Wider definition of `manufacturer' carries promise of lighter tax load

Legislation: Some Maryland companies will get relief for profits earned abroad.

Corporate Tax Breaks

October 15, 2004|By Paul Adams | Paul Adams,SUN STAFF

For years, Baltimore-based architecture and design firm RTKL Associates earned about 15 percent of its profits from overseas projects tax-free, thanks to a federal export subsidy designed to help U.S. firms compete abroad.

Then the World Trade Organization declared the subsidy illegal, leaving RTKL and thousands of other U.S. firms wondering what would happen to their profits from overseas business.

They got their answer this week when Congress declared RTKL - a firm that makes most of its money turning out drawings and plans - a U.S. manufacturer deserving of a tax break.

The design firm is one of dozens of Maryland companies that will benefit from a $137 billion corporate tax overhaul aimed at manufacturers, which Congress now says includes loafer-wearing architects and a broad range of other businesses not typically associated with smokestack industry.

Among those on the list are Maryland electricity producer Constellation Energy Group and engineering firm Bechtel Corp., which has operations in Frederick. Even newspapers - including The Sun - fall under the new definition.

Wendy Messersmith, RTKL's tax director, said that without the new law, the firm would have taken a severe hit.

"We would have watched our worldwide effective tax rate go up significantly," she said. "It [the export subsidy] has definitely benefited us and has been an incentive for us to look to other countries for business."

The proposed tax break comes at a critical time for Maryland manufacturers, facing intense competition from overseas producers. The state's manufacturing base has shrunk to about 7 percent of all jobs, versus 14 percent nationwide.

Though still foggy on the details, several manufacturers in the state said the new law could mean the difference between making money and losing it.

"Even $10,000 [in savings] is a big deal to a small guy," said Scott Macdonald, a partner in Maryland Thermoform Corp., a producer of plastic packaging components used in everything from cosmetics to electronic housewares.

Founded in 1972, the Baltimore company has 75 employees and less than $10 million in annual sales, making it vulnerable to low-cost competitors.

"It [the tax cut] might make the difference between buying that new milling machine or not this year," Macdonald said.

Anything that lowers costs for manufacturers will help U.S. producers compete more effectively with overseas companies that pay fewer taxes and have lower payroll costs, said Mike Galiazzo, executive director of the Regional Manufacturing Institute, a Maryland trade group.

"Manufacturers are struggling to survive in this country," he said. "Any break in the cost of operations, I think, is something that's going to serve more than just the board of directors, so to speak."

The bill shrinks the maximum 35 percent corporate tax rate paid by manufacturers to 32 percent over the next five years. The legislation also contains a provision that allows corporations to bring profits earned abroad back home at the bargain tax rate of 5.25 percent. Under current tax code, the government takes a 35 percent cut.

"If you have a Maryland manufacturer that is profitable, it will indeed help reduce the tax bite that they will have to pay," said Daniel L. Goldberger, a partner with accounting firm Grant Thornton, whose clients include numerous Maryland manufacturers.

With details lacking on how the legislation will be implemented, the unanswerable question at this point, he said, is how much Maryland businesses will benefit.

Ed Stoltz, vice president of tax matters for Constellation Energy, said the new legislation will mean tax benefits for the company's power-generating business, which has historically not been classified as a manufacturing concern. Constellation paid $134 million in federal taxes last year, though only a part of that was related to its power generating business.

"We're creating something, just like other manufacturers are, and it's nice to see that acknowledged in the law," he said.

The money Constellation makes by distributing electricity over its power lines is excluded from the tax break. And Stoltz said the proposed law contains a number of caps that could reduce the benefits the company receives.

"We'll certainly be looking at the cap on benefits," he said. "It could mitigate [benefits to] not just us, but other manufacturers, as well."

Towson toolmaker Black & Decker Corp., which has significant foreign operations, probably won't see much, if any, benefit because it will be mostly offset by the loss of export subsidies, said Barbara Lucas, a company spokeswoman.

The company could theoretically take advantage of the new tax provisions to bring profits back to the United States at the reduced tax rate of 5.25 percent. But Lucas said the firm has so far reinvested all of those profits in its overseas businesses.

"For the foreseeable future, we expect to use this foreign cash to fund foreign operations," she said.

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