Corporate jet tax hike hits ailing plane makers
WASHINGTON—President Barack Obama aims at corporate fat cats when he calls for a tax increase on companies that own private jets. But he hits an American manufacturing industry that is just starting to show life after years of slumping sales and thousands of job losses.
Most business aircraft are made in America, and the companies and unions that produce them don't appreciate the president's rhetoric or his plan to raise taxes on private jet owners. They fear that both will hurt sales, costing them even more jobs.
"I think it's just insulting," said Steve Rooney, president of District 70 of the International Association of Machinists and Aerospace Workers in Wichita, Kan. "He acts like it is just a luxury for somebody to own a business jet when they're used as tools. And I don't think he realizes how many people that this industry employs and how much revenue is brought in here from those types of aircraft."
Obama's proposal would scale back a tax break enjoyed by the private jet owners but not by commercial airlines. The administration has acknowledged it is more symbolic than substantive: The tax increase would raise $3 billion over the next decade, but that's a tiny fraction of the $4 trillion in deficit reductions that economists say are needed to put the government and U.S. economy on sound footing.
Nevertheless, Obama hammers away at the issue on a regular basis, using it to portray Republicans who oppose tax increases as defenders of the rich, the kind of people who fly around in private jets. Obama said this week he wants to get rid of "egregious loopholes that are benefiting corporate jet owners or oil companies at a time where they're making billions of dollars of profits."
The proposal, however, illustrates how difficult it is to limit even the most obscure tax deduction: All tax breaks benefit somebody, and some have deep tentacles that reach far beyond the high-flying executives targeted by the president.
How corporate jets are treated by tax law reaches deep into the heartland, places like Wichita, Kan., where companies like Cessna, Hawker Beechcraft and Bombardier Learjet have been manufacturing private aircraft for years.
"We are one of the few remaining manufacturing industries left in this the country, and it would seem to me it would be important to help us grow, not put impediments to our growth in place," said Shawn Vick, Hawker Beechcraft's executive vice president.
Hawker Beechcraft went from 9,000 workers in 2008 to about 6,000 today, while Cessna cut its workforce in half, to about 8,000. In all, private plane manufacturers have laid off about 20,000 workers since 2008, according to the General Aviation Manufacturers Association.
They now employ 120,000 to 130,000 workers, and they support a business aviation industry that employs 1.2 million, said Katie Pribyl, spokeswoman for the manufacturers association.
Industry analyst Brian Foley said business aviation is starting to show signs of recovery, but added, "It's still a little wobbly-kneed right now."
"Anything to make the purchase less desirable is concerning to the industry because we're still trying to get our bearings," said Foley, who runs Brian Foley Associates in Sparta, N.J.
Sales are down by more than half since 2008, though there has been a small rebound so far this year. In 2008, U.S. manufacturers shipped 3,079 general aviation planes, Pribyl said. They shipped 1,334 planes last year.
In addition to the poor economy, many in the industry believe they have been tainted by unfair attacks on the image of corporate travel. Auto executives were derided for flying in private jets to Washington to lobby for government loans, and banks have been criticized for their corporate planes after taking government money.
"The president is promoting a caricature of the industry that is very much at odds with reality of who the industry is," said Ed Bolen, president and chief executive of the National Business Aviation Association. "Most of these planes are operated by small and midsized companies."
Obama's proposal would change the complicated rules that businesses must follow to deduct the cost of buying an aircraft from their taxable income. For tax purposes, the law currently distinguishes between private aircraft used by executives and commercial aircraft used by airlines.
Under the decades-old law, corporations that buy private jets must gradually deduct the cost over five years. Airlines, however, must spread the deductions for buying commercial airliners over seven years, giving them smaller tax breaks up front and making them wait longer to realize the full savings. Obama wants companies that buy private jets to follow the same seven-year schedule as the airlines.
The timing of the deductions is important to companies. If they can claim bigger savings up front, businesses can improve cash flow and use the money to generate additional revenue. Lengthening the depreciation schedule is considered a tax increase by both private analysts and government tax writers.
Industry experts said the tax increase probably wouldn't be the deciding factor in whether a corporation buys an airplane. But it could affect when they buy it and how much they are willing to spend, said Gary Horowitz, an aviation and tax attorney at Wiley Rein LLP, a law firm based in Northern Virginia.
"This is an expense that makes it incrementally more expensive to own an aircraft," Horowitz said.