Background:
The cement and concrete industry, directly and indirectly, employs over 600,000 people in our country and contributes over $100 billion to our economy. With this substantial size, the industry faces complex financial and tax issues. It is governed by a tax code that for 2020 contains almost 10,000 sections. Congress has made significant revisions to the tax code in 1981, 1986, and most recently, with the Tax Cuts and Jobs Act (TCJA) in 2017.
Knowing the cement production process is essential for understanding how the tax code affects the industry and its role in the economy. Cement is manufactured through a tightly controlled chemical combination of calcium, silica, aluminum, iron, and other minor ingredients. These chemicals are commonly derived from limestone, chalk, or marl, combined with shale, clay, slate, blast furnace slag, silica sand, and iron ore. These materials are heated to high temperatures, 2700℉ or more until they liquefy and become clinker. Once cooled, gypsum is added to the clinker, and the product is ground into the fine powder that becomes portland cement.
Cement manufacturing is an energy-intensive process that depends on carefully balanced chemistry and physics. Cement plants run continuously, typically 24 hours a day, seven days a week, and generating and maintaining kilns at the high temperatures required to create clinker requires the combustion of significant quantities of fossil or alternative fuels. The chemical process to convert limestone and other ingredients into clinker is also emissions-intensive, typically generating 50 to 60 percent of the CO2 from manufacturing, making the industry exposed to any potential tax on carbon emissions.
Cement plants are large, complex systems with a sizeable footprint often occupying dozens of acres. Plants can cost several hundred million dollars to build, with the largest plants exceeding $1 billion, including millions of dollars of investment in emissions monitoring and control equipment and associated operational expenses. Plants are typically collocated with large limestone quarries, selected to provide 50 to 100 years of limestone supply. These extensive capital investments, the complexity of the manufacturing systems, environmental controls and permitting, and geologic constraints associated with siting can complicate rapid changes to a business’s tax liability.
Corporate Income Taxes
The United States taxes the cement industry at the top rate of 21% for C-Corporations. Prior to the TCJA, the U.S. Corporate rate was 35%, which was high compared to the current average for the 35 countries in the Organization for Economic Co-operation and Development (OECD) is 24.8 percent. Lowering rates gave cement manufacturers the greater ability to reinvest in their capital and workforce.
Mineral Depletion
Cement manufacturing depends upon a steady stream of minerals like limestone to maintain production. Manufacturers are allowed to deduct a set percentage (5-22 percent, depending on the mineral) of depletion to the gross income derived from extracting minerals. Plainly, this tax code provision allows for minerals to be deducted as a declining resource. Congress has recognized that mineral resources are an important part of the production process that deserve equitable treatment within the tax code.
Capital Cost Recovery
Cement plants are expensive capital investments, and the ability for manufacturers to recover the cost of those investments as quickly as possible facilitates investment in their workforces and plants. The Internal Revenue Service sets a schedule for deducting these investments in equipment. However, certain capital may be fully deducted at the time of purchase or the first year of operation, called full expensing or bonus expensing. The tax code normally allows for 67.7% of machinery to be deducted in its first year, but as a result of the TCJA, the current rate is temporarily 100% through 2021. It will then phase out until 2026. PCA supports making this tax mechanism permanent to support investment in American manufacturing.
Interest Deductibility
With cement plants and their upgrades costing hundreds of millions of dollars, debt financing is a major tool for funding plant construction, maintenance, expansions, and renovations. Further, it is an important tool for a business to survive difficult economic times, such as during the COVID-19 pandemic. Prior to the TCJA, manufacturers could deduct the interest they paid on such debt like any other business cost. Following the tax bill, deductions became limited to 30% of earnings before interest, taxes, deductions, and amortization (EBITDA). Starting in 2022, the amount manufacturers may deduct declined even more by using earnings before interest and taxes (EBIT). To facilitate investments in carbon removal and other improvements to plants, PCA urges Congress to reinstate the previous interest deduction level.