Low Commodity Prices and the Potential Revenue Impact of Taxing LIFO Reserves.

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Abstract

Motivation: Low commodity prices have reduced LIFO reserves, making prior estimates of eliminating LIFO obsolete.
Objective: We estimate overall U.S. LIFO reserves and the potential revenue impact of barring LIFO for tax purposes.
Methods: We estimate the total U.S. LIFO reserves by applying ratios of LIFO reserves to LIFO inventory of public companies to estimates of LIFO inventory held by the population of U.S. businesses.
Findings: LIFO usage is skewed towards large firms and certain industries. Fewer than 1% of 2013 corporate and partnership tax returns with inventory used LIFO, but LIFO inventories comprised about 18% of all inventories’ dollar value. Consistent with changing commodity prices, LIFO reserves of public companies decreased markedly from 2011 to 2015, before rebounding some in 2016. At a 35% (15%) rate, taxing the 2016 LIFO reserves would yield between $20 (8) and $25 (11) billion in revenues.
Contribution to accounting literature: The findings enhance understanding of how LIFO usage varies by company size.
Contribution to decision makers: Revenue gains from repealing LIFO will be less than prior estimates. The tax burden will fall mostly on a few large companies and particular industries.

Authors

• Daniel Tinkelman, CUNY-Brooklyn College

• Christine Tan, Hofstra University