Clinton likely to use tax credits to spur investment

December 07, 1992|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- President-elect Bill Clinton is expected t use three letters -- ITC -- to persuade Maryland executive Loren Jensen and thousands of businessmen like him to put their money where it matters most to the economy, in job-creating investments in plants and equipment.

ITC stands for investment tax credits. They are central to the Clinton blueprint for invigorating the economy by promoting new, or accelerating existing, corporate spending.

Exactly how the next administration's ITCs might be shaped is still under discussion by the Clinton transition team, but their inclusion in his promised 100-day economic action program is almost certain. They are strongly favored by Lawrence Summers, chief economist with the World Bank and an influential economic adviser to Mr. Clinton.

Mr. Jensen is chairman and chief executive of EA Engineering, Science and Technology Inc., of Hunt Valley, an environmental engineering, monitoring and cleanup company with 700 employees nationwide.

An ITC would enable him, he said, to increase his spending on equipment next year after a "conservative" investment program of about $1 million this year, which was restrained in part by difficulty in obtaining bank loans because of the credit crunch.

"We would probably translate a tax credit directly into additional equipment purchases for sure," he said, adding: "We don't discard equipment. We add new pieces, and you have to add to the payroll to operate them." Mr. Jensen would like to see a tax credit for research and development as well as investment, saying: "If we could get restoration of R&D credits . . . we would begin to stimulate more R&D in our own laboratories."

Mr. Jensen said his company had used an earlier R&D credit "very aggressively," and its abolition in the 1986 tax reform had "a very direct effect" on his ability to conduct in-house research.

"That's where the cutting edge, competitively speaking, is: to come up with a new type of mouse trap," he said.

So high are the hopes of business executives for new tax breaks that there is widespread suspicion that many investments are now being delayed in anticipation of the introduction of ITCs next year. A plunge of 24.9 percent from September to October in machine tool orders was partly attributed to this wait-and-see attitude in the nation's boardrooms.

"Just the mention of investment tax credits is doing more harm than good to the economy right now because businesses are holding off [buying equipment] in the hopes of getting that credit," said Paul Merski, of the independent Tax Foundation.

Mr. Clinton's advisers have to decide whether the credits should temporary or permanent, universal or targeted, on all investment or a limited percentage.

ITCs were first introduced by President John F. Kennedy in 1962 to stimulate the economy. They applied to all equipment but not to other assets, such as buildings and inventories. They were suspended in 1966 to slow down the economy but were quickly reintroduced in 1967.

The credits were permanently repealed in 1969 as contributing to inflation, and reintroduced as a stimulant in 1971. All this time, the tax credit was 7 percent. In 1975, it was raised to 10 percent and stayed there until the ITCs were abandoned as distorting investment and supply in 1986. Their removal also served Congress' attempt to bring corporate and individual tax rates more into line with each other.

If Mr. Clinton followed a traditional pattern of introducing a permanent ITC, this would promote the long-term buildup of the nation's capital base, a key element in the next administration's desire to revitalize and modernize the U.S. economy. But it could be expensive.

Temporary credits have the attraction of putting pressure on businesses to take advantage of them while they last. This is regarded as an effective way to accelerate investment plans that are already on the books as well as to spur new spending. A company planning to invest $5 million in new equipment in 1995 is likely to advance that spending if it is offered a tax credit that expires at the end of 1994.

Targeting the credits on certain types of equipment or industries would reduce the cost of the tax break and give a boost to selected parts of the economy. The downside is that targeting could distort investment patterns. Giving a break to all investments would be hugely expensive, adding to the deficit.

In his book, "Putting People First," Mr. Clinton advocates "a targeted investment tax credit to encourage investment in the new plants and productive equipment here at home that we need to compete in the global economy."

Sung Won Sohn, chief economist with Norwest Corp., agreed: "I feel this is really the most effective means of stimulating the economy right now. Our conclusion is that investment tax credits are probably 10 times as powerful as cuts in capital gains [tax] when it comes to stimulating actual investment."

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