March 20, 2017

Is LIFO Back In The Crosshairs—And What Would It Mean If It Is?

Comprehensive federal tax reform remains a top priority for leaders in the U.S. House and Senate, and for the Trump administration, and the process is moving along at a deliberate pace. The House GOP Ways and Means Committee “blueprint,” released last June, is still the only plan on the table, however. The Senate Finance Committee is waiting to see what happens with the blueprint, but a number of senators both on the committee and off of it have indicated that the Senate is likely to have its own reform plan. The White House also plans to release its own proposal. 

As Connecting the Dots readers are aware, the House blueprint includes a provision that has become the focus of much of the debate—the “destination-based-cash-flow-tax,” or Border Adjustment Tax (BAT). Under the BAT, the cost of imported goods would no longer be deductible, a fact that effectively imposes a 20 percent tax on imports. The revenue derived from exports would not be taxed. The BAT is an integral part of the blueprint because it raises more than $1 trillion in revenue and that revenue is needed to finance the other key provisions of their reform plan, including the full expensing provision and tax rate reductions (20 percent corporate income tax rate and 25 percent rate for pass-through businesses). Neither the White House nor the Senate Finance Committee has taken a clear position on the BAT, although individual senators have said they oppose it. (The White House has not stated a position either.) 

The Metals Service Center Institute (MSCI) and its partners at the LIFO Coalition also do not yet have a position on the BAT, but our members are affected by the debate on it. Specifically, if there is not sufficient support for the BAT in the House, other revenue sources will have to be found to replace it, and that includes the repeal of LIFO. Indeed, some House members reportedly have raised this option as a possibility. That means that MSCI and its members, and its partners at the LIFO Coalition, must intensify efforts to make sure tax writers oppose LIFO repeal. 

As a first step, MSCI encourages its members to contact their representatives in the U.S. House and lawmakers’ staffs in district offices over the next several weeks. These home-turf contacts have been very effective in the LIFO Coalition’s efforts over the last decade. A call to, or a meeting with, a member of Congress and/or staff in a home-state office is often the most effective way to demonstrate to elected representatives the importance of keeping LIFO in the tax code. Click here to find the contact information for your member of Congress. 

What should MSCI members tell their elected representatives during these meetings? First, personalize the matter. Tell representatives how LIFO would affect your business, your employees, and your community. Second, tell elected representatives how LIFO repeal would affect the U.S. economy. The Tax Foundation has found that LIFO repeal would:

  • Reduce GDP by $11.6 billion per year;
  • Result in 7,700 fewer full-time jobs; and
  • Retroactively tax a company’s “LIFO reserve,” a fact that could hit cash-strapped companies particularly hard and could result in 50,300 additional job losses in the short run.

The Tax Foundation also has found that LIFO repeal would not actually raise federal tax revenue—it would reduce it by $518 million a year. In other words, using LIFO repeal to “pay for” tax reform simply would not work. Other points to make:

  • LIFO is not a loophole or a tax expenditure, but an 80-year-old inventory accounting system authorized in the Internal Revenue Code.
  • LIFO defers recognition of income, it does not forgive it.
  • Repeal of LIFO with a recapture tax is an unfair retroactive tax increase of huge proportions because it changes the recapture rules that LIFO taxpayers have complied with and relied upon since its inception.
  • The LIFO method of inventory best measures income and maximizes cash flow for businesses with inventory costs that are subject to inflation.
  • LIFO and first-in, first out (FIFO) achieve the same purpose—most closely matching cost of goods sold with the cost of replacement inventory to ensure sufficient after-tax cash flow to ensure business viability.
  • Forcing LIFO users to move to FIFO would create unfair competitive advantages for some companies and industries over others.
  • According to the U.S. Small Business Administration Office of Advocacy, LIFO repeal would put a significant number of small businesses out of business.