U.S. Tax Law Boosts Growth, But Uncertainties Loom
By Chris Mitchell, vice president, global government relations
Key Summary
• The TCJA reshaped the U.S. tax code to promote competitiveness and support electronics industry growth.
• Key provisions include a lower corporate tax rate, full expensing for investments, and preservation of the R&D tax credit.
• Several TCJA provisions will phase out or shift starting in 2022 and 2023, creating uncertainty.
• Pending regulations and unresolved tax extenders leave key details incomplete for manufacturers.
• IPC highlights long-term planning needs as major TCJA benefits expire without congressional action.
Monday, April 15 was the deadline for millions of Americans to file their income tax returns, so this is a good time to review the Tax Cuts and Jobs Act of 2017 (TCJA) as well as the current tax policy landscape and how these rules are affecting the electronics industry. TCJA Fostering Economic Growth In passing the TCJA, Congress restructured the U.S. tax code for the first time since 1986. IPC applauded the bill’s passage because of the need to replace an outdated tax code with one that promoted competitiveness and innovation in our industry and economy-wide. Several provisions were especially important to the electronics industry, including: • Lowering the corporate tax rate from 35 percent to 21 percent; • Allowing full and immediate expensing of capital investments placed in service between September 27, 2017 and January 1, 2023; and • Safeguarding the R&D tax credit. • The bill also allows many small businesses that are organized as “pass through” companies to claim a 20 percent deduction for the non-wage portion of pass-through income.
These provisions have helped generate stronger-than-expected GDP growth and near record-low unemployment. In fact, the number of U.S. job vacancies has exceeded the number of unemployed Americans for months. Most economists are forecasting continued growth through 2019. Changes Coming in a Few Years Even as we celebrate the success of the TCJA, we should be mindful of work yet to do and new issues that have come up. Here are a few that affect our industry:
• Bonus Depreciation Starts Ramping Down in 2023. The TCJA provided for 100 percent bonus depreciation for capital expenditures, spurring investments in plant and equipment. However, the law phases out bonus depreciation from 2023 to 2026. Bonus depreciation enjoys wide support on Capitol Hill, so there will be attempts to prevent its expiration. Some skeptics believe bonus depreciation is more appropriate as a tool for reversing economic downturns, while others say it is accelerating automation and jeopardizing jobs. We expect a tough fight to extend this provision past 2023.
• R&D Tax Credit Falls Short. Beginning in 2022, companies will be required to amortize R&D expenses over five years instead of claiming an immediate, full deduction as they do today. There are concerns that this will reduce R&D investment, and some in Congress are working to rewrite this provision. Moreover, a cadre of Congress members will continue to fight to increase the alternative simplified R&D credit from 14 percent to 20 percent to bring it in line with international competitors. But such an increase is considered unlikely.
• TCJA Regulations Still Pending. Significant portions of the tax law require the Treasury Department to issue implementing regulations, but many such rules are still in the proposal stage. Regulations can undergo significant changes as they go through the process, so IPC and its members will need to keep an eye on them and be prepared for further advocacy.
• Pass-throughs (S-Corps) Still Face Unfair Treatment and Significant Uncertainty. Pass-throughs have long argued for tax parity with C-Corps, and the authors of the TCJA sought to provide some relief by granting a 20 percent deduction on some pass-through income. However, legislative rules prevented Congress from making the relief permanent, and the deduction will vanish at the end of 2025. Because pass-through tax rates are tied to individual rates, any debate over changing them will get caught up in the political battle over marginal tax rates for individuals.
• Expiring Tax Provisions in Limbo. No sooner had the TCJA passed in 2017 than congressional efforts began to pass an “extenders packages” to reinstitute several old tax provisions that were left out of the bill. Currently, there are 29 so-called extenders that expired in 2017 and 2018, and we are beginning to see bipartisan interest in passing an extensions bill later this year. The two provisions with the most support are the biodiesel tax credit and the short-line rail maintenance credit. We will continue to monitor developments. • TCJA Exacerbates Budget Woes. The TCJA may be boosting economic growth, but it is not paying for itself. Tax revenues are falling below forecast, and the Trump administration’s FY2020 budget proposes $1 trillion+ annual deficits through FY2022. And that is a best-case scenario! Planning Ahead The TCJA made some very helpful changes to an outdated tax system. However, the tax writers also created a great deal of uncertainty by putting a time limit on some of the most significant and popular provisions, which are likely to expire in a few years absent a resurgence of bipartisanship. We know that many IPC members make long-term business decisions based on the tax code. Thus, your company may want to consider taking advantage of TCJA tax provisions while they last and working with IPC to advocate for smarter, more predictable tax policies in the future.
The law lowers corporate taxes, allows full expensing of capital investments, and preserves the R&D tax credit, supporting growth in the electronics sector.
Bonus depreciation enables full expensing of capital expenditures, but it begins phasing out in 2023 unless Congress intervenes.
Beginning in 2022, companies must amortize R&D costs over five years instead of taking an immediate full deduction.
Their 20 percent deduction is temporary and expires in 2025, tying their tax outlook to shifting individual tax rate debates.
Dozens of extenders remain unresolved, leaving companies without clarity on incentives they previously relied upon.
IPC Working to Revive R&D on Lead-Free Electronics in High-Reliability Sectors
from government, industry, academia, and other stakeholders. Founded in 2008 and housed by IPC since 2012, the PERM Council provides leadership and coordination of Pb-free electronics risk management activities in both government and industry.
A major focus of the PERM Council has been gathering enough detailed engineering knowledge to underpin the conversion from tin-lead solder to Pb-free in the ADHP sectors. In 2009, PERM supported an effort funded by the U.S. Department of Defense (DoD) to identify the knowledge gaps and estimate the cost to fill them. The cost estimate this “Pb-Free Manhattan Project” was about $110 million over three years, broken down into more than 100 “bite-size chunks” from $100,000 to $5 million.
Unfortunately, due to DoD budget cuts in the last decade, the “Manhattan Project” was never fully funded, although some companies and universities continued to work on the smaller chunks. In 2014, IPC completed a “re-baseline” and estimated that about $40-50 million was still needed to complete the knowledge base. To date, the R&D project is still incomplete.
Now, in 2019, IPC and a consortium of manufacturers and academic institutions are working with more than a dozen congressional offices to secure $15 million in federal funding to put the R&D back on track. The formal funding requests have been filed; congressional deliberations on defense spending are underway; and Congress is expected to send a defense appropriations bill to the president for his signature by late summer, at which time we will know whether we have been successful.
A great deal of policymaker education and advocacy will be necessary to achieve this goal in 2019 and to keep the momentum going in 2020 and beyond. The IPC Government Relations team will be working on the issue 24/7, but members of Congress are most interested in hearing from IPC members, i.e. the front-line business leaders in their states and congressional districts.
To learn more and contribute your expertise to IPC’s Pb-free electronics efforts, please visit the PERM Council page on IPC's website and contact me at ChrisMitchell@ipc.org to join our Advocacy Team.Question of the Week: What Does Brexit Mean to Your Company?
Brexit Postponed Amid Political Gridlock; Industry Disruptions in Store
By Chris Mitchell, vice president, global government relations
Key Summary
• Brexit delays created prolonged uncertainty, with political gridlock pushing decisions past original deadlines
• A no-deal Brexit remained a significant risk, threatening tariffs, border disruptions, and severe economic impacts
• UK political instability — including potential leadership change and early elections — added to business uncertainty
• Manufacturers began stockpiling inventory and rerouting supply chains to mitigate Brexit-related risk
• The electronics industry faced disproportionate disruption due to its globalized supply chain and UK’s sizable workforce
• Economic indicators already showed Brexit-related harm, including reduced GDP growth and weakened investor confidence
The United Kingdom’s effort to leave the European Union, known by the nickname “Brexit,” is bogged down in political uncertainty, which in turn is creating disruptions in the global economy. With a “no-deal” Brexit possible within two weeks, here’s a recap of recent developments and the possible impacts on the electronics industry. (And let us know what you think about Brexit.)
First, a Quick Recap
Following a 2016 referendum in which the “leave” side won narrowly, the British government invoked Article 50 of the Treaty of European Union, which lays out a two-year process for member countries to withdraw from the EU’s political and economic structures. That process was set to conclude by last Friday, March 29. British Prime Minister Theresa May finalized a Withdrawal Agreement with the EU in November 2018. However, Parliament rejected the agreement on January 15, as well as two subsequent versions of it on March 12 and March 29. In a rare move, rank-and-file members of Parliament took control of the chamber twice in the last week to hold “indicative votes” on 12 Brexit alternatives, but none won a majority. Just yesterday, following a lengthy cabinet meeting, Prime Minister May signalled that she would seek a further extension from the EU until May 22 and that she would work more closely with Labour leader Jeremy Corbyn to forge a compromise.
Top Takeaways
1. The urgency remains even as the deadline is postponed. PM May asked for and received an EU extension of the Brexit deadline to April 12. She now has indicated she will seek an extension until May 22. But May 22 is right around the corner, and the country’s political leaders remain at loggerheads. It is not clear whether working with Corbyn can deliver a deal with majority support.
2. A no-deal Brexit remains a real possibility and would wreak havoc. Goldman Sachs has estimated a 15 percent likelihood that the UK will exit the EU without a deal in place. Some fear the likelihood is even greater, and most agree the outcome would be dire. World Trade Organization (WTO) tariffs would go into effect, requiring goods to be re-priced accordingly. Customs officials would need to re-establish rules and procedures at the border, but it’s uncertain whether adequate infrastructure could be put in place that quickly.
3. A new PM is likely soon. Throughout her tenure, May has come under withering criticism from both the Left and Right for trying to chart a middle course. In a last-ditch effort to win more Conservative Party votes for her Withdrawal Agreement, she pledged to step down if Parliament adopted her deal. The ploy did not work. Now the British political class is gearing up for a leadership contest on top of everything else.
4. A general election is also possible. Britain’s next national election is not scheduled until 2022. Parliament can trigger an election sooner, but the current Conservative majority is largely opposed, having lost seats in 2017 in an election that May did not need to call. On the other hand, the current impasse, if it continues, may make general elections a necessity. The Labour Party may pick up seats in a general election, but few experts think it would be enough for a strong mandate, and any election would be at least several months away.
5. Manufacturers must plan for various scenarios. Saddled with these uncertainties, companies with operations in the UK and EU are hedging against the various outcomes. IHS Markit’s Rob Dobson expects that “the impact of Brexit preparations, and any missed opportunities and investments during this sustained period of uncertainty, will reverberate through the manufacturing sector for some time to come.” In the near term, the uncertainty has led to advance purchasing and stockpiling of inventory, leading to surges in manufacturing production. But many companies are shifting their supply chains away from the UK, sourcing goods and materials from other EU countries or from outside the region altogether. Airbus, Nissan, Ford, Siemens and Sony are just a few of the companies that are considering or actively shifting operations out of the UK as a response to Brexit.
6. The electronics industry may be disproportionately impacted. According to an Oxford Economics study commissioned by IPC, the EU28 electronics industry employs more than 2.4 million workers, with about 8 percent or 196,000 of them in the UK. Without an orderly Brexit, the UK could slide into recession in 2019, and the country’s share of the EU’s electronics workforce could drop even further. It’s impossible to predict with precision, but the electronics industry has a highly globalized and complex supply chain. New trade barriers and uncertainties will constrain the ability of British electronics companies to leverage the European electronics marketplace and labour force.
7. Brexit has already harmed economic growth in the UK. A column in the Financial Times says the UK economy has already shrunk by 1.5 percent since the Bank of England’s 2016 forecast, even as the world economy has grown. Goldman Sachs predicts that a no-deal Brexit could whack UK GDP by another 5.5% and depreciate the pound sterling by 17 percent. The New York Times reports the UK has forfeited its role as an economically and politically stable country from which companies can base their European operations.
With so much at stake for the electronics industry, IPC will continue to stay abreast of developments and keep you informed. Let us know what you think by taking our survey or dropping me a line at ChrisMitchell@ipc.org.
Political deadlock in Parliament prevented approval of a Withdrawal Agreement, forcing the UK to seek multiple deadline extensions.
A no-deal exit would mean an immediate shift to WTO rules, triggering tariffs, border delays, and widespread supply chain disruptions.
Electronics relies on complex global supply chains, and new trade barriers or border friction would slow production, raise costs, and reduce competitiveness.
Yes. Major firms like Airbus, Nissan, and Sony were considering or initiating moves to the EU or elsewhere to avoid Brexit-related uncertainty.
Forecasts projected UK recession risks, a steep GDP decline, depreciation of the pound, and long-term damage to the UK’s attractiveness as a business hub.