This year has been a busy one for the equipment industry on Capitol Hill, and 2015 looks like more of the same. Issues that directly affect equipment markets and distributor costs of doing business remain front and center. Getting the federal highway program back on solid fiscal footing, reforming the tax code and reining in an out-of-control regulatory bureaucracy are still top priorities for the industry. What’s on tap, what’s at stake and what you can you do to help move the ball forward?

The Highway Trust Fund Debate Continues

The federal highway program remains on life support. Highway user fees — most notably, the gas tax — pay for road and bridge investment. All fees are paid into the federal Highway Trust Fund (HTF) and spent on transportation. However, existing revenues are inadequate to support current investment levels. In fact, over the past several years, Congress had to transfer tens of billions of dollars from the general fund to the HTF just to maintain current highway spending levels.

Heading into 2014, the HTF was in a crisis; the highway program was set to run out of money by mid-August and the underlying legal authorization was set to expire on September 30. While the immediate threat of this “Year Zero” scenario has passed — before leaving for the August recess, Congress shored up the federal highway program until the end of May 2015 — the reality is that Congress just kicked the can down the road a few months. The near-term threat remains and the long-term fiscal outlook is bleak: An AED-funded study has projected a 20-year, $365 billion shortfall for the HTF.

The uncertainty surrounding federal surface transportation investment is causing volatility in the construction industry. AED economic research shows 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 created an estimated $2.6 billion in EMA. There is roughly one equipment distribution job associated with each $600,000 in dealer revenue, so the federal highway program supports more than 4,300 jobs in our industry. However, with the future of highway spending uncertain and state transportation officials unable to plan, contractors are sitting on their hands and not purchasing as much new equipment.

The good news is this summer’s highway crisis was a wake-up call for Congress. There is more talk among lawmakers about doing something to shore up the HTF during the lame duck session after the elections. The simplest solution would be to raise the federal gas tax from 18.4 cents per gallon to 25 cents and index it for inflation going forward. An AED-funded study 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. As 2014 ends, a gas tax increase could possibly be paired with a package of tax cuts (e.g., the business tax cuts that expired at the end of 2013) to create a “tax neutral” bill that Republicans could support.

In the weeks and months ahead, AED will continue to press Congress to do the right thing, maintain a strong federal rule in infrastructure, and restore certainty to federal highway spending.

Tax Reform Remains a Top Priority

Equipment distributors have an enormous stake in the tax reform debate currently underway on Capitol Hill. Over the last year, both the House Ways & Means and Senate Finance Committees have unveiled tax reform proposals that help clarify the threats and opportunities for dealers.

• Unequal Treatment of Pass-Through Entities: Closely held, family businesses dominate the equipment industry. AED has repeatedly told Congress that for tax reform to achieve its intended results, it has to benefit large and small businesses alike. Under the Senate’s plan, a lower rate would benefit only corporations whereas the House proposal would provide lower rates to c-corporations and pass-throughs alike.
• A Hostile 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. Both the House and Senate proposals would extend cost recovery periods for equipment. That would make investment less attractive and hurt the cash flow of both dealers and equipment purchasers. One ray of sunshine is the fact that both versions of tax reform would increase §179 small business expensing levels and index them for inflation.
• Loss of LIFO and LKE: The LIFO (last in, first out) accounting method and Like-Kind Exchange (LKE) would both be repealed in the House and Senate tax proposals. Roughly a third of all equipment distributors use LIFO to manage the impact of inflation on inventory. Repeal 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. Similarly, AED projects more than $700 million in collective LKE deferrals, which could costs distributors a quarter of a billion dollars upon repeal.
• The HTF: As discussed above, AED has urged 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. While neither proposal does so, the House proposes a $126.5 billion transfer to the HTF. The Senate, however, proposes no HTF fix.
• No Obamacare Rental Income Tax Movement: The tax code is a tangled web of passive income rules, which means 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 hold equipment companies harmless from this new tax that active, brick-and-mortar businesses were never intended to pay.

The path forward for tax reform is uncertain. With House Ways & Means Chairman Dave Camp (R-MI) retiring and Republicans taking control of the Senate after the November elections, it is possible that the House and Senate tax committees could both have new leadership in 2015. That said, there is enormous pent up demand on both sides of the aisle to improve the tax code, meaning that the conversation is likely to continue in the next Congress.

Reining in an Out-of-Control Bureaucracy

The business community is increasingly alarmed by the slew of new regulations being proposed by the Obama administration that threaten to drive up costs of doing business with little to no social benefit. One example is the recently proposed “waters of the United States” (WOTUS) proposal, which threatens to dramatically expand the jurisdiction of the Environmental Protection Agency.

WOTUS would reclassify ditches and other landscape features that occasionally carry water as tributaries to navigable waterways. This would allow EPA to regulate development, farming, mining and other activity in large swathes of the country. Comments to EPA on the proposed regulation are due in November. The timeline beyond that for WOTUS is unclear, but it’s likely to be affected by what happens during the mid-term elections.

Gridlock on Capitol Hill has meant that there is no effective check on the executive branch (the courts generally give enormous deference to administration regulatory actions). Now hat the the Republicans have seized control of the Senate, look for much more aggressive oversight by both houses of Congress, as well as efforts to short-circuit bureaucratic overreach through the appropriations process.

Helping Us Move the Needle

AED is the voice of the equipment industry in Washington, D.C., but we cannot do our job alone. The industry is politically strongest when we are not the only voice in the nation’s capital, but rather thousands of voices singing in unison around the country. With that in mind, here are 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. Ultimately, lawmakers decide to support a position because they are hearing from their constituents about an issue and why it’s important.
• 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 New Members of Congress: The political process does not end in November. New members of Congress need to hear about important issues early and often. Seize the opportunity to talk to them about the issues, no matter their party.

The bottom line is that the equipment industry’s 2015 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 for Associated Equipment Distributors, the association representing independent, authorized distributors of construction, mining, forestry and agricultural equipment. He can be reached at [email protected].