Everyone is talking about manufacturing and its comeback. Politicians, economists and the media continue to focus on the sector’s “renaissance,” primarily because manufacturing has been a major contributor to our economic growth since our nation’s steep economic downturn.
Manufacturers have added 13 percent of the net new jobs gained since the end of 2009, and we have made larger-than-normal contributions to gross domestic product. But there is a black cloud looming with much uncertainty ahead.
It is no secret that our nation is racing toward a fiscal cliff on Jan. 1, with Americans facing tax increases and spending cuts totaling more than $600 billion. Few expect President Obama and Congress to address this issue before Election Day, leaving a daunting list of fiscal and economic issues to resolve during the “lame duck” session. This leaves manufacturers facing uncertainty and makes it difficult to plan for the future. In a recent survey, 64 percent of manufacturers said the tax and regulatory environment is their top concern.
Absent legislation, marginal tax rates for American taxpayers will go up in 2013 to levels not seen since 2001. A host of other tax relief provisions are also set to expire, including tax rates on capital gains and dividends. In addition, some $22 billion in new taxes in the health care law are slated for 2013, including a 3.8 percent surcharge on top incomes.
If these tax increases kick in, the nation risks a recession in the first half of 2013, according to the Congressional Budget Office. The United States already has the highest corporate tax rate in the world, and if the tax relief expires, the two-thirds of manufacturers that operate as “pass-through” entities and pay taxes at the individual rate would face even higher tax bills. With the addition of the new 3.8 percent surcharge, many manufacturers will face marginal tax rates of more than 40 percent.
Pending across-the-board cuts in defense spending will also place a drag on the national and local economies. A new National Association of Manufacturers study found that defense spending cuts will negatively impact manufacturers across the country, including defense contractors and their supply chains. By 2014, the economy would lose more than 1 million private sector jobs, including 130,000 in manufacturing. In addition, GDP would be nearly 1 percentage point lower.
The effects of defense cuts are particularly acute here. Virginia and Maryland are among the top 10 states impacted. Virginia — second only to California — would lose an estimated 114,900 workers in 2014, while Maryland would lose just more than 40,000. Given the planning cycle for defense contractors and their suppliers, the defense industry is already experiencing job losses.
As growth slows elsewhere, the United States should be primed to capitalize on new opportunities around the world. If we effectively deal with our fiscal situation and adopt pro-growth policies that allow us to more effectively compete in the global marketplace, manufacturers across the United States should flourish, creating new jobs and expanding their operations.
By failing to do so, however, policymakers are holding back a move to more durable economic growth and job creation. That is why we need action sooner, rather than later.
Dorothy Coleman is vice president for tax and domestic economic policy at the National Association of Manufacturers and Chad Moutray is NAM’s chief economist.