$2.6 billion in dealer revenues, 4,300 equipment industry jobs at risk in highway debate

The federal highway program is on life support. Road and bridge investment is funded by highway user fees — most notably, the gas tax. All are paid into the federal Highway Trust Fund (HTF) and spent on transportation. However, existing user fees are inadequate to support current investment levels. In fact, over the past several years, Congress has been forced to transfer more than $40 billion from the general fund to the HTF just to maintain current highway spending.
The long-term outlook for the federal road program is bleak: An Associated Equipment Distributors (AED)-funded study by researchers at the College of William & Mary recently determined that due to the declining gas usage, over the next 20 years user fee revenues will fall $365 billion short of what is needed just to maintain current spending. There is also bad news in the short-term: The Congressional Budget Analysis announced this summer that due to user fee shortfalls and other budgeting nuances, the HTF would be unable to support ANY highway spending in FY 2015.

The collapse of the federal highway program (we’re calling it the “Year Zero” scenario) would send economic shockwaves through the equipment industry. Past AED economic research has shown that each dollar in highway spending at the federal, state and local level creates an average of 6.4 cents in equipment market activity (EMA) — sales, rental and product support. In 2014, the $41 billion federal road program will create an estimated $2.6 billion in EMA. There is roughly one equipment distribution industry job associated with each $600,000 in dealer revenue, so the federal highway program supports more than 4,300 jobs in our industry.
With Year Zero putting $2.6 billion in dealer revenue nationwide and 4,300 jobs at risk, it’s no wonder that AED is lobbying Congress aggressively to fix the program. In the short-term, we will need another infusion from the general fund. A simple solution to resolve long-term fiscal imbalances would be to raise the federal gas tax from 18.4 cents per gallon to 25 cents and index it for inflation going forward. AED’s William & Mary researchers found that not only would that erase the $365 billion/20-year deficit, it would also provide an additional $167 billion to put towards our transportation needs over the next two decades.

Unfortunately, even though the impact on individual drivers would be minimal (about $65 per year in additional taxes for someone who fills up an 18 gallon gas tank every week), politicians have been reluctant to even consider a gas tax increase. But that may be changing as their awareness of the crisis improves. Happily, we’re starting to hear new, creative user fee options discussed on the Hill. AED has long made the case that a broader tax and budget deal, which may happen next year (see discussion below), is the appropriate place to deal with the HTF revenue issue and put the program back on firm fiscal footing.

The equipment industry has other infrastructure priorities beyond highways. Congress is close to a deal on a bill to authorize Army Corps of Engineers water navigation and flood control projects. We’re going to work in the months ahead to get that legislation across the finish line. We’ll also be working to protect already underfunded federal sewer and drinking water construction programs from further cuts.

Creating a simpler, investment-friendly tax code

There is a broad, bipartisan consensus on Capitol Hill that the federal tax code is a mess. The House Ways & Means and Senate Finance Committees have been hard at work on tax reform for more than a year, though at the time of this writing neither has proposed specific legislation. AED’s tax reform priorities are to:

1. Simplify, reduce uncertainty and cut rates. Beyond the tax code’s mind-boggling complexity, the expiration of certain provisions on an annual basis has created enormous uncertainty. Tax compliance costs are enormous. AED is lobbying for a simpler, permanent tax code with lower rates that encourages economic growth and creates a more business-friendly tax environment.
2. Reform the tax code for corporations and pass-through entities. The equipment industry is dominated by closely-held, family businesses. AED is telling Congress that for tax reform to achieve its intended results, it has to benefit large and small businesses alike.
3. Create a more favorable climate for capital investment. Equipment distributors and their customers are capital-intensive. We need to make the tax code more “investment friendly” and protect current provisions that encourage investment. That means permanently increasing §179 expensing and phase out levels, protecting the business interest deduction, and preventing Congress from eliminating Like-Kind Exchange (LKE) (a tax tool more and more equipment dealers are using to manage their rental fleets). AED projects its members have more than $700 million in collective LKE deferrals. LKE repeal could cost distributors a quarter of a billion dollars in immediate tax liability.
4. Get equipment dealers out from under the new 3.8% Obamacare tax on rental income. The tax code’s tangled web of passive income rules mean many equipment distributors are finding their rental revenues subject to the Obamacare law’s new 3.8% tax on investment income. AED is urging Congress to ensure equipment companies are held harmless from this new tax that active, brick-and-mortar businesses were never intended to pay.
5. Protect LIFO. The LIFO (last in, first out) accounting method is used by roughly a third of all equipment distributors to manage inventory. Repealing LIFO (which has been permissible since the 1930s) would subject these businesses to considerable retroactive tax liability and eliminate an important tax and accounting tool. AED projects that its members have total LIFO reserves of $588 million and that LIFO repeal would cost the industry more than $190 million in retroactive tax liability.
6. Fix the HTF. As discussed above, AED is urging Congress to use the tax reform process to increase the gas tax and/or create new user fee revenues dedicated solely to infrastructure investment to put the HTF back on solid, long-term fiscal footing.

Whether or not tax reform gets done before the 2014 elections is still anybody’s guess. But at a minimum, the debate will begin in earnest next year and lay the foundation for future legislation. AED will be making sure Congress understands what equipment distributors need from tax reform in order to grow and prosper.
Sustaining the shale energy boom

Equipment distributors around the country are benefitting from the economic boom created by new hydraulic fracturing (fracking) techniques. Recent AED surveys of members in just a handful of states documented hundreds of millions of dollars in shale energy-related equipment sales. Equipment distributors aren’t just providing equipment to help build drilling pads; they are also supplying equipment to road and utility contractors building fracking-related infrastructure. Additional tax revenue means states and localities have more money on hand, some of which they are spending on equipment. And farmers and other land owners who have leased or sold mineral rights also have more money to spend. More broadly, lower energy costs promise to make the U.S. manufacturing sector more competitive and help grow the economy.

But there are storm clouds on the horizon. In face of congressional efforts to expand the Environmental Protection Agency’s authority to regulate fracking, AED is lobbying to keep control at the state level, where the impact is most directly felt and understood. We’re also keeping an eye on Bureau of Land Management, which is developing new rules for fracking on federal lands. Finally, we are supporting efforts to improve public understanding about fracking’s economic benefits by getting distributors around the country involved in the debate about shale energy development. That will help beat back fracking bans that are expected to be on state ballots in the 2014 elections.

Helping us move the ball forward

AED is the voice of the equipment industry in Washington, D.C., but we can’t do our job alone. The industry is politically strongest when we’re not just one voice in the nation’s capital, but hundreds of voices singing in unison around the country. With that in mind, here some things you should be doing to help advance your interests:

• Communicate with lawmakers. AED’s grassroots website — AEDaction.org — makes it easy to send messages to Capitol Hill on all the issues discussed in this article.
• Host a congressional facility visit. Lawmakers and congressional staff love visiting facilities “back home” to find out what makes the local economy tick. AED’s Washington team is standing by to help you facilitate a congressional visit to your facility.
• Engage with candidates. We’re entering a period of intense political activity as the 2014 elections draw nearer. Candidates will be making themselves available to meet with constituents. Seize that opportunity to talk to them about the issues, no matter their party.
• Support good candidates. It takes enormous sums of money to run a successful congressional campaign. If you come across candidates who share your political values, help them get elected by contributing to their campaigns. It’s a great way to forge relationships, build our industry’s visibility and show you are playing the political game to win.

The bottom line is that the equipment industry’s 2014 agenda in Washington is all about your bottom line. Our success on any and all of the issues depends on your engagement. We are looking forward to working with you and distributors throughout the country to get the job done.

Christian A. Klein is vice president of government affairs and Washington counsel for Associated Equipment Distributors, the association representing independent, authorized distributors of construction, mining, forestry and agricultural equipment. He can be reached at [email protected].