Businesses ready … aim … hold their fire

Some prominent members of the business lobby came out swinging against the giant tax overhaul Rep. Charles Rangel (D-N.Y.) introduced last week, but the legislation may ultimately attract its share of K Street backers.

{mosads}“The business community is going to be somewhat divided about the Rangel bill. There will be some that will be attracted to the bill because of the rate cuts,” predicted Robert Leonard, a lobbyist for Akin Gump Strauss Hauer & Feld who served as tax counsel to the Ways and Means Committee during the 1986 tax reform.

The last time Congress tackled fundamental tax reform, a strong business coalition threw its force behind the legislation, eventually clinching its enactment in 1986. Back then, Rangel was a senior member of the Ways and Means Committee, which he now heads.

The New York Democrat has mimicked parts of the 1986 reform, which broadened the base of taxpayers, while cutting the corporate tax rate and rates on individuals.

Rangel’s proposal would cut corporate tax rates from 35 percent to 30.5 percent and grant tax relief for lower-income individuals. To pay for those cuts, Rangel would raise taxes on many higher income earners and eliminate some tax breaks that are popular among businesses.

Many business groups swiftly denounced the bill. But others have held their fire, perhaps signaling support for portions of Rangel’s self-described “mother of all” tax reforms.

“The direction of the legislation that has been put forth by Chairman Rangel is one that we have traditionally approved of,” Rachelle Bernstein, vice president and tax counsel for the National Retail Federation (NRF), said.

The corporate tax reduction was “very attractive” to NRF’s members because they are “very high-effective tax rate payers,” Bernstein said.

Although the corporate tax rate is 35 percent, many businesses pay much less thanks to various loopholes uncovered by their tax lawyers and deductions put in by the tax lobbyists. But retailers remain one of the highest-taxed segments of the economy.

Dorothy Coleman, the vice president for tax policy at the National Association of Manufacturers, said that giving up the so-called “section 199” tax break for manufacturers could be a “good deal” for her members if it is paired with a significant corporate rate cut.

She emphasized that she would strongly oppose certain provisions if they were enacted alone, but regarded the overall proposal as “the beginning of a debate.”

“We’ll take a look at it and see where it goes,” Coleman said.

Rangel said he won’t push the bill until next year, and most don’t expect the plan to get much attention until after the 2008 elections.
The bill also grants net tax cuts for 90 million Americans, partly by repealing the Alternative Minimum Tax. 

“Looking at my industry, if you have a tax cut on the middle class, that’s going to be good for retailers,” Bernstein said.

But for now, many in the business community remain leery of the plan, which Republicans have dubbed the “mother of all tax hikes.” Business groups say Rangel’s tax overhaul barely offers any crumbs to offset provisions they deem harmful to their members and the economy.

“It’s a tax change and a tax shift, but it’s not a tax cut and it’s not a tax reform,” the chief economist for the U.S. Chamber of Commerce,  Martin Regalia,  said.

Some segments of the economy will be unequivocally hurt by the legislation. Businesses that file as S-corporations would lose the manufacturing tax break but wouldn’t benefit from a reduction in the overall corporate tax rate.

The private equity and hedge fund industries would get hit by a doubling of their tax rate.

Meanwhile, the oil industry and large wholesalers, including auto dealers, would be hurt by a provision to repeal the last-in, first-out (LIFO) accounting method.

Jade West, the senior vice president of the National Association of Wholesaler-Distributors, argued that the business community would be remiss if it were to praise certain attractive provisions of what she views as an overall problematic bill: “We have no choice but to react strongly.”

Any legislation that has LIFO repeal as a point of departure was “non-negotiable,” West added.

Particularly toxic to the business community is Rangel’s proposed surtax on adjusted gross income above $200,000 for individuals and $500,000 for families. Lobbyists claim the tax hikes would sap consumer demand and raise taxes on small businesses that file under the individual code.

The surtax will reduce the number of would-be business supporters of Rangel’s plan, Leonard said.

“I would think it would impede the ability to put together a coalition,” he said.