Jade West, the Senior Vice President-Government Relations for the National Association of Wholesaler-Distributors and head of the LIFO Coalition, has written a guest post for Petro Primer:
On September 23, the Center for American Progress (CAP) published a report titled The Growing Consensus to Improve Our Tax Code and listed the repeal of the “Last-In, First-Out” (LIFO) accounting method as one way to improve the business tax code. They repeat an old, tired and inaccurate assertion that oil companies are the major beneficiaries of the LIFO accounting method.
It is true that the energy industry, including refining and petrochemical manufacturers, use LIFO. But so do hundreds of thousands of companies in other industries – manufacturers, wholesaler-distributors, retailers and others; grocers, auto dealers, plumbing and heating suppliers, jewelers, distillers, electrical suppliers, beer and wine distributors, convenience stores, pharmaceutical companies… the list goes on and on. It is simply false to suggest that only oil companies would be hurt if LIFO were repealed.
LIFO is a GAAP-accepted inventory accounting method that has been in use and a part of the U.S. tax code for 75 years. According to a Georgia Tech study, more than a third of all companies that maintain or sell inventory use LIFO.
LIFO is NOT a “tax loophole” or a tax expenditure.
LIFO is used by companies that sell products that generally rise in price over time. Without LIFO, those businesses would be paying taxes on the illusory “profits” that result from price inflation. There is no “trick” to using LIFO, as CAP has suggested. LIFO allows companies to generate after-tax income with which to purchase the replacement inventory that is necessary for them to remain in business. If companies on LIFO were not able to use it, they might not generate enough after-tax revenue to purchase replacement inventory. Some would have to borrow or cut back on inventory levels due to inflationary cost increases; others would simply go out of business.
LIFO and “First-In, First-Out” (FIFO), do the same thing, but FIFO benefits companies that sell products that tend to decline in price. When you think FIFO, think smart phones. The iPhone 6 you just purchased for $300 will cost much less in a year or two as Apple develops new and improved versions. However, FIFO does not work for everyone’s business model; if it did, businesses would not have been using LIFO for the past 75 years. In fact, businesses using LIFO risk paying HIGHER taxes in situations where their inventory costs decrease.
The Center for American Progress claims there is consensus and support for repealing LIFO. They clearly did not ask the huge number of companies which rely on LIFO to remain profitable if they support repeal. And they apparently did not see that 113 members of the House of Representatives recently asked Ways and Means Chairman Dave Camp to remove the LIFO provision from his tax reform draft. Elementary math indicates that when more than a quarter of a population (in this case, the House of Representatives) opposes a policy (repealing LIFO), there is far from a consensus on that policy.
I can assure you that the more than 125 organizations and businesses in the LIFO Coalition do not believe there is anything close to consensus supporting LIFO repeal. Nor do the wide and varied industries which use LIFO believe this is primarily an oil and gas tax benefit. As the head of the LIFO coalition, I can vouch for the fact that maintaining LIFO is critical for wholesaler-distributors, as well as for retailers and manufacturers across the supply chain.
Just because the oil and gas industry uses a specific tax provision or accounting method should not qualify it for repeal, as CAP has suggested. The tax code should not be used to punish or reward specific industries, and in the case of LIFO, the inappropriate wish to punish the oil and gas industry would cause collateral damage to many other industries, resulting in broad economic harm and job losses. It is inaccurate – at best – for CAP to claim there is a consensus for such a flawed policy.
I certainly hope that as Congress continues to consider comprehensive tax reform they understand the importance of LIFO to all of the industries and businesses that use LIFO.