Cutting the corporate tax rate may be easier said than done

McClatchy NewspapersJanuary 26, 2011 

WASHINGTON — A day after President Barack Obama called in his State of the Union address for lowering of the nation's corporate tax rate for the first time in a quarter century, business leaders were wary Wednesday about potentially painful tradeoffs.

The Obama administration has been talking privately for weeks with business groups and key lawmakers in both parties about how to lower the 35 percent corporate tax in a way that sparks business activity without widening the federal budget deficit.

His proposal to take a deficit-neutral approach means there would have to be tough tradeoffs, and no one in Washington wants their ox gored.

"Do I think it can be done? Yes. But it's going to be very painstaking, it's going to be difficult," said Dorothy Coleman, the vice president of tax policy for the National Association of Manufacturers. "If it was easy, it would have been done a long time ago."

Neither Obama nor Republican leaders of the House of Representatives have spelled out what the cuts or tradeoffs might be. The administration may show its hand when it releases its proposed budget in mid-February, but that's not certain.

The U.S. Chamber of Commerce is taking a wait-and-see approach.

"First thing you need is details. None has been offered by the administration, Treasury, Joint Committee on Taxation or the Hill," said Bruce Josten, a chamber vice president. Josten noted that the number of corporations has declined steadily since the 1980s as executives filed tax returns under other classifications to claim lower tax rates.

On Wednesday, White House spokesman Robert Gibbs said "I'm not going to . . . start the exact bargaining on that. I think, again, this will be a meaningful process and a discussion that the president and Republicans and Democrats alike will have as we move forward on these issues."

Japan is scheduled to lower its corporate tax rate in April. That will leave the U.S. with the highest corporate tax rate among 34 developed nations in the Organization for Economic Cooperation and Development.

But that high rate is somewhat misleading because the U.S. tax code is rife with deductions, big and small. The calculation for many sectors in the months ahead will be whether they're better off with the current higher rate and the plethora of deductions they now enjoy, or to lose their deductions and obtain a lower tax rate.

"I think our overall feeling on corporate tax rates is they should be as low as possible," said NAM's Coleman. She offered only a qualified endorsement because Obama said the lowering of corporate tax rates can't add to the deficit, projected Wednesday by the nonpartisan Congressional Budget Office to hit a record $1.5 trillion this year.

"We support fiscally responsible tax reform, but starting from the beginning, that it's got to be revenue neutral almost by definition means creating winners and losers," Coleman said. "When you target one industry over another, that changes the conversation."

Since 2004, U.S.-based manufacturers have enjoyed large tax deductions if they make things here. That potentially could end under a lower corporate tax rate. There's also the thorny issue of how to repatriate profits that U.S. companies made abroad.

The American Petroleum Institute, representing energy firms large and small, is also concerned that lowering the tax rate might be less beneficial than advertised. That's because lawmakers frequently target the oil sector as a means of offsetting lost revenue somewhere else, and that's what Obama proposed Tuesday night.

"We're a capital-intensive industry, so cost recovery and how that works is of big importance for us," said Steven Comstock, the manager of tax policy for API. "As we move to more of a service economy, it may not be as important for other industries. But for us, it is important. We are focused on how we could recover our costs in the new (tax) structure as well."

Stand-alone U.S. oil producers right now enjoy a tax deduction for what they're spending to develop an oil field. Large integrated energy giants such as Exxon Mobil can deduct 70 percent of their real-time cost and deduct the rest over five years. If that went away in favor of a broad lower rate, oil production costs could rise sharply.

"If you think of an offshore project, you can be spending money associated with drilling activity seven years before you ever have production," Comstock said. "You are talking about a wide divergence between what companies currently have and what would (potentially) be put in its place."

In a 160-page budget outlook released Wednesday, the CBO devotes a section to expected receipts from corporate taxes and another section on revenue currently not collected that could bring in huge revenues if subjected to taxation.

The CBO expects tax revenues to grow by 6 percentage points over the next decade, and corporate tax receipts account for 0.5 percentage points of that anticipated increase. A number of stimulus-related tax breaks allowing companies to speed deduction of equipment costs have helped lower that amount of corporate tax revenue collected by government, the CBO said.

The largest potential tax revenue placed off limits by current policy involves treating employer-provided health insurance as pre-tax income when calculating an individual's taxable income. Others include exclusion or deferral from taxes of pension and retirement investments, and the deduction of mortgage interest on owner-occupied residences, as well as deducting state and local taxes from the federal return.

The Mortgage Bankers Association was quick Wednesday to warn against using the mortgage interest deduction as a tradeoff to lowering the corporate tax rate. In a conference call, a number of its leaders warned that the housing sector is too weak to absorb any significant loss of homeowner tax deductions.

"Of all the times, particularly now is not the time to be going in and changing tax deductions," said Bill Killmer, the senior vice president of legislative affairs for the bankers' group.

Obama also called for a simplification of the tax code during his State of the Union address, and that, too, could involve tradeoffs that close loopholes. But for small businesses that employ the brunt of the nation's workers, simplification could be a good thing.

"Tax reform should address the entire tax code and find ways to help America's job creators and families deal with the complexity and cost burdens in the current code," Michigan Republican Rep. Dave Camp, the new chairman of the tax-writing House Ways and Means Committee, said in a supportive statement.

ON THE WEB

CBO budget outlook

State of Union address

Republican response

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