May 2025 Volume 7

TARIFFS TODAY, TAXES TOMORROW: MANUFACTURERS PLAN FOR BOTH By Omar S. Nashashibi WASHINGTON UPDATE

A s I write this on Tax Day, April 15, 2025, my inbox is flooded with questions about tariffs. Not about the $4.5 trillion in tax increases coming on January 1, 2026, not about the tax hike planned for small businesses in just 261 days, and not about the hundreds of thousands in added taxes manufacturers will pay this year on their R&D activities. All tariffs, all the time. Taxes are so tomorrow. That tomorrow is already here, and not just for those of us who make quarterly payments to the IRS. Tariffs and taxes clearly interact as some lawmakers are relying on the revenue from import duties to offset a portion of the costs associated with extending the Tax Cuts and Jobs Act of 2017. In April, the House and Senate passed their budget resolutions setting up a critical process in the U.S. Senate known as reconciliation. Unlocking this budgetary procedure permits Republicans to pass a tax, energy, immigration, and security package costing trillions of dollars, with only fifty votes in the U.S. Senate, instead of the typical sixty. This all but guarantees congressional Republicans in charge of both chambers will send President Trump a package of tax cuts this year – the question is for whom will lawmakers cut taxes, for how long, and how much it will cost? We had many of these same questions in 2017, when the GOP also controlled all of Washington and passed a $1.2 trillion tax bill. That law permanently lowered the C-Corporation rate to 21 percent from a near global high of 35 percent; created a 20 percent deduction called Section 199a for passthrough businesses paying at the owner’s individual rates; and provided manufacturers with four years of full and immediate expensing of their R&D activities and five years for capital expensing. As a tax lobbyist on that legislation at the time, manufacturers inundated me with questions. When will the tax provisions take effect? When should I place orders for new machines? Should I start hiring in anticipation of customers flooding me with orders? All very valid, and optimistic, questions. Today, few if any come my way on major tax legislation that may change the way manufacturers do business in the U.S. for the next decade. Of course, that pales in comparison to how tariffs may change the way manufacturers do business globally for the next generation. As is the case with all tax legislation, this reconciliation measure must start in the U.S. House of Representatives, where the Speaker of the House set an ambitious timeline to complete their version of the bill prior to the Memorial Day break. Sources in Washington, however, believe that the process to pass a bill, which may exceed $7 trillion and cover politically sensitive topics such as

immigration, the border, and energy will take months, not weeks. In our conversations with policymakers, we do expect an “R&D fix”, removing the requirement to amortize R&D expenses, however, it may not extend retroactively beyond January 2025. Many FIA members report Bonus Depreciation, the 100 percent deduction for capital expenses, as their top tax priority. That level dropped this past January to 40 percent and restoring full expensing is a traditional stimulus for manufacturing, prompting businesses to spend millions. As with R&D, retroactivity for 100% expensing likely only reverts to January 2025, not to 2023 when the provision began to phase down. An extension of the 199a deduction for passthroughs is also on the table ahead of its expiration later this year, though the uncertainty over these extends to whether lawmakers have the funds available to make the provisions permanent or must simply prolong their expiration date by a few years. This brings us back to the uncertainty hanging over what should be a tax measure that leads to booming investment in the U.S. Due to the swelling size of the reconciliation package, and resistance from fiscally conservative Republicans in both the House and Senate, lawmakers are unlikely to have the fiscal room to make all tax provisions permanent. The battles in the halls of the Capitol are already being waged over which provisions to make permanent, which to extend, and which will fall by the wayside. These decisions are expected in the coming months as us tax lobbyists press full speed ahead. Aside from the tough tax decisions lawmakers face, the clock is ticking for another reason. The nation’s borrowing limit is fast approaching with the most generous of expectations being we will exceed our debt ceiling as late as September. Most here in Washington expect that if lawmakers cannot complete a tax bill by the August break, negotiations become more complicated. We feel confident that lawmakers will send a tax relief bill to President Trump this year. It will address the tax on R&D, provide incentives for capital investments, and possibly include a special rate or deduction for domestic manufacturing. The uncertainty surrounds whether Congress can make these incentives permanent, or are they simply a temporary reprieve. Placing heavy equipment into service can take years, and can cost millions more if shipped from overseas, even from an ally. The tariffs present an opportunity for tax policy and headwinds at the same time. In an ideal situation, Congress would make permanent all the tax provisions that structurally change why and how we manufacture in America. Combined with a stable and

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FIA MAGAZINE | MAY 2025