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|The Advocate - January 2018|
The Advocate - January 2018
The Advocate is tailored for NWPCA members and affiliates, and provides the latest information on what’s happening with the public policy issues and meetings that have the potential to impact you - or are impacting the day-to-day tasks and operations of the pallet industry. These government affairs updates strive to "Give you a heads-up, while you're putting the hammer down.”
Taking the battle to the next level! Establishing a Wood Packaging Political Action Committee.
The NWPCA Board of Directors and Government Affairs Committee decided to take NWPCA’s Government Affairs Program to the next level, but we need your help and input. We have had political wins in gaining ground for the industry, but we could do more to protect the wooden pallet and container industry. With that, NWPCA is in the process of establishing a wooden pallet and packaging Political Action Committee – PalletPAC.
We want to expand our work at the federal level by helping to elect House and Senate candidates who will protect your business, promote NWPCA issues, and deliver your message to Washington, DC. The non-partisan political action committee (PAC) will be established for the purpose of electing qualified candidates who support the wooden pallet and container industry, and who are committed to maintaining a strong and business friendly environment for NWPCA members to succeed.
The PalletPAC will rely 100 percent on NWPCA member contributions. Our PAC will bring together in Washington strong small business advocates—from all political parties—who are dedicated to helping to defend a strong wooden pallet and container industry.
There is wide buy-in throughout the volunteer leadership and staff of NWPCA for a PAC. This is a group effort, and we are now soliciting your thoughts and support for a wooden pallet and container industry PAC. Please take a moment to complete the survey, and comment.
NWPCA’s Vice President of Advocacy and External Affairs, Patrick Atagi, said, “We have proven that the wooden pallet and container industry is a powerful political group, with wins against those who advocate for purchasing cardboard pallets. We have pushed back against very powerful organizations who seek to ban solid wood pallets and packaging outright. A strong advocacy program is critical, especially now that we have built up momentum for industry in Congress.”
PalletPac’s success will come from NWPCA members and leaders embracing the need, and financially supporting a targeted PAC. Please take a moment to complete the short survey. In the coming weeks you will also receive a ‘letter of solicitation”, which is a legal document allowing us to ask for contributions from individual NWPCA members. This is an important step forward for the industry and hope to have your support financially and in spirit.
The House and the Senate reached an agreement on a final tax cut bill and passed it in late December. Mistakes have already been identified in the bill and there will likely be more and other unintended consequences discovered in the coming year. This will require bills to be passed to make changes, the vast majority of which will not be substantive. NWPCA will monitor and provide updates as necessary.
State and Local Tax Deduction
Individuals will be able to deduct an aggregate of $10,000 of state and local government taxes. The legislation repeals the deduction of foreign property taxes. Corporations and pass-throughs can continue to deduct their state and local income and sales taxes. The provisions apply to the 2018-2025 tax years.
During tax years 2018 through 2025, the bill modifies the tax treatment of certain businesses organized as pass-throughs, which can include sole proprietorships, partnerships, limited liability companies, and S corporations. They continue to pay tax through the individual income system, but are allowed a deduction for 20 percent of their domestic qualified business income.
The deduction is limited to either 50% of the "W-2 wages" they paid or 25% of W-2 wages plus 2.5% of the cost of their tangible, depreciable property. The IRS still needs to set guidelines for valuation and acquisition timing of property.
The wage limit wouldn't apply to taxpayers with income of $157,500 or less for individuals, or $315,000 or less for joint filers, indexed for inflation. The limit would phase in for taxpayers with incomes greater than those thresholds.
For partnerships and S corporations, the deduction would apply at the partner or shareholder level, based on their allocable share of W-2 wages.
The deduction would be limited for certain professional services businesses, including those in health, law, and accounting. It would only be fully available for service businesses with income of $157,500 or less for individuals or $315,000 or less for joint filers (indexed to inflation), and would phase out for incomes greater than those thresholds. Engineering and architecture businesses wouldn't be considered service businesses.
Dividends from cooperatives and real estate investment trusts (REITs) and income from publicly traded partnerships would be deductible.
Alternative Minimum Tax
The measure would retain the AMT for individuals but increase the exemption amount and phaseout thresholds so fewer people would pay it. The corporate AMT would be repealed.
The AMT is levied on certain individuals with exemptions or special circumstances that allow them to pay a lower standard income tax. Taxpayers calculate their liability twice -- once under the rules for the regular income tax and once under the AMT rules -- and then pay the higher amount.
From 2018 through 2025, a higher AMT exemption would apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption would phase out at $1 million for joint filers and $500,000 for other taxpayers. Thresholds would be adjusted for inflation using the chained consumer price index.
In 2017, the exemption is $84,500 for joint filers and $54,300 for individuals. The phaseout threshold is $160,900 for joint filers and $120,700 for individuals.
Obamacare Individual Mandate
The measure effectively repeals the individual mandate by eliminating the penalties used to enforce it. The individual mandate is repealed beginning in 2019.
The bill would allow full and immediate expensing of capital investments placed in service after Sept. 27, 2017, and before Jan. 1, 2023, in most cases. The provision would apply before Jan. 1, 2024, for certain property with a 10-year recovery period, transportation property, and certain aircraft.
After 2023, "bonus depreciation" would phase out by 20 percent per year through 2026 (or through 2027 for property that qualified for an extra year of full expensing).
The measure would expand the types of property eligible for bonus depreciation to include used property when first acquired by the taxpayer.
The bill would expand "Section 179" expensing, which allows businesses to immediately expense some of the costs of qualifying property such as off-the-shelf computer software and some real property. Current law specifies that as much as $500,000 can be expensed unless more than $2 million in property is bought, in which case there's a dollar-for-dollar reduction in the deductible amount. The thresholds are indexed for inflation.
Under the measure, as much as $1 million could be expensed under Section 179, while the phaseout threshold would be increased to $2.5 million. Both amounts would be indexed to inflation.
Eligibility for Section 179 expensing would be expanded to include furniture, as well as nonresidential roofs, heating and air conditioning systems, and fire and alarm systems.
The measure would double the basic exemption from the estate, gift, and generation-skipping transfer taxes to $10 million during the 2018 through 2025 tax years. The exemption was $5 million as of 2011 and $5.49 million in 2017 after adjusting for inflation.
Corporate Rates and Deductions
The graduated income tax with a top rate of 35 percent would be replaced by a flat 21 percent corporate income tax rate beginning in the 2018 tax year.
The bill specifies the accounting method taxpayers should use to normalize excess tax reserves that result from the rate reduction.
The alternative minimum tax (AMT) would be repealed, as proposed by the House bill. Corporations could continue to use their AMT credits to offset their regular tax liability. Credits would be partially refundable in tax years 2018 through 2021.
The conference agreement would modify several corporate accounting methods for smaller businesses.
It would allow corporations and partnerships with corporate partners with average gross receipts of as much as $25 million (indexed for inflation) to use cash accounting, under which a business recognizes income and deducts expenses when cash is exchanged instead of having to accrue income and expenses. Cash accounting is already available to all sizes of sole proprietorships, partnerships without a corporate partner, and S corporations.
The measure would also allow farm corporations and partnerships with gross receipts of as much as $25 million to use cash accounting.
Eligible businesses could use cash accounting even if they had inventories. Under current law, businesses with inventory must use the accrual method of accounting for tax purposes.
Businesses with average gross receipts of $25 million or less -- instead of $10 million or less under current law -- would be exempt from uniform capitalization (UNICAP) rules. UNICAP rules require businesses to either include certain direct and indirect costs associated with property they manufacture in their inventory or capitalize those costs into the basis of that property.
The conference agreement would also modify the accounting method that businesses with average gross receipts of $25 million or less use for long-term contracts.
Net Operating Loss Deduction
The bill would modify businesses' ability to carry their operating losses to other tax years.
The net operating loss deduction carryover would be limited to 80 percent of a taxpayer's eligible income, computed without consideration of the deduction itself.
The ability to carry back a loss to a previous year would be repealed, but losses could be carried forward indefinitely. The measure would make exceptions for farms -- which could carry losses back two years -- and property and casualty insurance companies -- which could carry losses back two years and forward 20 years, as under current law.
Real Estate Provisions
The measure would temporarily reduce the cap on the amount of mortgage interest that taxpayers can deduct to $750,000 from $1 million for mortgages incurred on or after Dec. 15, 2017. If a mortgage incurred before Dec. 15, 2017, was refinanced, it would still be considered to have been incurred on the original date of the mortgage for purposes of the deduction.
The cap would be restored to $1 million in 2026, regardless of when the mortgage was incurred.
Waters of the US (WOTUS)
In a unanimous decision issued on Monday, the U.S. Supreme Court ruled that challenges to the 2015 Clean Water Act Waters of the United States rule should have been brought in district courts, not courts of appeals. This result was widely expected and predicted, though most were expecting a 6-3 or 7-2 decision, not a unanimous decision.
The proposed rule by the U.S. Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers related to the definition of “waters of the U.S.” (“WOTUS”) would expand both agencies’ authority under the Clean Water Act, allowing the federal government to extend its reach into most bodies of water across the United States—waters that are in many cases already being managed by their states.
The Act is largely implemented by the states in a cooperative relationship with federal authorities. In turn, the states oversee and regulate their waters through permits that are obtained and complied with by industries, such as the electric power sector.
In two separate decisions, the Supreme Court has said that there are limits to EPA’s authority under the Clean Water Act. If the agency can regulate every water body from the largest to the smallest, and even those areas that aren’t wet most of the time, as it is proposing in this rule, then there are effectively no limits to the agency’s regulatory reach. For example, if your business has a storm drain, the EPA could effectively regulate your business because the water from the drain touches a ‘body of water’.
This decision is likely to lead to considerable confusion in the coming days and weeks. It’s at least conceivable that the 2015 Rule could take effect in some states soon unless Environmental Protection Agency and the Army Corps of Engineers act, or a district court enjoins the 2015 rule nationwide.
The EPA and Corps have not yet finalized a proposed repeal of the 2015 rule or their proposal to extend the application of the 2015 Rule by two years. It’s not clear if/when agencies will finalize either action, but the whole reason they proposed to extend application of the 2015 rule was to avoid the very scenario we are now in.
The Sixth Circuit previously stayed the 2015 rule nationwide; however, the Supreme Court’s decision should result in dismissal of the Sixth Circuit proceeding, and a lifting of the nationwide stay.
Finally, one district court stayed the 2015 rule, but it did so in only 13 states. It’s likely that plaintiffs in other cases (e.g., the industry coalition) will ask another district court to issue a nationwide stay. But until that happens, there is at least the possibility that the 2015 WOTUS rule could take effect after all.
It’s expected the Court will take about a month to issue a certified judgment, which is the action that sends the case back down to the Sixth Circuit. It’s unlikely anything will happen to the nationwide stay before then. The bottom line is we’ll just have to wait and see how this all pans out.
“This decision is likely to lead to considerable confusion in the days and weeks ahead,” according to the Water’s Advocacy Coalition, “If the district courts do not issue a nationwide stay or if Congress does not act, the WOTUS rules will likely differ from state to state, creating even more confusion and uncertainty. It is difficult for businesses and states to operate with this confusion and it will undoubtedly be harmful to our nation’s economic growth. The agencies are still working on a rule to delay the applicability date of the 2015 WOTUS Rule however, we need Congress’ help to ensure that the rule is never implemented on the ground.”
Both the House and Senate FY 2018 Interior Appropriations Bills, as well as the FY 2018 House Energy and Water Appropriations Bill included language that would allow the EPA to withdraw the 2015 rule. This would help the EPA quickly finalize the withdrawal of that rule, ending the confusion and allowing all parties to focus time and efforts on creating a new rule.
Real GDP grew 3.2 percent in the third quarter, boosted by strength in consumer and business spending and net exports and extending the 3.1 percent gain in the second quarter. According to new data from the Bureau of Economic Analysis, manufacturing added 0.24 percentage points to top-line growth in the third quarter, with mixed results for the sector. Real value-added output grew 2.0 percent for manufacturers in the third quarter, buoyed by a 7.5 percent growth rate for durable goods firms but weighed down by a 4.1 percent decline for nondurable goods businesses. Recent hurricanes hit the latter hard, especially in chemical and energy markets.
Overall, manufacturing gross output increased to $6.031 trillion in the third quarter, rising to its highest point since the fourth quarter of 2014. Those findings closely mirrored the value-added data for manufacturing, which rose to $2.252 trillion in the third quarter, another new all-time high. Value-added output for durable goods increased to $1.224 trillion, with nondurable goods value-added output rising to $1.028 trillion. The bottom line is that manufacturing accounted for 11.5 percent of real GDP in the third quarter, which remained the same from the prior report. Adjusting for inflation, there was also a new all-time high for real value-added output in manufacturing, up to $1.958 trillion in the third quarter. Those figures are in chained 2009 dollars, and the latest number edged out the previous peak of $1.955 trillion recorded in the third quarter of 2007, or just before the start of the Great Recession.
Manufacturers will get the first look at fourth-quarter real GDP growth on Friday, and if current estimates hold, the numbers should show the U.S. economy grew at least 3 percent for the third straight quarter. Strong consumer and business spending, combined with an improvement in exports, have helped expand the economy. The NAM is forecasting 3.6 percent growth in the fourth quarter, with 2.3 percent and 3.0 percent growth in 2017 and 2018, respectively.
Meanwhile, manufacturing production rose for the fourth straight month in December, edging up 0.1 percent. While this was slower than the 0.3 percent gain in November and while more broad-based increases are preferable, the data remain encouraging overall. Indeed, manufacturing production has risen 2.4 percent over the past 12 months, down from 2.5 percent in November, which was the best year-over-year rate since July 2014. Similarly, manufacturing capacity utilization matched November’s rate of 76.4 percent, a reading not seen since May 2008. In terms of the forecast, manufacturing production is projected to grow 2.2 percent in 2018, up from 1.7 percent in 2017.
At the same time, total industrial production jumped 0.9 percent in December, bouncing back after falling 0.1 percent in November. In addition to manufacturing, both mining and utilities production increased, up 1.6 percent and 5.6 percent, respectively. Utilities benefited from colder temperatures. Over the past 12 months, industrial production has risen 3.6 percent, its highest rate since November 2014. Mining and utilities output increased 11.5 percent and 1.8 percent year-over-year, respectively. In addition, capacity utilization soared from 77.2 percent to 77.9 percent, the strongest rate since February 2015.
Regionally, manufacturing activity remained solid in the New York and Philadelphia Federal Reserve Bank districts despite their composite measures easing somewhat in the January surveys. New orders, shipments, hiring and capital spending continued to expand at healthy rates, even with some softening, and business leaders began the new year with an optimistic outlook for the next six months. In some special questions in the Philadelphia Federal Reserve survey, 71.7 percent of respondents said there had been an increase in demand for manufactured products over the past several months, with nearly 70 percent anticipating higher production in the first quarter of 2018. On the downside, these reports also indicated an acceleration in input costs, both for January and moving forward.
Turning to the housing market, the latest releases provided mixed levels of comfort. New housing starts fell from 1,299,000 units at the annual rate in November to 1,192,000 units in December, a three-month low. The decline in activity in the latest data came entirely from a significant reduction in single-family starts, off 11.8 percent from 948,000 units to 836,000 units, with notable decreases in every region of the country except the West (which was unchanged). Poor weather might have played a role in diminishing activity in December. More encouragingly, single-family starts have increased 3.5 percent over the past 12 months, up from 815,000 units in December 2016.
Such news might be more discouraging if there was not an expectation that December’s softer data might be a temporary blip toward stronger figures in the coming months. Along those lines, homebuilder optimism remains highly elevated with a healthy outlook for sales over the next six months. In addition, housing permits were also solid, essentially unchanged but down from an annualized 1,303,000 units in November to 1,302,000 units in December. It was the third consecutive month with permits—a proxy of future activity—exceeding 1.3 million units, with December’s reading not far from the 1,316,000 figure in October, which was the highest point since August 2007. Housing permits have risen 2.8 percent year-over-year, up from 1,266,000 units in December 2016.
This week, new surveys from IHS Markit and the Richmond and Kansas City Federal Reserve Banks will report on the health of manufacturing; they are expected to indicate continued expansion of the sector. Other highlights this week include updates on durable goods orders and shipments, existing and new home sales, the international trade in goods, leading indicators and state employment.