by Sheryll Poe, Free Enterprise
U.S. Chamber of Commerce
The fiscal cliff, the combination of automatic tax hikes and spending cuts set to take effect on January 1, 2013, is weighing heavily on the shoulders of business owners, including Rick McNeel and Theresa Kern.
McNeel is president and CEO of LORD Corporation, which makes critical parts for helicopters. About 15% of its business is tied to defense—the industry facing the deepest spending cuts. Kern is president and owner of MA Steel Erectors Inc., a subcontracting firm specializing in all facets of reinforcing steel placement for the commercial, industrial, heavy, and high-rise construction markets.
Kern and McNeel joined U.S. Chamber Chief Economist Marty Regalia and Free Enterprise staff writer Sheryll Poe for a discussion on the potential impact of the fiscal cliff on business and the economy.
Free Enterprise: Let’s start with an easy one: What parts of the fiscal cliff worry you most?
Kern: One of the problems I find is that people in Washington whose decisions affect our lives so greatly just don’t understand the ripple effect of their decisions. For example, my company is a Subchapter S. If I were lucky enough to make money this year—which hasn’t happened in the past three years because construction has done so poorly—I would have to leave that money in MA Steel because my bank would require it [for bonding purposes, a legal guarantee that the project will be completed as expected.] But I may have to pay tax on that income on my personal return and would never see it, never hold it, and never touch it. So you know, that’s one of the problems that I have with allowing the Bush tax cuts to expire.
McNeel: For us, there are three issues to think about. One is sequestration, which could require automatic across-the-board cuts to the defense budget of about $500 billion. Then, you add to that the tax increases if the Bush tax cuts expire. My third concern may be the biggest one long term—interest rates. Right now our country is $16 trillion in debt, and the interest rates are so low that if we have a significant uptick in interest rates, that’s going to be a huge burden on the federal government.
FE: Marty, are these concerns similar to what you’re hearing from the Chamber membership?
Regalia: There are two issues here, and both Rick and Theresa hit on both of them. One is the short-term fiscal cliff. How do we avoid going off the fiscal cliff? You have to find a way to extend the Bush tax cuts; address the tax extenders, such as the R&D credit, that aren’t being addressed; and deal with sequestration.
The problem is that the short-term fiscal cliff is wrapped up in our long-run fiscal situation. We have spent way too much money, and because of declines in economic growth, we have seen tax revenue drop dramatically. This combination has created deficits of more than $1 trillion a year for the last four years and has added significantly to our total amount of debt outstanding, which, as Rick pointed out, is about $16 trillion.
So we need to address the short-run problems but avoid exacerbating the long-run issues and, in fact, help the long-run issues. And the way to do that is to maintain economic growth. We need a stronger, more vibrant economy to generate a larger tax base and more tax revenue and put people back to work. Whatever we do in the short run and the long term have to achieve that ultimate goal.
We have an ace in the hole, and that is energy. We have a tremendous amount of energy that we have found in recent years, and we’re not exploiting that, we’re not collecting royalties on it, we’re not generating jobs with it, and we’re not increasing the tax base with it.
So if you address the fiscal cliff—stall it, if you will, for six months or a year—and in that time period fundamentally address and achieve some sort of a clear deal on entitlement expenditures and tax reform and exploit our energy resources, you have a chance to address both the
short-run and the long-run challenges.
Kern: The way Marty explains it makes sense to me. I just don’t understand why the educated people in Washington, D.C., haven’t moved in that direction.
FE: What do you think about Marty’s comment on the revenue potential of energy development?
McNeel: I actually spent my first 30 years at Amoco Chemical and then three at DC Chemical. I have pretty good knowledge of this whole area. And the potential for the whole downstream petrochemical industry as a result of the shale gas boom is huge. If you think about all the things that utilize petrochemicals—whether it’s carpet backing or textiles or polymers of all kinds—it’s a potential boon for the whole U.S. manufacturing industry.
FE: Marty, what should be done during the lame-duck session in Congress?
Regalia: My supreme hope is that they kick the can down the road. You don’t like that term. I don’t like it either, but that’s where we are. They’ve got to stall the fiscal cliff in the short run and address the debt ceiling. You’ve got to do something to put off the tax hikes and spending cuts at least for six months, or better yet a year, and address the debt ceiling [which is expected to be reached in the first quarter of 2013]. Then, we must address entitlement and tax reform.
FE: Theresa, Rick, what would that timeline do to your planning for next year?
Kern: I’m directly related to the economy and to the construction business. If the economy doesn’t do well, then all of us in construction don’t do well. And if we have another bad year, like the last three, I don’t know that I’ll still be here after having my business for 30 years.
McNeel: If they kick it down the road 6 to 12 months and do what Marty says, make some serious movements to give the world confidence that we’re going to address the long-term issues, then I think [LORD Corporation] can have a decent year. It probably won’t be as good as what we’ve had the last two or three years. But if they don’t [make serious progress], it’s all up in the air.