There is attached hereto a copy of the mentioned study for reference purposes. 6. What is the attitude of the Department of Energy in matters such as these? The Department of Energy supports the concept of "worldwide" procurement and encourages such policy. In a similar course of action it was stated "We believe that discussions with foreign firms may be a prudent course of action due to the estimated cost-and potential for significant savings." Further, under loan guaranties DOE takes the position this relationship does not give them "authority over project equipment procurement activity" and therefore they are helpless in this situation. They view this as a private venture but do acknowledge they are obligating U.S. Government funds. Also DOE insists that no more than 7 percent of the installed costs (the ANG Plant) are projected to go for foreign sources”. That small percentage still multiplies out to $100 million going overseas! If we assume a more realistic 10 percent figure, then we have a total of some $140 million U.S. dollars going "worldwide". Applied to the projected expenditure for the total Synfuels program, should this percentage prevail this figure becomes a whopping $8.8 billion of overseas purchases. This demonstrates the impact on our economy. How many jobs would that sum provide? According to current reports DOE is about to commit to ANG a loan guaranty of some $1.4 billion being the estimated cost of the plant. It would seem reasonable that the DOE should stipulate that the economic and social impact upon U.S. industries and workers must be considered before offshore procurement is approved. CBI's interest is based upon the belief that a viable and workable solution to this problem must be forthcoming to support the Synfuels program now and in the future. CBI's lost contract brings into focus at the start of the Synfuels program the impact on the people and the economy. This may be only the beginning, even though major industries have already been crippled or destroyed. That trend will continue until something is done about it. We don't want this to happen to CBI and others in our industry. We do not propose nor would we support a ban on foreign competition, but we do insist that U.S. industry be allowed to compete for the jobs on a fair and equitable basis. We do not ask for subsidies but we object to subsidization of our foreign competitors when taxpayer money is backing the Synfuel program. Although we do not desire to impede the progress of the ANG plant, those concerned with the project should recognize that this is not an isolated instance but rather a matter of continuing concern and they should act accordingly. Mr. Chairman and Members of the Committee, in my experience I have never before witnessed the anger and disgust, or the desire to act, exhibited by our employees, shareholders and others that came forth when they learned that "energy independence" may not mean more jobs and business for Americans. They want a workable solution now. Thank you for the opportunity afforded me to present this most important matter. APPENDIX B THE LIBRARY OF CONGRESS, CONGRESSIONAL RESEARCH SERVICE, Washington, D.C., February 28, 1978. To: Hon. John Heinz III. Subject: Analysis of S. 2318, the Buy American Act. In reference to your letter of January 24, 1978, we have carefully examined the data regarding the effects of the Buy American Act. Regarding your first question, "What is the tax effect of purchasing goods from American suppliers rather than foreign suppliers," we have roughly estimated the ultimate tax effect using the following assumptions: 1. $1,000 the amount of the original domestic procurement; 2. 1.7 the multiplier (how many times the original expenditure increases the GNP). Estimates of the GNP multiplier vary from 1.5 to 1.7; we used the high estimate for this analysis; 3. 10 percent=non-farm business profits before tax as a percent of sales; 4. 48 percent=the marginal corporate federal income tax rate; 5. 20 percent the average federal personal income tax rate; 6. 65 percent of non-farm business profits are taxed at the corporate rate and 35 percent at the personal income tax rate (about the percentages that corporate profits and non-farm proprietors' income represent); 7. About 90 percent of the total procurement minus corporate profits represents wage and salary payments (the remainder is rental and net interest); 8. 11.7 percent=social security tax on both employers and employees; 9.4 percent average state sales tax; and 10. Since states and localities do not collect sales taxes on their own procurements, state sales taxes apply only to the multiplied effects of the procurement ($700 in our example). Also, only about 70 percent of expenditures bring in sales tax revenues (due to exemptions by many states and localities on food purchases, certain services, etc.). Calculating the tax revenues for a $1,000 procurement: $1,000×1.7 (the multiplier)=$1,700. $1,700×10 percent=$170 non-farm business profits before taxes. $170×65 percent 48 percent=$53 corporate profits taxes. $170x35 percent×20 percent=$12 taxes on unincorporated non-farm business income. $1,700-$170=$1,530. $1,530×90 percent x 11.7 percent=$161 social security tax payments. $1,530×20 percent=$306 personal income tax payments on wages, salaries, rent and interest. $700×70 percent×4 percent=$20 state sales tax. Summarizing: Corporate profits taxes... Taxes on unincorporated non-farm business income Social security tax payments..... Personal income taxes on wages, salaries, rent and interest. Total taxes per $1,000 domestic procurement.... $53 12 161 306 20 552 The $552 in tax revenue added per domestic procurement of $1,000 is probably an overestimate because the foreign procurement it replaces often contains many American-made components, which are currently being taxed. For example, a Portuguese firm recently was awarded a contract for railroad cars, but only the shell was made abroad-all the components were U.S. produced. Your second question was, "How much would be paid in primary (i.e., unemployment compensation) and secondary (medicaid, welfare, etc.) benefits by Federal, State and local sources if a foreign purchase resulted in the loss of American jobs?" The variation in unemployment compensation, medicaid and welfare payments among States, as well as the virtual impossibility of knowing how many of the unemployed quality for these benefits, made it impossible to estimate the amount of government payments made to the unemployed if a foreign purchase resulted in the loss of American jobs. Regarding your third question, "What is the effect of a domestic versus foreign procurement on the Gross National Product," the effect would depend on whether or not the economy is at full employment. If the economy were at full employment, a domestic purchase would only increase price levels, leaving the real GNP (the GNP in constant-dollar terms) unchanged. If, however, unemployment and idle capacity were widespread, the real GNP would increase by $1,700 for a $1,000 domestic procurement ($1,000 × the multiplier of 1.7 discussed previously). In reality, the change in GNP would probably be somewhere between these two extremes. In answer to your fourth question, "What additional cost would be incurred by Federal, State and local governments if the bill were enacted,” we have no data on which to base an estimate, nor have we been able to discover any aggregate data in any other government agencies. ARLENE WILSON, Analyst in International Trade and Finance. CHICAGO BRIDGE & IRON CO. The purpose of this display is to show the net cost to the U.S. Government of purchasing goods from foreign sources as opposed to purchasing from U.S. sources. Any U.S. Government expenditure of funds for goods and services with U.S. companies produces revenue return to the Government in the form of taxes paid on income earned from the sale of these goods and services. Additionally, placing these funds into the U.S. economy where a company will be paying wages and purchasing other goods and services will produce additional tax revenues to the Government through the feedback effect. Therefore, we can assume that the cost to the Government for the goods purchased is not the initial purchase price but instead that purchase price less the tax revenues that will be initiated and generated by the purchase. Compare this to a purchase from foreign sources where the expenditure is placed in a foreign economy with no opportunity for U.S. taxation. Here, we will not comment on other factors such as the impact on our balance of trade, reduced number of jobs for the labor force or reduced capital investment. The attached chart indicates the flow of funds when the Government purchases from a U.S. company. For these illustrative purposes we have utilized the following assumptions: Average return on sales before tax of 10 percent. Corporate income tax rate on incremental income of 48 percent. Overall (corporate and personal) tax rate on incremental U.S. source income of 25 percent. Multiplier effect of two. As can be seen the net cost to the Government on a $1 million purchase from U.S. sources is $476,000. Therefore, in this example the "breakeven point" in the purchasing decision is when the foreign source price is equal to 47 percent of the U.S. source price. 68-676 0 81 15 STATEMENT OF THE LUKENS STEEL CO., CHARLES A. CARLSON, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER SUMMARY Charles A. Carlson, Jr., Chairman and Chief Executive Officer, Lukens Steel Company, said that Lukens, which currently employs approximately 4,000 men and women, is a supplier of steel plates for high technology, heavy wall pressure vessels used in the petroleum, chemical, petrochemical, nuclear and synfuels industries. Lukens facilities for the production and heat treating of such steelplate and plate shapes are currently underutilized as a result of the very low level of activity in the shops of the nation's three major heavy wall vessel fabricators. Partially as a result of this lack of domestic business, Lukens' own workforce is reduced by 500 persons from a year ago. American heavy wall pressure vessel fabricators have the facilities in place, techological knowhow and available capacity to meet domestic requirements and a desire to participate in the development of the American synfuels industry. However, due primarily to predatory pricing practices, Japanese fabricators have captured some 80 percent of the heavy wall pressure vessel fabrication tonnage in the past six months, including apparently the 14 gasifiers for the nation's first commercial coal gasification plant to be financed with government-guaranteed loans under the Synfuels Act. Lukens protests a government-backed program supported with taxpayers' dollars using foreign fabrications and containing foreign steel plate at the encouragement of the Department of Energy and the expense of American industry and American labor. A study prepared for Congress by the Library of Congress demonstrates that the return to the economy and the government in the form of taxes of a domestic purchase outweighs the savings of foreign procurement unless the offshore price is more than 50 percent below the domestic price. The continuing incorporation of Japanese capital equipment in synfuels projects merely exchanges our energy dependence from the Mideast to Japan and the use of foreign technology in the initial commercial project will provide the Japanese with a competitive and technological advantage as additional projects become available. Provisions should be made to assure American participation in the fabrication of major capital equipment for the synfuels program to avoid the shutdown of vital high technology fabrication facilities, the unemployment of skilled workers in both the fabrication and steel industries and the loss of technological leadership. STATEMENT Lukens Steel Company is pleased to have this opportunity to submit a statement to the Subcommittee on Trade of the House Ways and Means Committee regarding the distressing and potentially harmful trends taking place in the trade with Japan of high-technology, heavy-walled pressure vessels. As a matter of background, I am Charles A. Carlson, Jr., Chairman and Chief Executive Officer of Lukens Steel Company. Our company was founded in Coatesville, Chester County, Pennsylvania in 1810 and has been in continuous operation there since that time. We also operate a steel plate rolling mill in Conshohocken, Montgomery County, Pennsylvania, which was acquired in 1978 following the bankruptcy of the former Alan Wood Steel Company. I might add that the financial troubles of that firm were due in part to foreign steel imports. Lukens is the second largest employer in Chester County and provides employment for approximately 4,000 men and women, many from third or fourth generation steelworker families. Our company is unique in the steel industry in that it devotes all of its facilities and resources to the development, production and marketing of steel plate and plate products. As a result, Lukens ranks third in the steel industry in steel plate production capability and produces carbon, alloy and clad plates, heads and plate shapes. We produce steel plates in thicknesses up to 30 inches, as wide as 195 inches and weighing as much as 50 tons apiece. The thickness, size and weight capabilities of Lukens have a distinct bearing on the pressure vessel business about which I would like to comment today. While there are numerous markets and applications for Lukens steel plates, Lukens' specialty capabilities in heavy plate production and heat treating make our company particularly suited to service those companies which design, fabricate and construct pressure vessels used in petroleum refineries, chemical plants, nuclear power plants and, hopefully, the new breed of synthetic fuels plants. The fabrication of these vessels requires sophisticated technology, skilled manpower, and production facilities of specialized design. Numerous fabricators have such |