Manufacturers report higher tax and compliance burdens slow growth
McGladrey recently conducted a survey of 525 middle-market executives on the effects of the American Taxpayer Relief Act of 2012 (ATRA), which became law in 2013 as a result of the fiscal cliff tax deal.
Of the executives surveyed, 22 percent were from the manufacturing industry, a key component of the middle market, and they reported the most severe impacts from ATRA. Over three-quarters of the manufacturers surveyed indicated that the expiration of the research and development (R&D) tax credit has led to an increase in their tax bills, and 63 percent of manufacturers that reported having cut R&D over the past year said that the tax credit's expiration contributed to their decision to do so.
Nearly 80 percent of the population surveyed reported that their tax bills had gone up between 2012 and 2013. Respondents indicated that these tax changes are leading many companies to slow down or cut key indicators of business health and growth: workforce, expansion, M&A activity and R&D.
More than half of those who reported cutting jobs or rolling back expansion plans attributed those decisions, at least in part, to tax increases they have experienced since the fiscal cliff deal. Overall, two-thirds of middle-market businesses reported that federal tax policy is limiting their growth.
Survey respondents reported increased taxes and compliance burdens resulting from ATRA's increase in the top individual marginal tax rate to 39.6 percent, the new 3.8 percent net investment income tax and preparation for compliance with the Affordable Care Act. Just less than half of the survey population reported tax increases from the expiration of the bonus depreciation allowance and R&D tax credit.
Looking to the future, respondents were asked about the likely effect on their businesses of three major tax reform proposals: reducing the corporate tax rate from 35 percent to 25 percent; reducing the tax on long-term capital gains and dividends by 3 percent; and making the R&D tax credit permanent. In general, there was broad support for reducing the corporate tax and long-term capital gains tax rates, with 67 percent and 57 percent of respondents, respectively, saying those changes would have a positive effect on their businesses. While only 38 percent of respondents across all industries said their companies would benefit from a permanent extension of the R&D tax credit, nearly two-thirds of manufacturers said such an extension would have a positive impact on their businesses.
The results of McGladrey's survey confirm that these tax code changes not only failed to protect mid-sized businesses, including manufacturers, but also created new burdens that are holding back the most prolific job creators of the past five years. These findings are of particular significance because middle-market businesses represent approximately one-third of the U.S. economy and workforce.
Manufacturers should carefully consider tax planning for 2014 and 2015 and opportunities to improve their tax position prior to year-end. Read the report, Middle Market Tax Survey, in its entirety.