TMC News - Thompson Leads Bipartisan Letter to Chairman Camp to Strike LIFO Language from House Tax Proposal

June 2, 2014

By Staff

Rep. Mike Thompson, D-Calif. (5th CD), issued the following news release: U.S. Reps. Mike Thompson (D-CA) and James Lankford (R-Ok) led a group of 111 bipartisan Members of the House of Representatives in sending House Ways and Means Chairman Dave Camp (R-Mich.) a letter asking the Chairman to reconsider proposed changes to the "last in, first out," (LIFO) business accounting measures in the House's final proposal to overhaul our nation's federal tax code.

"Repealing LIFO will have a devastating impact on businesses across our districts and country," said Thompson. "The purpose of comprehensive tax reform should be to create jobs, make things simpler for people and businesses, and get our fiscal house in order. Ending LIFO will have the opposite effect. It will put people in the communities I represent out of work, punish businesses who have depended on this type of accounting for 70 years, increase their tax burden, and cause further economic uncertainty."

Currently, American companies with inventories that increase in value as it sits in storage can elect to use the accepted accounting method called "last in, first out" or LIFO. LIFO allows a company to use the cost of producing the newest unit in their inventory as opposed to the oldest when determining the profit of a single sale, which compensates for inflation. Companies electing to use LIFO are liable for changes in pricing; should the cost of producing the most recent unit decrease, they must continue to use LIFO and report the larger profit margin.

The Camp proposal retroactively implements the "first in, first out" or FIFO method over four years. As a result, companies currently using LIFO will incur a tax liability on the historic difference between using the LIFO method or using the FIFO method. Because these businesses were using an IRS-approved accounting method, many likely did not factor into their business plans a tax bill arising from a retroactive change in the tax code. Shouldering such costs could jeopardize the existence of some of these businesses and the jobs they support.

"I applaud Chairman Camp and his Committee's work to overhaul our nation's broken 72,000+-page tax code. However, as we make much needed tax reforms, we must also ensure we do not unfairly penalize companies that followed the previous tax rules," said Lankford. "Many American industries use the 'last in, first out' accounting method as a way to free up capital to hire new employees and keep their companies running on a predictable schedule. A provision in Chairman Camp's tax reform proposal would retroactively punish companies that have legally utilized this method for years to handle their accounting," "I do not believe it was Chairman Camp's intent to saddle these companies with added tax burden, despite the fact that they have utilized the legal LIFO accounting method for years. I join this esteemed group of Members to ask Chairman Camp to remove this provision from our House tax reform proposal to ensure we do not unduly punish hard-working businesses with yet another problem in our tax code. Rep. Thompson and I are grateful to be joined by so many of our colleagues on this letter to Chairman Camp. We will continue to protect the hardworking employees and industries in our respective states who need real tax reform," concluded Lankford.

A full copy of the letter is below.

Dear Chairman Camp: As we share your desire for comprehensive tax reform, we commend you for putting forth a proposal and for continuing to advance the discussions on tax reform. Like you, we believe that reforms are key to our long-term economic growth and global competiveness.

After reviewing the proposal in more detail, we would like to take this opportunity to share our concerns with the proposed repeal of "last-in, first-out" (LIFO) accounting and the negative impacts it will have on the businesses in our districts and, consequently, the local, regional and U.S. economy. LIFO is a legitimate and longstanding accounting methodology. It is not a "loophole," "subsidy," or tax expenditure; rather, LIFO is a widely accepted and utilized inventory accounting method that has been part of the U.S. tax code for more than 70 years.

A wide array of businesses, both small and large, use LIFO because they sell products produced from raw materials or feedstock that generally rise in price over time and because it best matches the replacement cost of goods with the revenue from inventory that is sold. This helps businesses such as manufacturers, retailers, wholesale distributors, and car and equipment dealers generate after-tax income that is reinvested in the purchase of replacement inventory, a cycle that is necessary for the company to remain in business.

We also have deep concerns with the retroactive nature of your repeal proposal and the adverse economic impact this will have on LIFO users, even with the applied transition rules and the proposed lower corporate rate. As you know, companies that use LIFO have a "reserve" that reflects the difference between current values of inventories and their historic costs, which for many companies has been accumulated over several decades. Under the proposal, these reserves would be recaptured and taxes would be owed and paid over a four year period, which -- in substance and in form -- is an unprecedented retroactive tax increase.

While the proposed transition rule and lower statutory rates attempt to lessen the economic and administrative burden of reserve recapture, they do not sufficiently mitigate the measureable harm that would be caused by repeal. LIFO reserves are not cash accounts or liquid assets. In fact, the savings generated from using LIFO are reinvested in replacement inventory. Therefore, repealing LIFO and retroactively taxing the reserves will divert operating cash flows away from productive operations and investments and result in negative economic consequences on jobs and economic growth, especially for small and mid-size businesses. No contemplated transition or reduction in rates would be sufficient to offset the overall economic and administrative cost of repeal.

We applaud your efforts to improve our tax system to spur job creation and economic growth. However, as stated above, repealing LIFO runs counter to these central tax reform goals. We therefore urge you to remove LIFO repeal from the tax reform proposal.

We thank you for considering our request and look forward to working with you and the Committee to advance a tax proposal that is fair, simple, and promotes economic growth and competiveness.

Sincerely,

Issues:Jobs & Economy