Tax Blueprint Mixes Pain, Gains
By: Wall Street Journal
Rangel Proposal Is Seen as Shaping Long-Term Debate
By SARAH LUECK and JESSE DRUCKER
October 26, 2007
WASHINGTON — The broad attempt to revamp the tax code introduced yesterday by the House’s top tax writer could hurt oil and technology companies, manufacturing firms and others in order to fund an across-the-board cut in tax rates long sought by many corporations.
The effort by Rep. Charles Rangel (D., N.Y.), chairman of the House tax committee, is a pairing of pain and relief for companies. Retailers could benefit under the plan, as could other firms now paying high effective tax rates.
Other companies, including some drug makers, wholesalers and distributors may lose access to long-held tax preferences. In one twist, one provision in the bill seems aimed at real-estate billionaire Sam Zell and his recent agreement to buy Tribune Co.
For now, the legislation is largely a discussion piece, as most of its provisions — including new taxes at the top of the income scale — have little chance of being taken up by Congress until at least next year and may not get serious traction until after the 2008 elections.
Mr. Rangel’s proposals will launch a broader debate between Democrats and Republicans, and among affected industries, about the amount of tax that companies should pay and whether the existing system is fair. The bill will also likely set the parameters of the tax debate for the 2008 presidential election.
Mr. Rangel described his plan as eliminating benefits for a few in order to fund a broader benefit for many. “All of those that don’t enjoy the loopholes or preferential tax benefits would support the reduction in the corporate tax,” Mr. Rangel said.
Industries are likely to fight any attempt to end tax preferences because few big companies pay anywhere close to the required rate of 35%. The true rate for thousands of big companies is generally in the mid-20% range, according to Internal Revenue Service data and other research.
The plan, dubbed the “mother of all tax bills” in Washington, is one of the broadest attempts to revamp the nation’s tax code since the 1980s. House Republicans derided the bill as the “mother of all tax hikes,” largely because of a proposal to increase taxes on upper-income taxpayers to fund a permanent repeal of the alternative-minimum tax, or AMT, a parallel income tax that will be paid by millions more people this year unless Congress acts. Treasury Secretary Henry Paulson said the corporate proposals “will hurt the ability of our businesses and workers to compete in a global economy.”
A few provisions have momentum this year, at least in the House, as part of a separate one-year tax bill that Mr. Rangel plans to introduce as soon as next week. It would protect additional people from having to pay the AMT this year and would also extend several expiring tax breaks for individuals and companies. To fund the one-year bill, Mr. Rangel said he would break out two proposals from his larger package: one that raises taxes on carried interest, a slice of private-equity and venture-capital managers’ compensation taxed at the 15% capital-gains rate, and another to limit hedge-fund managers’ ability to defer taxes on their pay by holding it offshore.
Mr. Rangel called the 15% rate for carried interest an “unfair and unwarranted benefit.” But the private-equity and venture-capital industries, as well as some real-estate ventures that use carried interest, aren’t losers yet. The Senate appears unlikely to pass a tax increase on carried interest. It is unclear whether the other proposal relating to deferred taxes would get enough support in the Senate.
The main bill tries to rein in various corporate-tax benefits. Two proposals that Mr. Rangel says will raise more than $130 billion during the next decade would curb the ability of multinational corporations to take tax deductions associated with foreign operations.
U.S. companies don’t pay corporate income tax on foreign income as long as the profits stay overseas. But companies can still take tax deductions for expenses associated with those operations. The proposal aims to prevent companies from taking those tax deductions until they bring overseas profits back to the U.S., where they can be taxed. Such a change, if it became law, could be a big hit to industries that report big international profits, particularly companies that have a lot of interest expense which they are deducting in the U.S. Companies that have reported enormous built-up foreign profits over the years include Pfizer Inc., Merck & Co., Hewlett-Packard Co., International Business Machines Corp. and General Electric Co.
The bill also proposes to repeal the so-called “domestic production activities” deduction, a provision that largely benefits manufacturers. That benefit has been attacked for subsidizing work that critics say would take place domestically regardless of the tax benefit. Companies that have benefited from the provision include Boeing Co. and Caterpillar Inc. A purely domestic manufacturer could end up being a net winner because of the overall corporate-rate reduction being proposed.
The other big corporate-tax change proposal is the repeal of so-called last-in, first-out accounting. That accounting method allows companies to value their inventory at higher levels than what they paid, providing greater tax deductions. The method has had a particularly big benefit for the oil industry, as the price of oil has been rising rapidly. The bill estimates that repealing it would raise more than $106 billion, a big hit to the oil industry if it happens.
The bill includes one item that appears targeted at reining in the tax benefits of the $8.2 billion deal engineered by real-estate magnate Mr. Zell to take newspaper and TV company Tribune private, according to Lehman Brothers tax accounting expert Robert Willens. That deal was structured in a complex way, including an employee stock-ownership program, to shield Tribune from paying taxes. The prospective provision seeks to increase Mr. Zell’s taxes for the deal. Mr. Zell, through a spokeswoman, declined to comment. The deal may close before any legislation is passed.
Mr. Rangel’s approach to corporate-tax changes has historical precedent. The Tax Reform Act of 1986, a broad overhaul, sought the same goal — lowering the corporate income-tax rate and eliminating loopholes. The top rate was lowered to 34% from 46% two years later. However, tax lobbyists at the time managed to keep some loopholes in place for various industries, and numerous new ones have crept back into the tax code over time.
Many industry groups responded negatively, or with mixed reactions, to the bill. Individual firms may benefit, they said, and they were still reviewing the details. “It’s going to take us a while to really assess how it impacts people,” said Dorothy Coleman of the National Association of Manufacturers. “On balance, it looks like the tax increases could exceed the tax benefits.
–Sarah Ellison contributed to this article.
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