Republican tax plan could fuel offshoring and automation, killing manufacturing jobs

In the dog days of summer in 2003, people in Kannapolis and neighboring towns northeast of Charlotte got news that more than four thousand people working for Pillowtex were losing their jobs. Several hundred more in Concord got the same news, along with other communities outside of North Carolina.

It was the largest single-day layoff in North Carolina history, and an event that could be traced in many direct ways to the enactment of an important and controversial federal law: the North American Free Trade Agreement (NAFTA).

Now, sadly, some of that painful episode, and many like it across North Carolina, could be repeated if another important set of proposals before the U.S. Congress becomes law – namely, the Republican tax plans currently making their way through the House and Senate.

Two provisions of Republican tax plans could accelerate offshoring and automation, the two chief reasons that manufacturing employment in the United States has been on the decline for more than a generation.

First, a proposal currently being debated would create new incentives to keep or move manufacturing overseas. The shift to a “territorial” tax system would allow multinational corporations to pay little or no corporate taxes on profits realized outside the U.S., a move that could fuel another wave of offshoring, cut the legs out from underneath purely domestic manufacturers, and ultimately kill manufacturing jobs. The existing tax code already allows companies to avoid taxation by keeping profits outside of the United States, but proposals under consideration could make the problem even worse.

Companies looking to avoid the U.S. corporate income tax could move or keep their manufacturing operations out of the country, raising the specter of another wave of offshoring like that which followed the implementation of the NAFTA. Some versions of the tax bill include language meant to limit companies’ ability to engage in this type of behavior, but many experts think the provisions are not nearly strong enough.

While the proposals in this area have not received a great deal of media attention yet, they worry both academic experts and leaders from manufacturing states that understand the threat they pose. The Congressional Research Service has raised this concern citing both economic theory and empirical evidence that adopting a territorial system in the United States could push investment out of the country.

Republican Senator Ron Johnson from Wisconsin has also expressed his misgivings, saying that “with a territorial system, there will be a real incentive to keep manufacturing overseas.” Senator Johnson’s perspective is all the more striking given that he often favors lower taxes but has thus far refused to support the current tax plan because it lavishes so many tax advantages on multinational corporations to the detriment of local manufacturing firms.

All of that should be worrisome enough to manufacturing communities in North Carolina that have still not recovered from previous waves of offshoring, but the trouble might not stop there.

Another arcane provision, known as “full expensing” could accelerate the process of replacing people with machines on shop floors. Automation is nothing new in manufacturing, and has allowed the United States to remain competitive in many sectors even when going up against low wages abroad, but the simple fact is that it costs jobs in the short-run.

Full expensing allows companies to deduct the full value of new machinery in the year in which the investment is made, rather than spreading the deduction over years as the equipment depreciates in value. This accounting trick would make the tax advantages of buying equipment far greater, creating even more pressure to invest in machines instead of people, potentially accelerating the pace of automation in manufacturing and other industries.

Territorial taxation and full expensing are not the only worrisome tax ideas on offer in Washington these days, but they should be particularly alarming to communities in North Carolina that rely on manufacturing.

We should be looking to strengthen domestic manufacturing, but this specific spread of tax cuts for multinational corporations isn’t the answer. Several pieces of the current tax plan could simply add weight to the forces that have slammed manufacturing communities for decades, and we know how that turns out.

Dr. Patrick McHugh is a Policy Analyst at the North Carolina Budget and Tax Center.