Pennsylvania’s manufacturing sector has played a crucial role in our state’s economy since the early years of the commonwealth. From the steel mills of Pittsburgh, to the paper mills of York and St. Mary’s, to the medical device makers across the state, manufacturing makes up 12 percent of our economy and employs more than 560,000 workers.
Unfortunately, President Barack Obama would impose a massive tax increase on most of Pennsylvania’s manufacturers, costing us jobs we cannot afford to lose.
The president has misleadingly argued that he seeks only to raise taxes on "high-income" earners, but businesses will bear a large burden of his proposed income-tax increases. For a variety of reasons, about 80 percent of manufacturers organize as "pass-through" companies instead of corporate entities, according to a 2012 Ernst & Young report. This means their profits are not taxed at the corporate rates imposed on most larger companies, but instead are attributed to the business owners and taxed at individual rates. Virtually all of these small- and medium-sized businesses would be hit with a huge tax increase under the president’s plan.
This week I released a comprehensive report that studies the negative impact of President Obama’s tax increases on Pennsylvania’s manufacturing sector, including 10 detailed case studies of companies across the state. The report finds that many Pennsylvania manufacturers would face a devastating tax increase under the president’s plan. Most glaring is the president’s desire to effectively raise the top rate to 41 percent from 35 percent.
This is a terrible idea. Higher tax rates discourage entrepreneurs from starting new businesses and make it riskier for existing companies to expand their operations. Tax increases diminish the funds available for manufactures to invest in new facilities, to upgrade their machinery and software and to hire new workers. Lower investment levels mean lower worker productivity and correspondingly lower wages. Fewer jobs and lower wages from President Obama’s tax increases are hardly the prescription our ailing economy needs.
The proposed tax increases are an even worse idea when you consider the foreign competition many companies must contend with. At the current rate of 35 percent, American manufacturers already pay the highest corporate tax rate in the developed world. Comparable companies in China pay 25 percent; in Canada, they pay 15 percent; and in Ireland, the rate drops to a low of 12.5 percent. Even though our convoluted tax code already places American businesses at a competitive disadvantage, President Obama and his Democratic allies are clamoring to raise taxes on small and midsize businesses even further.
In a global business environment, it is not uncommon to see businesses move to friendlier business climates due to excessive taxes or regulation. The last thing we should do is give companies another reason to leave the United States. Yet this is exactly what the president’s tax policy would achieve.
Richardson Cooling Packages in Lawrence County is a perfect example. Based in New Castle, the company relocated from Turkey to Pennsylvania in 2002, in part because the 2001 and 2003 income-tax cuts made the United States a better place to do business. Despite the economic downturn, Richardson has continued to thrive, expanding its business and hiring 35 new employees over the past year, bringing its workforce to 80. But company president David Richards is emphatic that "there is no way we could have done this if the president’s tax policies had been enacted. … We pay about 40 percent in taxes. That is money that we cannot use to grow. We need our working capital to remain competitive."
Another example is Precision Medical Products, a global leader in medical-device production in Lancaster. CEO Doug Yocom believes his company can play a key role in providing affordable health care to America’s aging population, but uncertainty about federal tax policy is making it difficult for the company to realize its full potential.
Like many small- and mid-size manufacturers, Precision Medical reinvests much of its profits back into its business. Last year, the company spent about $750,000 upgrading its existing equipment and purchasing new machinery. These investments allow Precision Medical to remain competitive and allow this American factory to compete with its Chinese rivals.
According to Mr. Yocom, "If tax rates increase, small businesses that pass income through to their owners (as most small businesses do), will need to set more aside to pay for taxes rather than reinvesting in machinery and equipment and growth opportunities that would lead to new jobs."
These companies are not alone. We interviewed 10 Pennsylvania companies for my report, but there are hundreds, if not thousands, like them, and they are nearly unanimous about one thing: They cannot afford President Obama’s tax increases. And if they can’t afford them, neither can we.
Pat Toomey, a Republican, represents Pennsylvania in the U.S. Senate.
Western Pennsylvania Director
U.S. Senator Pat Toomey
100 Station Square Drive, Suite 225
Pittsburgh, PA 15219
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