Industry Execs: Don't Rule Out Tax Hikes to Avoid Defense Cuts

Pratt & Whitney president says to avoid Pentagon cuts, "everything has to be on the table."

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The Pentagon is spending nearly a $1 billion a year on a program that sends unemployment checks to former troops who left the military voluntarily.
The Pentagon is spending nearly a $1 billion a year on a program that sends unemployment checks to former troops who left the military voluntarily.

Find a way to void deep reductions in government spending on which defense companies are dependent, and consider raising taxes to do so. That was the somewhat surprising message several industry executives delivered to lawmakers Wednesday.

Senior executives from some of the biggest firms that sell arms to the Pentagon say they could notify employees of mass layoffs as soon as late September, with one saying he has never been so worried about the U.S. arms-manufacturing sector.

That assessment came from Lockheed Martin CEO Robert Stevens, who told a House committee deep Pentagon cuts slated to kick in January 2 will force his firm and others to fire employees and close factories. Those moves will hinder U.S. national security, erode defense firms' bench of highly skilled workers, and, of course, cut into weapons-makers' bottom lines.

Republican lawmakers and some industry officials have long lobbied against raising taxes to help void $500 billion in planned Pentagon spending cuts over a decade. The purpose of the House Armed Services Committee hearing was not just to warn about the effects of the cuts, but to use industry leaders' public testimony about a lack of White House guidance about how they would be implemented to bash the Obama administration.

[Photo Gallery: Nation Gripped by Drought.]

At times, the session appeared highly scripted. But then, New Jersey Democrat Rep. Robert Andrews pressed defense sector CEOs on whether tax hikes should be part of the kind of $1.2 trillion federal deficit-paring bill that would void the defense cuts.

That's when the script took a major hit.

"I think everything has to be on the table at this point," replied David Hess, Pratt & Whitney president.

Stevens was more opaque, saying: "When we face challenges in our business...we try to put into the recipe every possible ingredient that might lend itself to the formation of a solution."

But don't think the executives offered a full-throated endorsement of raising taxes.

Rep. Hank Johnson, a Georgia Democrat, tried to get specific on increased revenues. When he asked Stevens and other executives if they would forfeit the dollars they keep under tax cuts enacted during George W. Bush's presidency, the CEOs danced and ducked--but not one supported the idea.

Sean O'Keefe, CEO and chairman of EADS North America, told Johnson that question can only be answered by Congress. Stevens simply said he was unable to answer the question. Two other defense executives merely agreed with the Lockheed boss.

The executives reiterated their description of bleak times ahead for the defense sector.

Federal law requires the largest defense firms to give employees around 60 days of notice when their positions are being eliminated. Unless the defense cuts are voided before, the first wave of notices will go out in late October or early November--right before Election Day. In so-called early-warning states like New York, notifications must go out about 90 days prior to termination. That means some defense-sector workers will be notified in late September or early October.

The economic effects will hit defense companies large and small.

Hess says some units of Pratt's parent company, United Technologies, already are opting to invest in research projects for commercial ventures rather than ones that would be used in its weapon platforms.

And Della Williams, president of Pyro, which is a supplier to larger firms, already has frozen five of its major contracts.

Those big contractors have asked her, "When can you finish this?" Williams said. Her reply was: "Well, when you give me the funds."

John T. Bennett covers national security and foreign policy for U.S. News & World Report. You can contact him at jbennett@usnews.com or follow him on Twitter.

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