February 15, 2016

President Obama Proposed LIFO Repeal Would Raise Taxes On Businesses, But Still Result In A Larger Federal Deficit

As expected, President Barack Obama again included last-in, last out (LIFO) repeal in his annual budget proposal. (The president submitted his Fiscal Year 2017 budget to Congress last week.) 

U.S. Treasury Secretary Jack Lew was asked about the proposal last Thursday in a hearing with the House Ways and Means Committee. In that exchange, Secretary Lew told Rep. Mike Thompson (D-CA), who opposes LIFO repeal, that the Obama administration will not concede that its proposal amounts to a retroactive tax. Lew said, “I understand this is an issue of deep concern to businesses in your district … The danger of this provision is that it will be implemented over time and that businesses will have the ability to do some averaging so that it doesn’t hit all at once. We don’t view this as retroactive because it’s just a question of timing and not the incidence of the tax burden.” Secretary Lew also made it clear the Obama administration considers LIFO repeal a vital part of tax reform. 

When the president proposed LIFO repeal last year, the Congressional Budget Office estimated it would raise taxes by $105 billion over ten years. 

According to a new study, however, that tax increase would not actually translate to new revenue for the federal government. The nonpartisan Tax Foundation released a report last week that estimated repealing LIFO would result in $11.6 billion in lost economic activity, 7,700 fewer full-time jobs and a $53.3 billion reduction in capital stock. As a result of this lost economic activity, the repeal of LIFO would end up reducing federal tax revenue by $518 million each year. In other words, “[I]nstead of bringing in more tax revenue, as proponents of repeal anticipate, ending LIFO would reduce tax revenue.” 

That’s not all: in contrast to what Secretary Lew said in his testimony, the Tax Foundation argued LIFO repeal is a retroactive tax increase and that retroactivity would have profound economic consequences. The report explained, “Unless a special provision were made, LIFO repeal would also retroactively tax a company’s ‘LIFO reserve’” and “this additional tax could hit cash-strapped companies particularly hard and could result in 50,300 additional job losses in the short run.” MSCI’s partners at the LIFO Coalition have posted the Tax Foundation paper on the coalition’s website

While Congress is not expected to act on the president’s LIFO repeal proposal – in fact, the House and Senate Budget Committees are not even expected to hold hearings on the measure – since members of both parties have signaled an openness to LIFO repeal as part of broader tax reform, MSCI will continue to monitor this issue and work with the LIFO Coalition to oppose any efforts for repeal.