Industry experts discuss the future of HVAC under Republican-led government

With President-elect Donald Trump now in office, the HVAC industry remains hopeful and optimistic about its future under a Republican-led government.

Takeshi Ebisu, president and CEO, Goodman Mfg. Co., suggested a unified federal government was a good thing for the HVAC industry. “The federal government has been experiencing an extended period of gridlock where no major pro-business legislation has been passed or deregulation has occurred. It’s a good thing for the HVAC industry when you have a government that is action-oriented.”

However, Ebisu also noted it was too early to tell how the new administration and Congress will impact the industry. “Right now, we can only speculate based upon the limited actions we have witnessed and what has been stated publicly. For example, there have been frequent communications suggesting the new administration and Congress are considering a reform of the tax codes affecting manufacturing businesses. Like nearly any for-profit business, Goodman would welcome changes to the current tax codes that encourage manufacturing and business development.”

Goodman’s parent company, Daikin Industries Ltd., is currently in the process of constructing a new facility located near Houston. When the facility is completed, it will employ up to 5,000 people.

“My personal wish list that I hope the incoming administration and Congress will deliver to the HVAC industry over the next four years is a possible reduction in regulations and potential reform of the current tax code that does not harm our ability to provide customers with the best services and products, opportunities that allow homeowners to enjoy increased levels of home comfort with the installation of more affordable energy-efficient heating and cooling systems, and enacting policies that help to encourage manufacturers to maintain the existing level of jobs in the U.S. and that continue to encourage investments resulting in an increase of the total number of  manufacturing jobs in the U.S.”

Trump has already gained national headlines for his work within the HVACR industry after he and Carrier Corp. signed an agreement that is intended to preserve several jobs in Indiana.

In February, Carrier announced plans to relocate its Indianapolis manufacturing operations to Monterrey, Mexico. The move, which would have occurred over three years and cost 1,400 American workers their jobs, was often referenced by Trump during both the primary and general election campaigns.

The agreement will see Carrier receive $7 million in tax breaks over 10 years in exchange for a $16 million investment from the manufacturer into the plant. While the move benefits many Indianapolis workers, Carrier still intends to send some jobs to Mexico.

POTENTIAL PARTNERSHIP

Joe Trauger, senior vice president of policy and government relations, Air-Conditioning, Heating & Refrigeration Institute (AHRI), agreed there are still a lot of unknowns, especially in terms of personnel.

“The president-elect just put forward Gov. Perry’s nomination for Secretary of Energy and a number of others for cabinet placements, but we still don’t have a good idea of what the personnel will look like on that second, third, or even fourth layer down,” he said. “And, as most people know, personnel is policy, so there are still a lot of unknowns as of yet. Overall, we’re looking forward to having a more collaborative relationship, not only with the DOE [Department of Energy], but with all the government agencies we interact with, rather than this sort of adversarial posture that’s been taken over the course of the past eight years. We are hopeful that we’ll be in a position to be a partner and work together to ensure our members are not unduly impacted by any particular regulation.”

Barton James, senior vice president of government relations for ACCA, said the organization’s members are excited.

“I think a conservative-led administration and Congress is pretty appealing to small business owners in terms of stopping the onslaught of regulations, having a more business-minded focus, and understanding the issues that impact small business owners,” he said. “There are advantages to having control of the executive branch held by the same party as the one controlling Congress, and we don’t get to see this very often. I’m pretty excited to see what this may mean. Hopefully, it leads to real progress for many of the issues we’ve been facing.”

James said ACCA has already been working with Trump’s transition team and the new Congress. “Our top issues are making sure we utilize industry consensus standards. What we’ve seen in the past eight years from the DOE, EPA [U.S. Environmental Protection Agency], you name the source; they’ve not looked to gain consensus from industry stakeholders and experts. Specifically to our issues, we have ANSI [American National Standards Institute] standards that are already created through a consensus model. The DOE doesn’t need to go through as many processes when you already have this group that’s creating stuff.

“Another top issue for us to tackle is energy-efficient HVAC installations,” he continued. “This is our top, overarching issue. As much as the past administration talked about energy efficiency and tried to focus on improvements, all of it was aimed at manufacturers, which are already making great products. That focus was really to the detriment of consumers, because they didn’t focus on installations. We think we’re going to see some real progress with this new administration. We want to see less mandating efficiency through regulations and more letting consumers drive that process. Let’s focus on the actual installations, where you can see real results versus what occurs in a lab.”

Mark Riso, vice president of government relations, Plumbing-Heating-Cooling Contractors Association – National Association (PHCC), said PHCC is closely monitoring potential industry opportunities.

“Preliminary indications are that movements could be made related to tax reform. Changes are expected in the regulatory environment, and housing finance reform may occur,” he said. “There also has been talk of increased investments in infrastructure, and if that happens, there could be positive collateral effects on the HVAC industry, although perhaps not immediately. As we begin 2017, we hope the new administration and the 115th Congress will work together in a bipartisan way in order to bring about a more productive environment for responsible policy development. When the legislative and executive branches don’t work effectively together, the result is either extreme gridlock, extreme focus on the regulatory process, or both.  Many positive pro-small business initiatives died in the 114th Congress — for no good reason other than politics as usual.”

Riso said PHCC has a number of small business legislative initiatives it wants enacted by Congress. “Regulatory accountability, regulatory flexibility for small businesses, and increased funding for career and technical education need to be addressed. One of our more urgent priorities is to establish a regulatory environment where agencies partner with industries to create regulatory policy. The HVAC industry is always willing to come to the table to offer expertise on policies that impact our nation.”

CHALLENGES AHEAD

A new president and Congress present challenges for the HVAC industry, according to Stan Kolbe, director of legislative affairs, Sheet Metal & Air Conditioning Contractors of America — National Association (SMACNA).

“For the construction industry, there are opportunities — and challenges — abound with the new Congress on Capitol Hill and in the Trump transition team,” he said. “The opportunity list for construction contractors includes many new Trump administration promises to address the national infrastructure needs for roads, airports, water systems, bridges, and public buildings, including military bases and veterans’ health facilities. While Congress has resisted raising tax revenue for these needed investments in recent years, President-elect Trump is suggesting a new and massive tax break for private funding of infrastructure through infrastructure investment bonds.

“Additionally, Congress must act on airport construction and water bills,” he continued. “With the FAA’s airport construction program expiring in September 2017, Congress must act to reauthorize a major airports program. In addition, a major water resources bill must be passed for urban water systems. In October 2016, Trump proposed a $1 trillion, 10-year ‘revenue-neutral’ energy infrastructure plan in his first 100 days to promote energy exploration and fuel transportation, extraction, and refining upgrades. One legislative initiative SMACNA and other industry groups have supported in Congress is a bipartisan bill that would allow the repatriation of overseas corporate profits if a portion of the profits would be invested in infrastructure bonds. Additionally, some of the profits would go to offsetting the deficit.”

Kolbe also noted that tax reform is expected to move on Capitol Hill, and that raises questions concerning the many energy-efficiency incentives for residential, commercial, and industrial retrofits and new construction. Additionally, a repeal of the Affordable Care Act could impact booming health care construction.

CHANGE TAKES TIME

Jon Melchi, vice president, government affairs & business development for Heating, Air-conditioning & Refrigeration Distributors International (HARDI), said there are two ways to look at the issue.

“Immediately, there may be some review on regulations that are currently pending or in the process of being developed from the new administration and the executive branch,” he explained. “I think Congress will begin developing legislation that could impact our industry in a couple of different ways. The first is on the business side with the tax code in an effort to make the U.S. tax code more competitive with foreign countries, and that’s something businesses have been wanting for a while. House Republicans have been very interested in tax reform for some time, but they haven’t been able to find a dance partner in the current administration. With a one-party rule in effect, the odds of them being able to achieve some of their goals increase. But it’s not a sure-fire thing because the Senate has different priorities than the House, and President-elect Trump has different priorities than both the Senate and the House. But there is opportunity there, and that’s something we’re interested in exploring.

“Additionally, Congress may look to do some regulatory reform, which could impact the products we sell and how efficiency standards may be developed,” he continued. “I know there’s been a lot of interest in that for some time, but again, there hasn’t been a lot of appetite for attacking them. Now, there’s an opportunity to do that. In the next four years, I think tax code and the potential for regulatory reform are ripe for action.”

Melchi also noted that while there is potential opportunity under a Republican-led government, there is also a potential threat. “Every industry in Washington is lining up to do the same thing the HVACR industry is – trying to fix some existing issues, which means there is going to be a lot of competition for attention, activity, and action. We have to find a way to fit ourselves into the limited bandwidth Congress and the president-elect have. The fear is always that you get left at the altar, nothing changes, and you’re left with the status quo. The biggest threat of one-party rule isn’t in Washington; it’s what would happen if state governments decided to become more aggressive on regulating products, particularly efficiency standards or refrigerants, which could have a large impact on the industry. It would lead to a patchwork of standards and legislation, which is what we want to avoid.”

Melchi added, “The one thing we’re telling everybody is rolling back regulations takes time. It would be imprudent to think that the day after Trump’s administration has taken office, everything is going to be great. Regulation development takes time. It’s an arduous, challenging process to be involved in. The industry is going to have to be engaged in that throughout. Good outcomes can happen, but they will take time. My guess is that the process of changing a lot of these regulations will take every bit of the Trump administration’s four years, if that is indeed their goal.”

NEXT ROUND OF STANDARDS

Andrew deLaski, executive director of the Appliance Standards Awareness Project (ASAP), which was founded by American Council for an Energy-Efficient Economy (ACEEE), said the industry has done a good job in being proactive in terms of negotiating the next rounds of standards.

“The standards for commercial rooftop units and residential central air conditioners have recently been negotiated,” he said. “The industry really got ahead of the curve to develop new standards that will take effect in the years ahead. These standards were negotiated between the industry and other stakeholders over the last couple of years, so they’ve done a good job getting the regulatory environment stabilized for it to be predictable for some number of years for many product categories. Those are done, though there is reason to expect they will be on the plate for the new administration.”

DeLaski noted the residential furnace standard will likely be rescinded by the Trump administration. “The implication is this one will be handled by the new administration eventually. There are always delays when a new administration comes in as it gets its footing. There is certainly some uncertainty regarding President-elect Trump in regards to his views on energy efficiency and climate change. They haven’t been a priority for him. However, the HVAC industry has been a leader in recognizing climate change as a serious problem. The industry sees it every day through the increase in sales and market size as more and more climates need cooling. They also see it with respect to global limits on refrigerants. In many ways, the realities that are driving efficiency, refrigerant phasedowns, and what’s happening with climate change don’t go away because of a change in political leadership in Washington, D.C. These are global manufacturers functioning in a global marketplace. The underlining drivers for improving efficiency will continue.”

CONTRACTORS REACT

Butch Welsch, owner of Welsch Heating & Cooling Co. in St. Louis, said he is more excited about what the new administration won’t do than what it will do.

“I don’t think we’re going to see the proliferation of regulations that we’ve seen over the last umpteen years — certainly the last eight years, where they pass regulations and then they don’t have their act together when they pass them,” he said. “First, they don’t have the rules on how to implement the regulations, or they find out, as they did with the 92 percent furnace standard, that it’s not feasible, and they end up having to repeal it. Meanwhile, the industry is concerned. It’s just a waste. If we don’t get a lot of that, it will be a tremendous blessing in itself. Go away and leave us alone. Let us do our business. I can’t think of any law or regulation that ever helped us in business. They only make it more difficult for us to do business. Therefore, the less they do, the better. Maybe it’s just a coincidence, but maybe not.”

Welsch also hopes to see the inheritance tax repealed. “That is extremely important in our industry. So many HVAC and sheet metal businesses are family businesses that have been passed down from generation to generation and will continue to be so. Every one of those businesses has paid tax on any income they made along the way. They’ve paid their fair share. As the business is passed from one relation to another relation, to think there’s going to be a gigantic tax against that transaction, what logic is there to that? I’ve never been able to figure that out. Whether they’ll be able to repeal the inheritance tax, I don’t know, but it sounded good in pre-election rhetoric. It would be nice, but I’m not counting on it. At the very least, I don’t want to see it increased anymore to become more taxing than it already is.”

Steve Lauten, president and CEO of Total Air and Heat Co. in Plano, Texas, said contractors should prepare the same way, regardless of a new administration.

“The DOE has long been focused on rated efficiency instead of installed efficiency,” he said. “We’re making progress in this area and might get better traction with the new administration.  The process of how the DOE decides what efficiencies should be used are flawed. They used methods of determining installed cost and rated efficiency that, in general, had flawed data. I’m in favor of energy efficiency when it makes sense. Though, let’s be honest, the proposed furnace efficiency requirement had fatal flaws. You can’t require homeowners in the Southwest to install 92 percent AFUE furnaces when there is no payback, ever. It’s time the HVAC industry had a voice in how standards are set and how the models for payback and energy savings are determined.

“I’m very optimistic the new administration will listen to us and let us be involved in the decision making process,” Lauten continued.

He added a functioning government is good for progress in the industry. “Let’s be honest and agree the last eight years has not had much in the way of progress for our industry. We’ve been plagued by many new rules and regulations that have not been business or end-user friendly. Setting political preferences aside, we need a government that’s in tune with the needs of the people, and we now have the opportunity to get things done. Only time will tell the end result. Based on how the stock market, banking, and transportation segments have responded, I think it’s fair to say there is an upside to what’s ahead for us.”

Ray Isaac, president of Isaac Heating & Air Conditioning in Rochester, New York, is also optimistic about the future under a new president and Congress.

“As business goes, so does the industry, in many cases,” he said. “I think this administration is going to be good for business and the industry in a lot of different ways. Donald Trump is a businessman. I love that he’s an outsider that isn’t part of the machine. He’s taking a new look at things and approaching it from a business sense.

“They’re going to be able to get stuff done,” Isaac continued. “The biggest problem in government, no matter what side you’re on, is inactivity. If you look back at the last eight years, what really happened? I think we’re going to see some things get done, and that will be good. I like activity. My dad always said, ‘Do something, even if it’s wrong.’ Out of activity, something right usually comes out of it.”

Isaac pointed to the Carrier agreement as a sign of things to come. “Look at the Carrier deal. You hear opponents calling it crony capitalism, but if you take basic math and break it down, Carrier is getting a $7 million tax break. The average Carrier pay rate is about $30-$35. Multiply that by 2,000 hours, which is around $70,000 a year, times 1,000 jobs, which is $70 million. Then, take the average tax rate at the federal level, 26 percent, and you get $18 million staying in tax revenues from jobs. And I classify jobs as real jobs — jobs where the workers are paying taxes, not those that are tax-subsidized.

“Here’s a guy who has created an empire, and look at the jobs he’s created. When you build a casino, you create thousands of jobs. I’m not a political person; I’m more of a pragmatic person. I look at the dollars and cents, history, the facts, and the results. Trump doesn’t care about talking points, and I love that. He does things because they make sense, and I love that, too, because it’s not Democrat or Republican, it’s more independent. He’s not polished. The things they beat him up on are the things I love about him. He’s not afraid of making mistakes, so, let’s get something done.”

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