Special Message to the Congress Recommending Reinstatement of the Investment Tax Credit and Accelerated Depreciation Investment Incentives

To the Congress of the United States:

On September 8, 1966, I asked the Congress to suspend temporarily the 7 percent investment tax credit for machinery and equipment and the tax benefits of accelerated depreciation on buildings.

That suspension was specifically designed to relieve excessive pressure on the overheated capital goods industries and the resulting strain on our financial markets. My economic advisers and I believed that the measures then proposed would relieve the acute inflationary pressures of the capital boom on the capacity of our machinery producers, the supplies of skilled workers, interest rates and the availability of credit for private homebuilding.

The Congress promptly enacted the legislation. The legislation provided for automatic restoration of these special tax pro, visions on January 1, 1968. At the time I signed the bill into law, I stated:

"If... any earlier reinstatement would be appropriate, I shall recommend prompt legislative action to accomplish that result."

In enacting the law, the Congress and the Administration assumed the obligation to terminate this selective fiscal restraint and restore these tax incentives as soon as changes in the situation justified such action. The reports to the Congress of both the House Ways and Means Committee and the Senate Finance Committee stated:

"If military requirements in southeast Asia should decrease before January 1, 1968, or if for some other reason it should become apparent that suspension of the investment credit and suspension of the use of the accelerated depreciation methods with respect to buildings are no longer necessary to restrain inflation, the Congress can promptly terminate the suspensions. The Administration has also indicated that it would recommend terminating the suspension period before January 1, 1968, under such conditions."

In appearing before the Senate Finance Committee, the Secretary of the Treasury testified:

"The Administration will be alert to any change in the situation and will be prepared to recommend terminating the suspension period before January 1, 1968, if a change in circumstances makes that at all possible, and I would hope that the Congress would, in turn, be willing to entertain such a recommendation."

When I signed the bill last fall, I listed clearly what my economic advisers and I expected the legislation to accomplish. I said it would help:

--restore more normal interest rates and ease tight money and credit conditions;

--free funds and resources for homebuilding and other essential uses;

--trim down excessive backlogs of machinery orders;

--curb upward pressures on prices and costs of capital goods;

--guard against a needless repetition of the old pattern of boom and bust in capital spending; and

--improve our current balance of payments positions." In the six months since Congress received the temporary suspension legislation it has already effectively done the job we hoped it would do.

Interest Rates

Since last September, aided by action of the Federal Reserve Board interest rates have fallen dramatically: 3-month Treasury bills-down 22.2 percent; Long-term Treasury securities-down 9.3 percent; New corporate Aa bonds--down 12.0 percent; New municipal bonds--down 15.1 percent.

Funds for Home building

Funds are again flowing into our thrift institutions. Savings and Loan Associations-our key mortgage lenders--accumulated funds at an annual rate of only $100 million last spring and summer. Subsequent to our action last September, there has been a very sharp rise in their accumulation of funds.

From October 1966 through January 1967, their accounts grew at an annual rate of $8 billion.

Mortgage interest rates have started to come down, and new housing starts have now risen for the last 3 months in a row.

Backlogs of Machinery Orders

Last September, new orders for machinery and equipment were 18 percent higher than a year earlier, and order backlogs had grown 28 percent over that period. Order backlogs for machine tools were particularly large.

Orders for machinery and equipment have declined steadily since September, by a total of 7 percent. Order backlogs have leveled off, and in January actually declined for the first time since June 1963. For machine tools, backlogs have fallen substantially, as shipments exceeded orders by 17 percent in December and January.

Pressures on Prices and Costs of Capital Goods

The machine industry had been straining their capacity--running close to 100 percent of maximum use--in August 1966. Between August and January the average utilization rate of capacity has declined to a healthier and more efficient rate. For makers of electrical machinery, the decline is from 97 percent to 91.5 percent.

Acute shortages of skilled labor, that plagued the machinery industries last spring and summer, are gradually disappearing.

Guarding Against Boom and Bust

In 1965, plant and equipment spending rose 16 percent. In 1966, it rose 17 percent. That was an unsustainable pace. At that rate, the capital boom was headed for a bust. Now, the latest survey of investment plans for 1967, conducted by the Department of Commerce and the Securities and Exchange Commission, shows a modest increase of less than 4 percent. That is a sustainable pace of advance.

Balance of Payments

During the first three quarters of 1966, imports of capital equipment soared an average of 14 percent a quarter. In the fourth quarter of 1966 the rise was only 3.9 percent, and this partly reflected deliveries against earlier orders. Now that domestic producers can take care of domestic demands, this extra drain on our balance of payments should be alleviated.

On the basis of this evidence, it is clear that the investment credit and accelerated depreciation, consistent with our promise and in justice to our society, should now be safely restored. Although the demand for capital goods continues to be strong and remains at record levels, my Council of Economic Advisers informs me that it no longer threatens to strain our growing ability to produce.

In fulfillment of the commitment made by this Administration as well as the Congress at the time we asked that these tax incentives be suspended, and in accordance with the strong recommendations of my Council of Economic Advisers, the Secretary of the Treasury, the Secretary of Defense, and the Director of the Budget, I recommend immediate and prompt reinstatement of the 7 percent investment tax credit and accelerated depreciation.

I recommend restoration of these incentives effective today, the date on which legislation will be introduced in the Congress.

I urge the Congress to act promptly on this legislation without delay so that there will be no uncertainty or doubt in our free enterprise community.

In doing so, the Congress and the Administration can show the country and the world once again that we can and will work together for stable prosperity in our growing and free economy.

LYNDON B. JOHNSON

The White House

March 9, 1967