Several lines were omitted inadvertently from an article in Sunday's Business & Finance section on business response to the new tax bill. The first four paragraphs of the article should have read: In April, Inland Steel Co. announced it would spend $100 million on a dramatically improved process at its East Chicago plant for making light, high-strength steel for the auto industry and other customers, cutting production time from four days per batch to 10 minutes. The decision, bringing Inland abreast of its most modern competitors in Japan, was based on the expectation that a major cut in business taxes would be passed this year. Confident of the outcome, Inland decided not to wait, said Theodore A. Myers, Inland's vice president for finance. The passage of the 1981 tax bill, with $165 million in buisness tax cuts over the next six years, fulfills most of the fondest hopes of the business community. Myers, echoing the enthusiasm of many business executives last week, said the tax bill "will be a springboard for the revitalization of the American economy.
In April, Inland Steel Co. announced it would spend $100 million on a dramatically improved process at its East Chicago plant for making light, high-strength steel for the auto industry and other customers, cutting production of the business community. Myers, echoing the enthusiasm of many business executives last week, said the tax bill "will be a springboard for the revitalization of the American economy."
But the critical questions now are how fast and how far these incentives will go toward accelerating investment in more efficient plants and equipment, and whether the results will heal the country's sick industries and create enough new jobs among the healthy ones.
Total investment (not counting housing) as a percentage of the nation's income has varied only slightly year to year in the past 30 years, accounting for 9.5 percent of the gross national product in 1950 and 10.5 in 1970. Last year, it climbed to 11.3 percent, and moving significantly higher will not be easy.
The chief beneficiaries of the tax bill couldn't restrain their enthusiasm about the future, however.
Myers predicts that Inland and many other companies already are working on wish lists for new processes and plant additions that were on the shelf before but that now can be considered seriously because of the new tax breaks given to capital investment.
"We're ecstatic," said Frederick Webber, executive vice president of the Edison Electric Institute, speaking for the struggling utility industry. It gained extremely valuable tax incentives for coal and nuclear plant construction and investment in utility stock.
Steel, autos, airlines and other industries hurt by last year's recessions are taken care of by changes in leasing rules that permit them to trade unused tax credits and depreciation deductions to more profitable firms and lease new equipment and facilities in return, at favorable terms. "Equipment leasing should flourish," said Charles E. Walker, of the American Council for Capital Formation, one of the chief lobbyists for tax bill.
There's much less enthusiasm in the building industry. Office construction has been booming without the help of the new tax break and is getting close to an over-built situation, said George A. Christie, chief economist of F.W. Dodge, an important analyst of construction markets. The residential construction industry is on its back, "and all the tax breaks in the world won't help very much" until interest rates come down, he said.
And amid popping champagne corks last week came the first warnings that the tax bill -- despite its anticipated vast impact -- is not an instant cure-all.
"We're very concerned that people will regard this as a quick fix when it's clearly not," said Paul Huard, vice president of the National Association of Manufacturers.
The business cuts, concentrated in a new system of deductions for business investment in new vehicles, equipment, facilities and structure, are very significant, Huard said.
"But a lot of companies don't make their investment plant overnight," he said.
The fact is that no one knows, now, what the impact of the business tax cuts will be, said Alan Greenspan, former chairman of President Ford's Council of Economic Advisers and a member of Ronald Reagan's campaign economic advisory group.
"In truth, the chief executive officer doesn't have a clue," Greenspan said. Each proposed investment project must be restudied in light of the tax bill, he said, to determine whether it now promises to provide the minimum return on investment that each corporation demands.
"There is no way he would know there were 40 different projects sitting down in the bowels of his organization which were never surfaced for consideration because they couldn't create the [required] aftertax rate of return," Greenspan said.
The tax bill creates three major new categories governing depreciation of new business investment. Vehicles, research and development equipment and certain other investments can be written off in three years; most machines and equipment and some facilities like oil refineries can be deducted over five years; and most investment in plants and structures can be written off over 10 years.
In most cases, these new rules permit companies to deduct the costs of investments over a shorter period of time, thus increasing the size of the annual deductions and lowering a company's tax bill from what it would have been under the old rules. The estimated tax savings to business start at $10.7 billion in the 1982 fiscal year and rise to $54.5 billion in fiscal 1986.
The bill maintains a 10 percent tax credit -- a bottom-line reduction in taxes due -- for new investment, plus an additional credit of up to 25 percent for R&D investments.
The benefits are clear from Inland's case. In simplified form, the investment in the $100 million continuous annealing line would, under the old rules, be deducted over 12 1/2 years in installments of $8 million a year. Now it can be deducted over only 5 years, with annual deductions of $20 million. In addition, Inland well receive a $10 million investment tax credit, and the combination of tax breaks will provide a much quicker return on the investment than before.
Companies with heavy capital needs, like steel, benefit particularly from the change, since the changes in deduction periods are most substantial for them.
The new bill is less exciting for high-technology companies like Xerox Corp., a spokesman said. Xerox typically deducted its equipment investments over seven years under previous rules. The new bill shortens that to five years -- not a huge change.
But Xerox and many other technology-dependent firms should benefit from the investment credit for research and development.
Xerox and many other companies also are interested in the new leasing provisions, included to help ailing basic industries. Ford Motor Corp., for example, is expected to accumulate $80 million to $100 million this year in tax credits and deductions for new investments, but it can't take advantage of the savings until it starts making profits again.
The new law makes it easier for Ford to swap unused deductions to profitable companies like Xerox that would buy equipment Ford needs and lease it back to the auto company at favorable rates.
And profitable companies like Inland also might find they had deductions that were more valuable to other corporations, such as banks, with higher marginal tax rates. Leasing swaps could be advantageous in that situation, too.
If the impact of the bill is impossible to predict precisely now, its significance is likely to be debated years into the future, because it won't be certain how much new investment was triggered by the tax bill and how much would have occurred anyway.
"That's a tough question," Myers said. Without the tax bill, Inland might well have made do with older equipment a while longer or settled for a smaller step toward new technology in the annealing process, he said.
Factors other than tax policy will continue to affect investment decisions -- inflation and interest rates, the strength of the economy and specific markets and the risks of new ventures.
By itself, the tax bill doesn't lower the minimum rate of return that corporations demand from new investments, Greenspan said. The hurdle will be just as high, but the tax bill will put more spring into the legs of companies making capital investments by leaving them with more cash after they make the investments, he added.