Lawmakers will have to cross a minefield laid by K Street in order to achieve the kind of comprehensive tax reform that they envision.
Corporate tax reform is a stated goal of many business groups in Washington. But for every tax break that would be washed away to lower the corporate rate, there is a pressure group in place to keep it alive.
Kenneth Kies, managing director of Federal Policy Group, said it’s not shocking that different industries will act in their self-interest during the corporate tax reform debate.
“People will look at the deal and will do the math. If you come out as a loser, you’re going to squawk,” Kies told The Hill. “If you want a revenue-neutral deal, and that looks where we are headed now, you’re going to have winners and losers. It’s kind of hard to make everybody a winner.”
“To achieve tax reform on a revenue-neutral basis, something’s got to give,” said Rob Leonard, partner at Akin Gump Strauss Hauer & Feld. “The legislative process tends to hear a lot more from the losers than from the winners.”
Kies, formerly Republican tax counsel to the House Ways and Means Committee, and Leonard, once Democratic tax counsel to the same panel, both played big roles the last time Congress succeeded in passing comprehensive tax reform, in 1986.
Despite lawmakers coming out more and more in support of reform, both lobbyists said moving forward on lowering the corporate tax rate might have to wait until after the 2012 elections.
“The stars have not been fully aligned here yet,” Leonard said.
Dorothy Coleman of the National Association of Manufacturers (NAM) said her group had several bedrock principles it wants to see out of corporate tax reform — including strengthened incentives for research and development, lower rates and the sort of territorial system for taxing offshore profits that Rep. Dave Camp (R-Mich.), the House Ways and Means Committee chairman, proposed last week.
With that in mind, Coleman signaled that NAM was more willing to compromise on other tax credits and deductions the manufacturing sector uses — such as for the depreciation of property — in the context of reform.
“I think we certainly understand that some base-broadening is going to be part of the debate,” said Coleman, NAM’s vice president of tax and domestic economic policy. “And we’re willing to have that debate.”
But Coleman also said that the specific horse-trading — tax breaks for lower rates — that will almost surely be part of the reform discussion hasn’t really started yet.
“From our perspective, tax reform is very important,” Coleman said. “But we are not going to sign off on anything that increases the tax burden on our members.”
Coalitions for various tax breaks and deductions are set up across Washington to protect their fiefdoms in the tax code.
NAM helps run the R&D Credit Coalition, which protects the tax incentive for spending on research jobs. Manufacturers and Silicon Valley likely will want to keep that credit alive as corporate tax reform progress.
The group also plays a part in the Net Operating Loss Coalition, which works to protect a tax break that allows businesses that lose money in a certain year to deduct that loss from their income in other years.
Elsewhere, the Coalition for E85 appeared in recent weeks to lobby for an ethanol-derived alternative fuel that is expected to lose some assistance if the ethanol tax credit expires at the end of the year, as expected. With Congress having already designated E85 as an alternative fuel, the coalition is hoping to get E85 access to a tax credit for those energy sources.
Jeff Trinca, a coalition spokesman, said the group had generally been received warmly on Capitol Hill, despite all the focus on tax reform.
“We’re trying to fix sort of this baby in the bathtub issue,” Trinca said. “That’s a lot easier, in this environment, than saying you want a new credit.”
Retailers also are bullish about tax reform — perhaps not surprising, given that sector pays among the highest average effective tax rates in the U.S. corporate world.
The National Retail Federation, for instance, has joined the Reducing America’s Taxes Equitably, or RATE, Coalition, a group whose main goal out of tax reform is a sharply lower rate.
Rachelle Bernstein, tax counsel at NRF, said the group was willing to discuss eliminating any tax break in exchange for lowering the top corporate rate from its current 35 percent to around 25.
That includes the “last in, first out” technique, or LIFO, which is used by many retailers and basically operates under the belief that companies sell the newest goods in their inventory first. Because older goods generally cost less, LIFO allows companies to lower their taxable income.
“We think the most economically efficient type of tax reform would allow businesses to make decisions based on what makes business sense, instead of what the tax code incentivizes,” Bernstein said.
But with the retail industry relying on fewer tax credits and deductions than some other sectors, Bernstein said NRF would continue to resist efforts to eliminate LIFO simply to help rein in deficits, something the Obama administration has previously proposed.
“I don’t want to leave the impression that we are not fighting against using LIFO as a revenue-raiser,” Bernstein said.
Other business groups are fighting for LIFO’s survival.
“LIFO shouldn’t even be on the table,” said Jade West, senior vice president of government relations at the National Association of Wholesaler-Distributors (NAW). “You would put small businesses under.”
At NAW, West helps run the LIFO Coalition, which lobbies to protect the tax technique. West said her business group is supportive of corporate tax reform but will work to protect LIFO while lobbying for overall reform.
Several business groups are telling lawmakers to go bigger than just the corporate tax rate. The individual tax rate needs to be lowered as well to boost the economy, those groups say.
Brian Reardon, executive director of the S Corporation Association, said his member companies are taxed through the individual tax code, not the corporate one. If corporate tax credits, which are used by his businesses like other corporations, are voided to lower just the corporate tax rate, it would be “a double-whammy.”
That’s why his group’s position is “comprehensive reform.”
“We understand that our corporate tax rate is out of sync with the rest of the world. But if you’re going to do tax reform, you have to consider both the corporate and individual tax rate,” Reardon said. “The reason we need to do comprehensive reform is because most people work for pass-throughs. In order to make American business more competitive, we need to include all sides of business.”
K Street recognizes that once a plan to lower rates is finalized, there will be corporate players lobbying all out for and against reform of the tax code.
“Once all the analysis is done and understood, there are going to be some voices in the business community who view it as a negative. There will be others who view it as a positive. The challenge on the Hill will be how to balance those disparate voices,” Leonard of Akin Gump said. “That was the challenge in ’86, and that will be the challenge this time.”