Life Without the Tax Credit

Lyndon Johnson's anti-inflation package unveiled last week (see THE NATION) received a mixed reaction among the businessmen whom it will immediately affect. Most were relieved that the President had finally taken some kind of action to cool the economy. But they also felt that, in an election year, industry had been singled out to bear the main burden imposed by Johnson's request for a suspension of the 7% investment tax credit.

Four years ago, when he was Under Secretary of the Treasury, Henry H. Fowler argued forcefully for congressional approval of the investment tax credit; by this means, businessmen could deduct from their corporate tax return 7% of the cost of new equipment. Since its introduction, the credit has meant $8 billion in savings for business, and it has helped spur capital spending from $37.3 billion in 1962 to an estimated $60.9 billion this year.

As recently as last February, Secretary of the Treasury Fowler still felt the same way. He urged the Senate Finance Committee not to tamper with the capital investment tax credit. "We feel," he said, "the investment credit is a sound, long-range measure in that its basic purpose was to produce an incentive to increase productive capacity. An increase of productive capacity, and an increase in supply, is one of the best answers to increased demand or inflationary tendencies."

Feeling Foxed. Remembering Fowler's words, many businessmen felt foxed last week when President Johnson cited "an exaggerated boom in business investment" and included a 16-month suspension of the credit among his emergency anti-inflationary measures. "A mistaken choice of remedies," said U.S. Steel's Chairman Roger Blough.

Part of the pique stems from the fear that, once suspended, the investment credit may never be restored. Another part is due to the loss of earnings the suspension will involve. Bethlehem Steel last year counted $20.6 million, or 14% of its earnings, as a direct result of the 7% credit. Airlines, with over $4 billion in new equipment on order, will hesitate before ordering more. TWA, which only last week gave Boeing orders for $410 million in new jets, is now faced with an unexpected reduction in profits because the Administration has requested that the credit suspension be retroactive to Sept. 1.

Forced Postponements. Beyond this, many a businessman felt that the credit suspension was unnecessary: the scarcity of money and higher cost of borrowing it, as well as rising construction costs, are already forcing postponements. G. C. Murphy Co., the variety-store chain, reported for instance that construction of 25% of its proposed new stores is being put off because shopping-center operators cannot get building money. The Securities and Exchange Commission and Commerce Department last week released a survey that shows planned capital spending 17% above last year's total; the survey marked the first quarter since September 1963 that estimates of spending have not been raised from the previous quarter.

Still, even without the investment credit, a massive amount of capital spending will be undertaken. Some of it is based on expanding markets. Phelps Dodge reported that it was going ahead with a $100 million copper mine development program in New Mexico because "our customers are waiting." Pittsburgh Plate Glass has a $125 million program under way to build new chemical facilities because there is a solid, steady demand for such output; a $37 million chlorine and caustic-soda plant at Lake Charles, La., was announced last week in the midst of the furor over the Johnson tax program. Anheuser-Busch has just opened a fifth brewery costing $30 million in Houston and will spend about $50 million on a sixth in Columbus.

Yet much capital spending today is not merely to broaden markets, but to replace costly old plants with automated new ones, or introduce some of the refinements of the research and development on which business spends $24 billion annually. The steel industry will lay out $2 billion this year, much of it for basic oxygen furnaces, continuous casting mills and other new technology rather than to increase capacity.

Some industries, notably airlines and railroads, half hope that they will be exempted when the President's legislation is voted upon. But House Ways and Means Committee Chairman Wilbur Mills, convinced that the measure is necessary, has decided on no exceptions. Businessmen can only live with it and hope, like the financial community, that the measure will provide at least a psychological remedy.

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