Thursday, February 4, 2010

Bi-Partisan Pushback on Administration's Proposal to Repeal LIFO

Courtesy of yesterday's Bureau of National Affair's cover story:

House Members Raise Bipartisan Questions Over Obama's Call to End LIFO Accounting

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 (41 DTR G-7, 3/5/09). “You brought it back to us. You told me there was a difference of opinion on that, but we had very broad bipartisan support to keep it,” Davis told Geithner.

Similarly, Reps. Devin Nunes (R-Calif.) and John Yarmuth (D-Ky.) also questioned how repealing LIFO would aid the administration's goal of boosting small business activity and creating jobs. Geithner said the administration still believes the change would be a “reasonable policy,” but he promised to work with Congress on the idea. “I know not everybody agrees. That's how this process works. We get to sit down and look at these proposals and figure out what's going to make the most sense,” Geithner told the committee.

By Brett Ferguson

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