A Question for the President

Jun 28, 2011

by Caroline Harris

Today, the President spoke to Alcoa, an American manufacturer based in Iowa, about the importance of the manufacturing industry to job creation in this country. The President touted the manufacturing jobs that have been added to the employment rolls, and the fact that Alcoa has already hired back employees and wants to add more in the future. So why, during current debt ceiling talks, is the President also entertaining tax hikes, like LIFO repeal, that will harm these very same job-creating manufacturers?

Manufacturers, including Alcoa, according to its annual report, use LIFO for inventory accounting. In fact, Alcoa’s LIFO reserves are the 10th largest in this country – in other words, this is a big deal and means big dollars. Is the President keeping in mind the real damage of LIFO repeal?

As I told Dow Jones yesterday, "[LIFO repeal] could force many companies out of business. Many companies lack the capital resources or the ability to obtain the debt financing needed to pay the taxes resulting from the repeal of LIFO."

Here’s a little refresher course on what LIFO is and why we have it…

LIFO is an accounting method that has been expressly permitted by the Internal Revenue Code since the 1930’s. Businesses that use LIFO assume for accounting purposes that they sell first the inventory most recently acquired or manufactured. Industries that often experience rising inventory costs typically account for inventory using the LIFO method. This is because LIFO accounting allows them to match current sales income with the current higher cost of that inventory. In short, the LIFO method enables businesses to avoid phantom profits caused by inflation.

So, Mr. President, repealing LIFO could have some very harsh real world impacts for the very company you stood before today. It could result in a punitive, retroactive tax increase for Alcoa and other businesses, could place significant cash constraints on them, and could limit their ability to manage inflation. They would have to record illusory profits on their books, when no economic activity has occurred that would justify recording any profits.

Less cash means reduced benefits, less hiring, and even potential layoffs. So if you are serious about job creation, perhaps it’s time to take off the table tax hikes that are hurting job creation.

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