Manufacturing Equipment

OTTAWA - The federal government should not further extend a temporary tax break that encourages the struggling manufacturing sector to invest in new productivity enhancing machinery and equipment, a business-backed think-tank says in a report that was immediately challenged by the industry itself.

It was right to allow manufacturers to writeoff such investments over a relatively short two-year period rather than over the full life of the investment, a tax incentive introduced in the 2007 federal budget that initially was to run for two years until the end of 2009, the Conference Board of Canada says. And it was right to extend that measure in this year’s federal budget for a third year to the end of 2010.

“Nevertheless, the conference board believes that this exceptional, tax-based assistance for investment should be allowed to lapse at the end of the planned period,” it adds in the analysis released Wednesday.Ditto for a parallel measure introduced by the Ontario government this year and that runs through 2010-11, which the board noted was also a welcome alignment of federal and provincial tax policy.

“It is appropriate for the federal and Ontario governments to help companies adjust to the extraordinary rise in the value of the dollar over the past six years,” said the board’s chief economist Glen Hodgson. “But making these measures permanent would distort investment toward the manufacturing sector and away from other sectors of the economy-which may lower Canada’s productivity growth in the long run.”

While the question for the two levels of government is whether the lifespan of the tax incentives gives manufacturers enough time to make the necessary investments to improve their productivity and competitiveness, the evidence to date suggests that “many manufacturers are taking advantage of the measure,” the report says.

Outside the auto sector, which is bearing the brunt of the adjustment to the strong dollar and the slump in the U.S. economy, investments in new machinery and equipment by other sectors, such as aerospace, food manufacturing and electronic equipment are projected to post double-digit growth this year and next, the board said.

“If governments wish to help specific manufacturing sectors and their employees to adjust to new economic realities, they should target any assistance to the particular circumstances of the sectors in question, not offer broad-brush solutions,” it said.

“Allowing the three-year window to close would also add credibility to government policy decisions aimed at aiding adjustment by businesses to very specific shocks,” it added.

The conference board’s recommendation, however, was flatly rejected as wrong headed by Jayson Myers, the president and chief economist of Canadian Manufacturers & Exporters, which sought to have the tax incentive extended further to five years.

“First of all, they are overestimating the strength of investment in the Canadian manufacturing sector … given the economic circumstances right now,” Myers said.

Many manufacturers’ bottom lines have been tightly squeezed by the strong dollar and the weakness in their largest export market, the U.S., and they haven’t had, and won’t have, the cash flow to take advantage of the tax incentive before it ends, said Myers.

Further, large capital investments often need several years of lead time, Myers said, suggesting the board’s analysis is the product of ivory tower thinking and not related to the real world of business.

Myers also challenged the think tank’s claim that if the tax incentive was long-term it would result in a shift in investment to that manufacturing from other sectors and hurt overall productivity.

“This is not about investing in manufacturing versus any other sector, it’s about investing in productive assets, in equipment that produces things of greater value,” Myers said. “And manufacturing equipment does that.”

The wars in Iraq and Afghanistan have been good for the Rock Island Arsenal, business leaders at a forum Tuesday sponsored by DavenportOne were told by brass at the installation.

Since Oct. 1, 450 new employees have been hired by the Joint Manufacturing & Technology Center, and the operation is twice the size it was five years ago, Col. Craig Cotter, commander of the division, told the crowd of 150 who gathered at the Radisson Quad-City Plaza Hotel in Davenport.

“We’re manufacturing a lot more stuff now than we have in recent memory,” Cotter said. “Where five years ago, $100 million in new orders in a week would have been good business, last week we had $430 million in new orders.”

The division, which makes parts for military equipment, is also doing things it has never done or has not done in years, Cotter said. New operations include making armor kits for military vehicles. It is also making replacement parts for small arms, something it hasn’t done in 25 years.

The Base Closure and Realignment Commission, or BRAC, which in 2005 decided to transfer more than 1,600 jobs away from the Arsenal, also agreed to bring the 1st Army from Georgia and the River Bank Army Ammunition Plant from California to Rock Island by 2011, said Joel Himsl, garrison manager.

Those two operations should bring in 650 military and civilian personnel, Himsl said.

Iowa U.S. Sen. Tom Harkin told the gathering that he and other members of the Iowa and Illinois congressional delegations are trying to bring the Army Expeditionary Contract Command to the Arsenal, a move that could result in a few hundred new jobs. In March, the delegation sent a letter to Army Secretary Peter Geren urging the placement as a good fit with the Army Sustainment Command already on the island.

With war on two fronts, the Arsenal is busy turning out material in support of U.S. troops, Harkin said. As the fighting winds down, Department of Defense priorities will change and shift away from manufacturing. That will make it more important to have agencies with other missions stationed there.

“For the future, I want to keep the Arsenal out of the jaws of the BRAC process,” Harkin said.

In the manufacturing division, Cotter said, he wants to move away from strict production of steel products and branch out into “more exotic alloys, composites that are lightweight. That is something we need to get good at.”

The division has a solicitation “out on the street” for a furnace that can handle titanium, a metal that can be formed into alloys with other metals to produce strong, lightweight, corrosion-resistant materials for aerospace, military, industrial and other uses, Cotter said.

In support of the Arsenal, the community must continue to look after the needs of transient soldiers and employees and market the Quad-Cities as a package so that military personal and contractors will want to locate here, some of the panelists said.

“With the 1st Army coming in, we have to show how welcoming we are and we have to accept the mobility that comes with that deployment,” said Jyuji Hewitt, deputy commander of the Arsenal’s Joint Munitions Command. “We have to make conditions so that they may want to stay here when they retire.”

Col. Robert Sinkler, commander of the U.S. Army Corps of Engineers Rock Island District, said it is important to make the outside world realize that the Arsenal is located in a metropolitan area of 350,000, with everything that a large city has to offer, instead of in a city — Rock Island — of 40,000.

“When people think of the Rock Island Arsenal, they need to think of a community of nearly a half million people,” Sinkler said. “We need to make the Rock Island Arsenal a place where people want to put things. The more we can market the Quad-Cities as on the cutting edge of technology, the better it will be.”