Iowa remains front and center on the US
political scene with the first primary of the election season occurring here on
February 1st. The “Hawkeye” state is important to Republican candidates in
large part because historically it has been home to a core conservative voting
group and because it has been crucial for initiating momentum as the primaries
get underway. Iowa has a strong, diverse economy that boasts a low unemployment
rate, a strong manufacturing base, and a vibrant financial sector. The next
president and his or her policies are likely to have a significant impact on
Iowa’s economy as well as that of the country as a whole.
According to the latest pols on Real
Clear Politics, the top three Republican candidates in Iowa are: Donald Trump
27.8%, Senator Ted Cruz 26.7%, and Senator Marco Rubio 11.7%. In this article,
we’re going to review the key components to Donald Trump’s economy plan and
their impact on Iowa’s economy. While the tax reform component of Trump’s plan
would help most businesses in the state, the protectionist trade component would
likely reduce sales dramatically for a range of businesses and hurt Iowa’s
exports to her top trading partners as Canada, Mexico, and Japan. Trump has
stated he is in favor of the renewable fuel standard mandate and called for a
higher ethanol mandate.
Trump’s Plan on Tax Reform, Regulation, and Trade
Unlike past presidential campaign years,
2016 appears to be a year in which most of the Republican candidates have
agreed on reforming the tax code and they have released plans on how to do so.
§ Reduce the corporate
income tax rate to 15 percent from 35 percent.
§ Limit the tax rate on
pass-through business income (sole proprietorships, S corporations, LLCs, and
partnerships) to 15 percent.
§ End tax deferral on
overseas corporate income.
§ Enact a one-time
repatriation of tax of 10 percent on all foreign profits currently retained in
foreign countries.
§ Eliminate all other
corporate tax expenditures.
§ Eliminate the corporate
Alternative Minimum Tax.
§ Substantially reduce
the deductibility of interest expenses.
We need to remind ourselves that even
were Trump to be elected, these proposals would be far from realized: all tax
bills of course need to originate in the House and be approved by the Senate.
Given the recent acrimony between the Legislative and Executive branches and
between the House and Senate, it could take quite some time for such a bill to
become law.
On trade, we’re going to take what Mr.
Trump has said during the debates and what is on his website as his current
policy statement.
Here are the major components of Trump’s
trade program:
§ Kill the Trans Pacific
Partnership (TPP) trade deal.
§ End NAFTA.
§ Impose 35% tariff on
imported autos and auto parts from Mexico.
§ Impose 20% tariff on
imported goods.
§ Impose a 15% tax on
outsourced jobs.
§ Declare China a
currency manipulator and begin the process of sanctions.
One again, even as President, the
termination of NAFTA, like that of all treaties needs to be approved by the
Senate, which may well be harder to persuade than the American electorate.
Lastly on energy, Trump has not released
a full plan to review and therefore all analysis stems from his comments made
during speeches or debates. At a January 2016 speech hosted by the Iowa
Renewable Fuels Association, Trump stated the Environmental Protection Agency
(EPA) ought to follow the ethanol volumes Congress set in 2007 (15B gallons per
year or approximately 10% of gasoline volume). According to The Hill, “Trump
has generally very supportive of the ethanol law, saying he is “100 percent”
behind the ethanol industry, a powerful force in Iowa. “As president, I will
encourage Congress to be cautious in attempting to charge and change any part of
the RFS,” he said.”
Impact on Iowa
To understand the impact of these plans
on Iowa’s economy, we’re going to look at these top areas: manufacturing,
finance, and insurance, and exports (includes agriculture).
On the business tax reform side, Trump’s
plan for lower corporate and pass-through tax rates would enhance economic
growth in Iowa. For those companies in the top three sectors paying the top
nominal 35% tax rate, they would see a 57% drop in their tax costs. In the
United States, the median effective corporate tax rate is 29% and consequently
the reduction in tax costs would be 48%. The Trump rate cut would help offset
Trump’s proposed termination of the tax code’s provision for the tax deferral
on overseas corporate profits, which would add at 15% new tax on foreign
profits and create a one-time 10% tax on past earnings held overseas. Moreover,
the reduction in the overall rate would help those losing other corporate tax
deductions in the US code like some of those involving domestic manufacturing and
the R&D tax credit.
Trump’s current plan would limit the
deductibility of interest expenses without stipulating what the limit might be.
Nearly all companies using debt would see an increase in their expenses and a
reduction in profits. (This would likely lead to a major change in the way US
companies are structured as it diminishes many of the advantages debt might
have over equity within a company’s financial structure.) By cutting the cost
of investment through lower tax rates on corporations and pass-through
entities, the Trump plan will result in an estimated 29% increase in the size
of the capital stock. This will increase productivity and economic growth. (Tax Foundation).
Summing this up, Trump’s business tax
reform plans would benefit Iowa’s top three business sectors overall. However,
there would be losers (domestic manufacturing, E&D tax credit and debt) as
well as winners (high tax rate entities). Clearly manufacturing (reduction in
tax expenditures) and financial firms (debt issuers) would see a significant
change due to these measures.
From the trade side, there would mainly
be losers to the export sector from Trump’s stated plan. Iowa’s export sector
was over $15 billion in 2015 and comprised of 8.9% of state GDP. According to
the US Census Bureau, the top exports were:
|
Description
|
2014
(millions of dollars)
|
|
|
1
|
CORN
(MAIZE), OTHER THAN SEED CORN
|
1,161
|
|
2
|
TRACTORS,
NESOI
|
966
|
|
3
|
MEAT OF
SWINE, NESOI, FRESH OR CHILLED
|
530
|
|
4
|
MEAT OF
SWINE, NESOI, FROZEN
|
518
|
|
5
|
SOYBEANS,
NESOI
|
515
|
|
6
|
SOYBEAN
OILCAKE & OTH SOLID RESIDUE, WH/NOT G
|
450
|
|
7
|
HERBCD,
ANTISPROUT. PROD. & PLANT-GRWTH REG.
|
374
|
|
8
|
CIVILIAN
AIRCRAFT, ENGINES, AND PARTS
|
284
|
|
9
|
ALUMINUM
ALLOY RECT PLATES ETC, OVER .2 MM TH
|
245
|
|
10
|
MECH
FRONT-END SHOVEL LOADERS, SELF-PROPELLED
|
222
|
|
11
|
BREWING
OR DISTILLING DREGS AND WASTE, W/NT P
|
210
|
|
12
|
MEAT OF
BOVINE ANIMALS, BONELESS, FROZEN
|
203
|
|
13
|
MOLYBDENUM
ORES AND CONCENTRATES ROASTED
|
196
|
|
14
|
ETHYL
ALCOHOL & OTH SPIRITS DENATURED ANY STR
|
176
|
|
15
|
MEAT OF
BOVINE ANIMALS, BONELESS, FRESH OR CH
|
156
|
|
16
|
OFFAL
OF SWINE EXCEPT LIVERS, EDIBLE, FROZEN
|
152
|
|
17
|
SPECIAL
PURPOSE VEHICLES, NESOI
|
149
|
|
18
|
COMBINE
HARVESTER-THRESHERS
|
144
|
|
19
|
COMBINED
REFRIGERATOR-FREEZERS W SEPARATE DOO
|
135
|
|
20
|
AGRIC,
HORT, FOREST, BEE-KEEPING MACHINERY NE
|
133
|
|
21
|
MECH
SHOVELS, EXCAVATORS AND SHOVEL LOADERS N
|
127
|
|
22
|
ANIMAL
FEED PREP EXCEPT DOG OR CAT FOOD, RETA
|
124
|
|
23
|
FRUCTOSE,
NESOI & SYRUP, OV 50% FRUCTOSE IN D
|
118
|
|
24
|
GRAIN
SORGHUM, NESOI
|
118
|
|
25
|
ENGINE
AND MOTOR PARTS, NESOI
|
115
|
The top 5 destinations: Canada (30.6%),
Mexico (15.3%), Japan (7.8%), China (6.3%), and Brazil (3.3%). NAFTA countries
comprise 45.8% of Iowa’s exports.
Trump’s plan to end NAFTA, end TPP,
impose import tariffs and name China as a currency manipulator would likely
lead to a retaliation of the same from all of the US trade partners affected.
In turn, this could lead to a slowing of global trade and slowing of demand for
Iowa’s exports. While it’s unlikely this would lead to a 1930s Smoot-Hawley Tariff Act, economic response, global trade is
already slowing significantly and Trump’s plan could exacerbate its
deceleration.
From corn to tractors to civilian
aircraft, the Trump trade agenda would negatively impact Iowa and lead to a
slowing of economy. If his trade plans were enacted, the global economic damage
would have the potential to offset all of the positives from his tax reform
plans.
On ethanol, Trump supports both the
mandate and advocates increasing it. For corn growers and ethanol producers,
this is very positive and will continue the use of ethanol in gasoline
production. However, Trump’s plan to increase production of ethanol may cause
negative secondary effects. First, corn production is already at a high level
and to produce more corn would likely mean taking other grains out of the
field. This could lead to higher prices for those grains. As well, the majority
of corn grown goes to feed stock and the increased demand for corn would likely
keep the price higher than otherwise. This
would increase the cost of corn to beef, dairy, and poultry producers. Lastly,
the emphasis on energy production via a government mandate means the Iowa
economy becomes more dependent on both government spending and the price of
oil. Given the dramatic increase in US production and the decrease in global
prices for oil, this reliance on energy production will make the Iowa economy
more volatile.
Points to Keep in Mind for Iowa
Iowa has a vibrant, diverse economy that
is a microcosm of the entire US economy. Therefore, changes to the US tax code
and trade matter significantly more to the state. As a candidate, Donald Trump
has stated his goal to reform the tax code and to change US trade policy. While
the tax reform plan would generate economic growth, the trade plan would take
it away and potentially cause a global slowdown if other nations followed in a
similar way. Despite the difficulty in getting his trade agenda through Congress,
the announced trade policies would likely generate a negative signal to US
trade partners and the markets, should Trump become president. Finally on
energy, Trump advocates for increases in both the RFD and ethanol production,
which is positive for corn growers and ethanol producers. While in the short
run this will have a positive impact on Iowa, these policies may increase the
cost to other food producers and make the Iowa economy more Volatile.
http://affluentinvestor.com/2016/01/3942/
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