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Auto industry could get boost from Obama tax credits

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Auto industry could get boost from Obama tax credits

Brian J. O'Connor / Detroit News Finance Editor

While many businesses and economists are taking a wait-and-see approach to the Obama administration's plan to pump up to $200 billion into business spending, the auto industry's chief lobbying arm enthusiastically embraced one part of it.

President Barack Obama is expected to ask Congress to let businesses write off 100 percent of their spending on new equipment through 2011 at a speech in Cleveland today. The president also wants to make permanent the tax break for research and development to encourage more long-term spending.

While representatives of Ford Motor Co. and General Motors Co. say they want more details, Obama's call to fix the R&D credit got an enthusiastic response from the Alliance of Automobile Manufacturers, which represents Detroit's Big Three, Toyota Motor Corp. and other automakers. Globally, the industry spent more than $86 billion on R&D in 2008, said alliance spokeswoman Gloria Bergquist.

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"The auto industry is one of the leading centers of R&D in all industries -- even higher than computers and pharmaceuticals," Bergquist said. "Making a permanent R&D tax credit sends us a strong signal that we should invest in a lot of the technology. To the extent it can encourage R&D and generate investment, that translates into jobs."

One effect of the tax credit, experts noted, is that it makes high-paying U.S. research jobs competitive against sending work offshore to lower-cost countries.

The idea behind the tax breaks is to encourage business owners to part with some of the $1.8 trillion sitting in corporate coffers -- or to tap the millions in bank capital waiting to be lent -- and spend it on everything from new computers to new factories. Companies have delayed spending because of economic uncertainty.

The boost in demand from spending ideally would prompt equipment manufacturers to hire more workers, while the R&D tax credit would encourage other businesses to hire more researchers and engineers.

The proposals come on top of Obama's call Monday for an additional $50 billion in spending on infrastructure.

The tax write-off for capital spending could matter a great deal in Michigan's manufacturing economy, said Mike Johnston, vice president of government affairs for the Michigan Manufacturers Association.

"The one thing that's different in manufacturing, and why it's good for the economy, is that it takes enormous amounts of capital investment," Johnston said. "Think of a steel plant or auto plant or cement plant. There are billions of dollars in investment to make those products."

The question is whether manufacturers need new plants and, even if they do, does a tax break now offset the risk of spending in such a weak economy?

Dozens of auto plants have closed during the industry's restructuring, and more are scheduled to be shuttered in the next few years. And low consumer demand means manufacturers of other goods -- from washing machines to toaster ovens -- aren't running their assembly lines day and night to meet the consumer demands that drives nearly 70 percent of the U.S. economy.

"The idea is that it would be cost-effective for a business to buy some of this stuff in advance of when you need it," said Dana Johnson, chief economist for Comerica Bank. "But there's a lot of spare capacity in our economy."

Still, Johnson said, "We have a pretty sizeable segment in our manufacturing sector that would benefit from this."

But accelerating spending by pulling future investments forward into today's economy can have a see-saw effect, such as the big drop in sales that followed government incentives for new cars and homes, noted Peter Cohan, an economic analyst and professor at Babson College in Wellesley, Mass.

"The idea is that the economy needs help now, and the hope is that by the time it expires, regular old private-sector demand will take over and make the economy work," Cohan said.

With the U.S. unemployment rate hovering near 10 percent, businesses won't lay out money today and hope to get it back on taxes tomorrow, noted David Cole, chairman of the Center For Automotive Research.

"If we don't see some potential for growth, I'm not sure how much impact this can have," Cole said. "The economy is too uncertain right now, and cash is the one thing you can count on."

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From The Detroit News: http://www.detnews.com/article/20100908/BIZ/9080374/1148/auto01/Obama-s-tax-credits-may-boost-auto-industry#ixzz0ywQ8BREy

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