Politicians Eye LIFO in Budget Showdown

A standard inventory accounting practice widely used in the electrical industry and elsewhere has caught the attention of Congressional leaders and the White House in the midst of their budget negotiations. With Republicans in Congress refusing to accept any kind of tax increase and the federal government’s debt limit hanging in the balance, President Obama and Congressional Democrats are looking for any source of additional revenues they can find to offset federal spending.

One proposal the White House has floated would change the tax code to eliminate the option for companies to account for inventory on a “last-in, first-out” basis — LIFO, for short. LIFO has been used since it entered the tax code in 1939 by companies whose inventory is subject to large changes in valuation and by small businesses with thin capitalization. Compared with its alternative, FIFO (first-in, first-out), in which inventory is valued at its actual purchase cost, LIFO allows a company to value its inventory based on replacement cost, lowering the tax burden when the cost of inventory replenishment is rising, but increasing tax liabilities when prices fall.

Forcing companies using LIFO to make the change to FIFO would result in a substantial tax liability for those companies and an estimated tax windfall to the federal government in the range of $50 billion to $70 billion over ten years, depending on the timeframe in which the change is phased in.

The move came as no surprise to Kyle Pitsor, head of government relations for the National Electrical Manufacturers Association (NEMA), who has fought off LIFO-killer proposals every few years on behalf of NEMA member companies.

The last time NEMA polled its members on the subject, it found that about 30 percent of NEMA member manufacturers use LIFO to value their inventories. The practice is most used among manufacturers of products whose inputs are subject to volatile price swings, such as wire and cable companies, and is more prevalent among privately held companies compared with publicly held companies, Pitsor told Electrical Marketing. LIFO is even more widely used among electrical distributors than it is among manufacturers.

Removing LIFO would put a huge burden on most electrical distributors and many manufacturers at a time when money is already tight.

“To the White House this offers a revenue-raiser that they believe — mistakenly, we think — will not impact companies’ competitiveness and job growth,” Pitsor said. “But a changeover to FIFO would translate, for a company using LIFO, into a huge increase in tax liability. This is not a good time to raise taxes on small and medium-sized firms using LIFO. It would just dampen these companies’ ability to invest in new jobs, and for some on the margins it could seriously challenge their ability to stay in business.”

NEMA has again taken an active role in seeking to persuade Congress to keep LIFO in the tax code. It sent out call-to-action letters to NEMA members last Wednesday, asking them to contact their members of Congress and the White House to raise their objections and tell them what a repeal of LIFO would mean to their individual companies and their ability to expand and grow, Pitsor said.

Meanwhile the debt-limit negotiations and their expected roll-over into 2012 budget and appropriations fights are keeping Pitsor and his team busy advocating to preserve funding for federal programs that are key priorities for the electrical industry. Among those are programs promoting and supporting the development of a smart-grid, energy storage technologies, electric vehicle supply equipment, solid-state lighting research and advanced energy research projects.

NEMA also is working to educate Congressional staffers about the implications of recent moves to repeal the Energy Independence and Security Act of 2007, or at least its provision for increasing minimum efficiency levels for lighting.

“There has been talk about wanting to repeal those provisions because of a mistaken understanding that incandescent lighting will be banned,” Pitsor said. “We’re telling them they will still have incandescent lighting, but it will be more efficient.”

A bill to repeal that law is expected to be introduced in the House of Representatives as early as next Monday, Pitsor said.