Business Community Split on Corporate Tax Reform
Lobbyists have been waiting for a president to greenlight corporate tax reform for years, but now that one has, the business community is hardly unified.
Lobbyists were quick to acknowledge that the proposal the Obama administration unveiled today is largely a political document designed to help Democrats prove their commitment to fixing the economy in advance of the 2012 elections. But K Street is divided on what the move actually means for the business community and the future of reform.
Already the debate downtown is shaping up as a brawl between industries that want to protect their existing tax breaks and the ones that figure they would be better off with a lower overall rate.
The American Petroleum Institute scheduled a conference call for Thursday with its president and CEO, Jack Gerard, and wasted no time in attacking President Barack Obama’s proposal. The group, which benefits from what some call tax law loopholes, will discuss “why punitive taxes on the industry will destroy job creation and weaken America’s energy security” on the call.
Other groups, such as the Business Roundtable and the Information Technology Industry Council, both of which support lowering the corporate tax rate, criticized the administration’s plan for increasing the burden on companies with global operations, including a minimum tax on foreign income.
Large technology firms have been advocating for a territorial system that would not tax foreign profits at all.
“We feel like we’re being targeted,” one Democratic technology industry lobbyist said. “This makes it more difficult for our friends on the Hill, particularly on the Democratic side.”
Still, don’t expect tech industry executives to bombard the Hill with words of warning.
“I don’t think we need to be particularly aggressive,” the Democratic lobbyist added. “This conveniently fits into the campaign narrative that they are developing. Maybe outside of a campaign setting they will be more open-minded.”
For much of K Street, the stakes do not seem much higher than before.
“I would not expect to see much of an uptick in activity,” said Kenneth Kies, the managing director of the Federal Policy Group. “One, there are no surprises; two, no one thinks it’s going anywhere; and three, there is already a fairly high level of activity on tax reform.”
Some lobbyists groused today that the proposal was low on substance and high on politics. The 20-page document contained few surprises. Most of the ideas had been floated in the administration’s previous budget proposals.
K Street has its sights on the details that were left out, the places where wiggle room could turn into opportunity for its clients. For example, the president’s proposal for a minimum overseas tax rate, an effort to encourage corporations to invest in the United States, gave no specific number.
“Until you run the numbers, you have no idea how each company is going to fare,” said Patrick Heck, co-chairman of the tax policy practice at K&L Gates, who served as a tax counsel on the Senate Finance Committee for seven years, including four years as chief tax counsel.
If anything caught lobbyists by surprise, it was a suggestion to reduce the incentive for corporations to deduct interest payments and to tax “pass-through” corporations at the corporate instead of the individual tax rate, ideas bound to ruffle the feathers of the financial services industry.
As usual, the devil is in the details, explained John Harrington, a tax partner at SNR Denton.
“It depends if you’re going to allow any exceptions,” he said, referring to the pass-through provision. “There are very large family-owned businesses that operate as S corporations — do they get pulled under this as well?”
Many lobbyists who represent industries that have been calling for a lower corporate tax rate reacted more favorably to the president’s outline, if not to all the details.
“For us, this is a very important thing: The president is finally coming out and affirming that yes, the corporate tax rate needs to be lowered,” said Matthew Shay, president and CEO of the National Retail Federation.
Shay added that his organization doesn’t envision corporate tax reform exactly as the president does. For example, the NRF wants to see a rate closer to 25 percent, not Obama’s 28 percent average. But he said Obama’s proposal will help energize the debate, especially given the “significant impediments” of an election year.
“With the right kind of leadership from the business community, it can happen,” Shay said.
But today’s announcement exposed fissures even within industries. The Retail Industry Leaders Association released a statement dinging the administration for preserving “implicit preference for some industries at the expense of others.”
Elaine Kamarck, who co-chairs the Reforming America’s Taxes Equitably coalition, dismissed those conflicts, saying that such fractures did not stop a reform package from passing in the mid-1980s.
“Because this system is so distorted by the loopholes, clearly you’re going to have winners and losers in the community,” Kamarck said. “I think they cancel each other out, and what you have is the essential argument: Broaden the base, lower the rates.”
With momentum for lowering the corporate tax rate building not just among big businesses, but also on Capitol Hill and on the presidential campaign trail, Obama’s blessing was the missing ingredient. Kamarck said a corporate reform package could even get done this year.
“I was around in ’86, and there’s a sort of dance that happens,” Heck said. “Nothing was really going to happen until the president got engaged. … This is the first time since 1986 that the president is engaged.”
Bruce Thompson, a tax expert with Van Scoyoc Associates, agreed: “His involvement will up the ante for reform.”