House Members Question Obama's Call to End LIFO Accounting
By Brett Ferguson
Publication date: 02/04/2010
House Ways and Means members crossed party lines in Feb. 3 budget hearings to criticize the Obama administration's proposal to raise an additional $59 billion in tax revenues by eliminating firms' ability to use the last-in, first-out accounting method.
“If we do this, if we end it, what's going to happen is U.S. small businesses are going to take a big tax hit and their competitors overseas are going to have a terrific advantage over us in the marketplace,” Rep. Mike Thompson (D-Calif.) told Treasury Secretary Timothy Geithner. “There're some industries that have to hold their inventory for a long time; this is a fair and reasonable way to recognize that and I would strongly urge you to go back and revisit that.”
The practice can reduce a business's tax liability, particularly in times of rising inflation, because it takes into account the higher costs of replacing inventories. The LIFO method is especially important to companies that maintain large inventories over a period of years, such as wineries and distilleries that need to age their inventories. As a result, shifting to a first-in, first-out accounting practice would have the effect of giving those producers income on which they would have to pay taxes, even though the products they have put into inventory may not be available for sale for several years.
Rep. Geoff Davis (R-Ky.) said the proposal not only hurts distillers, but also the aerospace industry and other business fields that sit on inventory for many years.
“If we want to create jobs in manufacturing, the repeal of LIFO creates many challenges,” Davis said, noting that Congress already rejected the same proposal from Obama in his fiscal year 2010 budget.
Geithner said the administration still believes the change would be a “reasonable policy,” but he promised to work with Congress on the idea.
Caps on Deductions
Lawmakers also attacked the administration's plan to cap the value of itemized tax deductions at the 28 percent tax rate, rather than allowing tax deductions to be valued as high as the 39.6 percent top tax rate that would be in place in 2011 under the Obama budget.
Critics have argued that capping the value of the deductions could have a chilling effect on charitable giving and—like the LIFO proposal—the idea was rejected by Congress in 2009.
“The limit on itemized deduction has been somewhat controversial within our ranks and across party lines. We need to talk about that,” Rep. Sander Levin (D-Mich.) told White House Office of Management and Budget Director Peter Orszag in a separate budget hearing later in the day.
The White House said in its budget proposal that capping the value of the tax deductions would make the income tax system more progressive and “distribute the cost of government more fairly among taxpayers of various income levels.”
The proposal would raise an estimated $291.2 billion over 10 years. Combined with the proposal to raise the top tax rates to their pre-2001 levels for high-income individuals and the reinstatement of certain phaseouts on exemptions and deductions, the budget would raise an additional $969.5 billion from upper-income taxpayers.
The complete text of this article can be found in the BNA Daily Tax Report, February 4, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2010, The Bureau of National Affairs, Inc.
House Members Question Obama's Call to End LIFO Accounting
By Brett Ferguson
Publication date: 02/04/2010
House Ways and Means members crossed party lines in Feb. 3 budget hearings to criticize the Obama administration's proposal to raise an additional $59 billion in tax revenues by eliminating firms' ability to use the last-in, first-out accounting method.
“If we do this, if we end it, what's going to happen is U.S. small businesses are going to take a big tax hit and their competitors overseas are going to have a terrific advantage over us in the marketplace,” Rep. Mike Thompson (D-Calif.) told Treasury Secretary Timothy Geithner. “There're some industries that have to hold their inventory for a long time; this is a fair and reasonable way to recognize that and I would strongly urge you to go back and revisit that.”
The practice can reduce a business's tax liability, particularly in times of rising inflation, because it takes into account the higher costs of replacing inventories. The LIFO method is especially important to companies that maintain large inventories over a period of years, such as wineries and distilleries that need to age their inventories. As a result, shifting to a first-in, first-out accounting practice would have the effect of giving those producers income on which they would have to pay taxes, even though the products they have put into inventory may not be available for sale for several years.
Rep. Geoff Davis (R-Ky.) said the proposal not only hurts distillers, but also the aerospace industry and other business fields that sit on inventory for many years.
“If we want to create jobs in manufacturing, the repeal of LIFO creates many challenges,” Davis said, noting that Congress already rejected the same proposal from Obama in his fiscal year 2010 budget.
Geithner said the administration still believes the change would be a “reasonable policy,” but he promised to work with Congress on the idea.
Caps on Deductions
Lawmakers also attacked the administration's plan to cap the value of itemized tax deductions at the 28 percent tax rate, rather than allowing tax deductions to be valued as high as the 39.6 percent top tax rate that would be in place in 2011 under the Obama budget.
Critics have argued that capping the value of the deductions could have a chilling effect on charitable giving and—like the LIFO proposal—the idea was rejected by Congress in 2009.
“The limit on itemized deduction has been somewhat controversial within our ranks and across party lines. We need to talk about that,” Rep. Sander Levin (D-Mich.) told White House Office of Management and Budget Director Peter Orszag in a separate budget hearing later in the day.
The White House said in its budget proposal that capping the value of the tax deductions would make the income tax system more progressive and “distribute the cost of government more fairly among taxpayers of various income levels.”
The proposal would raise an estimated $291.2 billion over 10 years. Combined with the proposal to raise the top tax rates to their pre-2001 levels for high-income individuals and the reinstatement of certain phaseouts on exemptions and deductions, the budget would raise an additional $969.5 billion from upper-income taxpayers.
The complete text of this article can be found in the BNA Daily Tax Report, February 4, 2010. For comprehensive coverage of taxation, pension, budget, and accounting issues, sign up for a free trial or subscribe to the BNA Daily Tax Report today. Learn more »
© 2010, The Bureau of National Affairs, Inc.
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