Tuesday, June 21, 2011

GOP eyes tax breaks, loopholes

Last week’s resounding votes on ethanol subsidies were just the start. Republicans are now starting to eye all sorts of tax breaks and special-interest loopholes once considered sacred cows as they seek ways to increase government revenue without actually raising tax rates.
The targeting of long-protected tax breaks — for ethanol, research and development, manufacturing and foreign company income — is a sign that key House Republicans are ready to break with the orthodoxy of past tax debates while ditching special interests that have long held sway in tax reform discussions.
In going after some of these tax credits, Republicans on the House Ways and Means Committee are proposing a trade-off by lowering corporate and individual tax breaks. And while Republicans would like to keep tax reform discussions separate from the deficit reduction talks led by Vice President Joe Biden, the negotiators may still discuss closing certain tax loopholes.
Some tax breaks, like the depreciation of business equipment, are well known and have large constituencies on Capitol Hill. Others, like the exclusion of interest from state and municipal bonds are more technical, yet still have a powerful lobby that has protected them. Their costs to the Treasury range from a few million to billions.
But GOP insiders are making no mistake about new scrutiny of the long-protected class of tax credits and other breaks: They’re on the chopping block for real now. The ethanol vote in the Senate last week, followed by a less sweeping rollback of certain ethanol benefits in the House, seemed to open the dam for Republicans to discuss tax reform.(See also: Ethanol vote fuels subsidy doubts)
“We have proposed elimination of some tax breaks” during hearings and in informal discussions, said Ohio Rep. Patrick Tiberi , a leading tax reform proponent and chairman of the Ways and Means Subcommittee on Select Revenue Measures. “The process is to build momentum and create consensus.”
And while Republicans have stuck with the talking point that the government doesn’t have a revenue problem; it has a spending problem, GOP leaders have left the door open to finding more money in the tax code.
“We are not opposed to revenues. We are just opposed to tax increases,” Majority Leader Eric Cantor (R-Va.) told reporters.(See also: Cantor, Ryan urge Obama against tax hike)
Complex business tax breaks — some criticized as corporate welfare — may be particularly vulnerable to attack. These provisions typically have had few defenders other than corporate executives who benefit from them and their accountants. They have survived mostly because entrenched business interests have far more at stake than critics seeking to clean up the tax code.
Even the tax-writing committees that created many of these boondoggles are getting into the act, though they have not yet taken legislative action. Right now, the various manufacturing, research and equipment tax breaks — as well as dozens of other more obscure provisions — are merely under discussion.
In embracing a simpler tax code with lower rates, Club for Growth President Chris Chocola welcomed the repeal of the ethanol tax credit as a first step “to ridding the tax code of market-distorting energy subsidies and … a message that Republicans are serious about tax reform.”
Once they actually make it into any real legislation, the battle will begin as each industry lobbies to save its individual tax breaks.
Calman Cohen, president of the Emergency Committee for American Trade, said his roughly 50 corporate members have not spoken as a group on possible repeal of international tax breaks — many of which they have strongly advocated.
“The debate has just begun,” he said. “We need to think overall in terms of the U.S. debt crisis … and a package that will improve our ability to sell the products of American workers around the world.”
All told, the tax breaks under scrutiny could bring in several hundred billions of dollars in revenues. Here are examples of what’s on the chopping block, with cost-savings estimates from the Joint Committee on Taxation:
• Deferral of income for controlled foreign companies ($70.6 billion) is the largest business tax break and a frequent topic of review. Enacted in 1984, the measure was designed to promote exports by multinational firms and responded to other nations’ comparable practices. It has survived partly because international trade experts have raised fears of the adverse impact of rolling it back.
• The manufacturing deduction ($43.2 billion), which has been applied chiefly to oil and gas production activities, has been targeted for repeal by President Barack Obama’s energy policy. Although the administration has abandoned sweeping energy reform, congressional Democrats have sought to increase pressure on Republicans to repeal oil and gas tax breaks. “It’s long past time to turn off the spigot of public funds flowing to Big Oil,” Minority Leader Nancy Pelosi (D-Calif.) told the House last month.
• Accelerated depreciation for capital equipment ($37.1 billion) was designed to boost business spending that kick-starts job creation by expediting the multiyear schedule for depreciation. This tax break has been widely used by major manufacturers and by smaller “pass through” businesses that file individual tax returns. As with other tax breaks that have been designed to create jobs, Rep. Sander Levin (D-Mich.) has cautioned that Congress “should be sensitive to” the impact of tampering with these incentives.
• The research and development tax credit ($25.6 billion) has been a favorite of Democrats and their corporate allies — in Silicon Valley and other parts of the technology industry. Proponents of the credit, enacted as a temporary measure in 1981 and repeatedly extended since then, have sought to expand its reach. “Innovation drives America’s future,” Ways and Means senior Republican Rep. Kevin Brady of Texas said when he filed a bill early this year with Democratic Caucus Chairman John Larson and two California Democrats to make the measure permanent and increase the amount of the credit.
But Boeing executive James Zrust, the company’s vice president of tax, told Ways and Means this month that the company would abandon support for the credit in exchange for lower overall corporate tax rates.
“In return for simplicity, we would like to get rid of the complexity,” he said.







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