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

Abstract

Low commodity prices have reduced LIFO reserves, making prior estimates of reserves and the impact of eliminating LIFO obsolete. Using a combination of IRS and public company data, we estimate overall U.S. LIFO reserves and the potential tax revenue impact. At a 35% (15%) rate, taxing the 2016 LIFO reserves would yield between $19 ($8) and $25 ($11) billion. Although fewer than 1% of 2013 corporate and partnership tax returns with inventory used LIFO, LIFO inventories comprised about 14% of the dollar value of U.S. inventories. The findings are relevant to tax policy and accounting standards, and also provide context for instructors teaching about inventory methods.