechanical Contractors Association of America
National Asphalt Pavement Association
National Association of Minority Contractors
National Association of Plumbing, Heating, Cooling Contractors
National Association of Surety Bond Producers
National Association of Women in Construction
National Constructors Association
National Electrical Contractors Association
National Society of Professional Engineers
Portland Cement Association
Prestressed Concrete Institute
Sheet Metal and Air Conditioning Contractors National Association
Standard Oil Company (Indiana)
Washington Office
1000 Sixteenth Street, N.W.
Washington, D.C. 20036
202-857-5304
Rady A. Johnson
Vice President, Government Affairs
December 26, 1984
Mr. James A. Baker III
Chief of Staff and
Assistant to the President
The White House
Washington, DC 20500
Dear Mr. Baker:
We furnished Secretary Hodel the attached letter outlining our
concerns with the Treasury tax reform proposal. I hope you will
find the information useful.
Sincerely,
for
Rady A. Johnson
ek
Standard OII Company (Indiana)
200 East Randolph Drive
Chicago, Illinois 60680
Richard M. Morrow
Chairman of the Board
December 21, 1984
Mr. Donald P. Hodel
Secretary of Energy
U.S. Department of Energy
1000 Independence Avenue, S.W.
Washington, D.C. 20585
Dear Mr. Secretary:
Thank you for the opportunity to provide our thoughts concerning the tax
proposals contained in the Treasury report "Tax Reform for Fairness,
Simplicity, and Economic Growth," and their potential effect on the oil
and gas industry. While I commend the Treasury's goal of making the
federal income tax system more equitable and less complex, I have
serious reservations about the "price" the oil and gas industry, and
ultimately the nation, will have to pay as a result of some of the tax
code changes embodied in the Treasury tax report.
I know you were made aware of many of the generic concerns of the oil
and gas industry at the recent National Petroleum Council meeting. I
must echo those apprehensions. The country has been enjoying stable
energy supplies and prices, which have helped bring inflation under
control and bolster the economic recovery. Absent prudent foresight,
however, tomorrow's energy picture could change dramatically.
In the longer-term, industry trends portend declining domestic reserves
and increasing imports of crude oil and petroleum products, and thus,
the reoccurrence of the economic and national security problems that we
have worked so hard to overcome. The Treasury proposal would accelerate
those trends. Government energy, environmental, and tax policies must
reflect the national importance of a healthy and stable domestic energy
industry.
The wide-sweeping nature of the Treasury tax plan has made it difficult
to complete any comprehensive assessment of its effects to datë, but
preliminary analyses point to some very serious problems. My comments
focus on two areas: 1) the consequences of the Treasury plan on the
corporate sector generally, and 2) the effects on the petroleum industry
specifically.
Mr. Donald P. Hodel
Page 2
The effect of the Treasury tax proposals would be to increase corporate
taxes 25 percent in FY '86 to 37 percent in FY '90. That is, total
corporate tax payments would increase from about $87.9 billion to $110.1
billion in FY '86, and from $122.6 billion to $167.4 billion in FY '90.
This will have a profound adverse. effect on job creation. Increased
business taxes will stifle economic growth and ultimately result in
fewer federal tax revenues and increased outlays -- continuing a
dangerous cycle that we are just beginning to break.
Federal tax policy has traditionally been used not only to raise
revenues for the government, but also to promote social and economic
goals. The Economic Recovery Tax Act of 1981 provided powerful tax
incentives such as the Accelerated Cost Recovery System (ACRS) which
spurred investment in productive plant and equipment, and is responsible
for much of the current economic growth the country is presently
enjoying. The erosion or repeal of ACRS and/or the Investment Tax
Credit (ITC) simply runs counter to the nation's objectives of continued
job creation and long-term economic growth, and could prove a high
"price" for small gains in tax equity and simplicity.
The goal of the National Energy Policy Plan -- assuring an adequate
supply of energy at reasonable costs -- can only be realized through
government policies which promote the rational development and use of
our domestic energy resources. However, certain elements of the
Treasury tax proposal run counter to our national energy objectives.
Proposed changes in the treatment of intangible drilling costs (IDCs)
and dry hole expenses would discourage domestic exploration, thereby
exacerbating the divergence between domestic reserve additions and
production. Repeal of the ITC and the ACRS will also increase the cost
and decrease the availability of capital which would have a negative
effect on capital-intensive industries.
Specifically, our preliminary analyses of the Treasury tax plan indicate
that the internal cash flow of the oil and gas industry will be reduced
by approximately $81.2 billion over the 1986-90 period. If corporate
tax rates are indeed lowered, and the cash dividend deductibility and
Crude Oil Excise Tax phase-out provisions retained, oil and gas industry
tax liabilities would be reduced by approximately $43.7 billion over the
five year period. Thus, the Treasury tax plan results in a net $7.5
billion annual tax increase on the oil and gas industry, or $37.5
billion over the 1986-90 period.
Internally-generated cash flows represent only part of the total capital
generated by the oil and gas industry. Estimates indicate that for each
dollar of funds the petroleum industry generates internally, it will
Mr. Donald P. Hodel
Page 3
typically raise another 35 cents from external sources -- primarily
through borrowings. If the industry is unable to generate the initial
$1.00 internally through earnings and capital consumption allowances,
lenders are unlikely to advance the 35 cents of additional borrowed
funds. Hence, the total impact of the Treasury tax plan on corporate
capital availability to the oil and gas industry will be more in the
order of $10 billion per year. This decrease in capital availability
will result in a reduction in 1990 domestic crude oil equivalent
production in the order of 1.0 MMBD, thereby increasing dependence on
imports to satisfy domestic demand.
The proposed tax changes will also negatively impact prospective
internal rates of return from new investments in oil and gas projects.
In a highly competitive market for investment capital, and a reduction
in prospective investment profitability in the oil and gas industry
accompanied by prospective improvements in after-tax investment returns
in other lines of business, available capital will be diverted from
marginal projects in the petroleum industry to other business
investments. While not readily quantifiable, the expected deterioration
in project rates of return will further decrease capital availability,
depress domestic production and increase imports.
The decline in domestic production will worsen in the years beyond 1990
as the impact of reduced incentives and spending affect a greater and
greater share of our domestic production base. Domestic oil and gas
production would be expected to decrease by an oil equivalent of 1.5
MMBD by 1995 compared with production under current tax laws. Domestic
net oil imports are expected to increase from about 5 MMBD in 1984 to
about 8 MMBD in 1995 under current tax laws. With the Treasury
proposal, U.S. oil imports by 1995 would be expected to increase to over
10 MMBD or 60 percent of domestic oil requirements. This doubling of
imports from the current 30 percent to 60 percent of requirements would
make the U.S. extremely vulnerable from both an economic and national
security standpoint.
Estimated 1984 spending by the oil and gas industry (net of lease bonus
payments to government) is roughly $50 billion, 80 percent of which will
be in upstream spending to find and produce new oil and gas supplies.
Industry spending commitments of this magnitude simply cannot be
sustained in the face of a prospective cut of 25 percent or more in
available capital and a sharp reduction in investment profitability.
Mr. Donald P. Hodel
Page 4
The proposed reduction in the corporate tax rate, the treatment of
dividends and phasing-out the ill-conceived Crude Oil Excise Tax
represent significant steps toward long-term economic growth. I am
concerned, however, that many of the favorable corporate tax provisions
promised down the road in exchange for increasing business' tax burden
in the short-term, will fall prey to changas in the political landscape.
Without implementation of these tax reductions, oil and gas industry
internal cash generation would be decremented by some $25 billion per
year and U.S oil and gas production would be reduced by an oil
equivalent of 1.8 MMBD in 1990 and 3.5 MMBD in 1995.
As evidenced above, the present Treasury tax package would be severely
disruptive to the domestic energy industry, particularly in terms of
domestic exploration. In the longer-term, it is not difficult to
envision the adverse consequences of declining domestic energy supplies,
increasing crude and petroleum product imports, and the implications for
the nation's economic vitality and security.
Given the potential consequences of such broad changes in the Internal
Revenue Code, I think it only prudent that the Administration proceed
slowly and deliberately in assessing the ramifications. We must be
sure that we are not establishing policies that will plunge the nation
into serious energy supply problems.
Sincerely,
DRILLING AND SERVICE
SPUDDERS / ROTARY DRILLING
LES
WILSON
INC.
President Ronald Reagan
The White House
Washington, D.C. 20500
December 20, 1984
Dear President Reagan:
As a CPA who recently left a "Big Eight" public accounting firm in St.
Louis, Missouri to move to Southern Illinois and enter the petroleum
industry, I would like to convey to you that I believe the implementation
of the Treasury reform proposal for the petroleum industry would bring
irrevocable negative consequences to the entire economy of Southern
Illinois.
While living only 120 miles away in St Louis, Missouri, although I knew
the oil industry was a significant industry, I had no idea just how many
businesses are interrelated to the industry. Starting at the oil pro-
ducer who puts together the oil lease and seils the joint interest, to
the drilling contractor, to the related service companies and all the
way to the car and truck dealers who sell and repair the many vehicles
used in the industry, the number of businesses that would be negatively
effected by an industry slump is too numerous to estimate. Similarly,
while in St. Louis, I assumed a majoriiy of the drilling was done by
major oil companies in search of new reserves to replenish old fields.
However, in reality a majority of the oil wells drilled in Southern
Illinois are for independent producers who are selling their deals to
higher income individuals locally. in short, the loss of the major tax
incentives would put a significant damper on the sale of such invest-
ments and drilling activity would be dramatically slowed down and the
economy would come to a screetching halt. The number of unemployed
would climb to staggering numbers and the lost revenue on individual
income tax alone would not equal the amount hoped to be gained by the
Treasury with these new policies. The Company I work for alone has a
$2,000,000 annual payroll.
I readily understand the need for increased taxes for the Treasury and
feel that a rate increase would be a better vehicle. I personally am
not in the 50% tax bracket but would be glad to have the problem of
paying 70% of my income in taxes as was done before the tax change in
1982. I know that all the political pressure of increasing the rates
of the higher income brackets is a tough bullet to bite, but its high
time someone starts biting. All this happy bull about not raising the
rates but instead taking away the deductions is just a facade. A 20%
increase in rates on income ove $100,000 would alone bring a
substantial increase in Treasur revenue not to mention an increase
in the rates for lower brackets
In summary, the 1982 changes put a significant damper on the oil in-
dustry, but the proposed changes for 1985 would put the nail in the
coffin and I assure you, the consequences of such changes cannot be
fully understood or quantified in Washington, (1 could not even see
it only 120 miles away), and I urge you to look at alternative means
of increased revenue. I urge you to study this problem as I am sure
Southern Illinois is not alone in my feelings, and I seek your support
to publicly reject such provisions and seek alternative means
of increasing the revenue. I will pay may fair share to help, but I
would not like to see an idustry which his supported the economy for
so many years, go down the tubes so quick in one short swipe of the
Treasury's hand.
Very truly yours,
LES WILSON, INC.
David G. Watkins, CPA
Vice President/Controller
DGW/rac
Carmi Industrial Park P.O. Box 331 Carmi, Illinois 62821 (618)382-4666