The U.S. Chamber of Commerce wants to protect breaks for capital investments. Corporations balking at tax reform

Washington is finally starting to get serious about corporate tax reform — and now businesses are getting cold feet.

At first, it seemed like an idea the White House, Congress and corporate America could all agree on. Every company would play by the same tax rules: They would give up their special tax breaks in exchange for lowering the basic tax rate from 35 percent to as little as 25 percent.


But with Congress starting to dig into the details, many captains of industry are backpedaling — and fast.

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The corporations aren’t keen on giving up the special tax breaks that have let many of them pay Uncle Sam less than advertised for years.

And they’ve gone on the offense to protect their favorite loopholes.

On Tuesday, the U.S. Chamber of Commerce said it wants any tax rewrite to protect breaks for capital investments, such as new machinery. Pharmaceutical and technology companies are telling the House Ways and Means Committee that credits for research costs should be preserved. Energy companies don’t want the treatment of expenses related to drilling touched.

“They’re all excited that we’re looking at this opportunity, but they’re also nervous about what we might do,” said Rep. Pat Tiberi (R-Ohio), a Ways and Means subcommittee chairman. “There are companies today that have an effective rate in the single digits who wouldn’t like the fact that we’re going to take away credits and deductions to make [the Tax Code] simpler — because … they might be paying … more than they do today.”

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This anxiety stems from the fact that while the current corporate tax rate is 35 percent, many companies can shave 10 to 15 percentage points, or more, off that number by taking advantage of special provisions in the code.

For corporate tax reform to have any chance at succeeding, it will need the strong support of the business community, and the more companies rebel, the more its prospects dim.

Big Business groups like the Chamber, the Business Roundtable and the RATE Coalition are still pushing Congress to pursue tax reform, but the breaks they or their members are trying to preserve underscore how difficult it will be for Congress to accomplish the task.

The tensions are breaking into the open as Congress solicits specific ideas from the business community.

A month ago, Ways and Means created an email address to allow trade groups and businesses to weigh in on the debate, and the leaders of the tax reform working group on manufacturing sent businesses questionnaires to gauge whether they’d be willing to give up their vital tax breaks for a lower rate.

In response, the Chamber on Tuesday threw cold water on the idea of closing all corporate “loopholes,” or tax breaks, asking Ways and Means to preserve a set of incentives that make it easier for businesses to build factories and buy equipment.

“[T]he Chamber believes that provisions must be included in the code which allow businesses to more quickly recover their capital investments,” the Chamber wrote. “Failure to include such provisions, even if coupled with a lower marginal rate, is likely to harm economic growth and job creation.”

Until recently, it was considered standard practice to keep such protestations private.

As a couple of business lobbyists involved in tax reform explained, there was no reason for a company or an industry to make its favorite tax break the subject of discussion — and therefore a possible target for elimination. Especially if tax reform was doomed to die under its own weight.

“Those discussions were going on at a lower level,” Rep. Kevin Brady (R-Texas), a senior member of Ways and Means, said.

The new hedging is a sign that business leaders understand that the tax-writing leaders — Ways and Means Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) — are committed to moving forward.

The fight has been joined, and that’s OK, Republicans say. They know that some longtime allies will have to accept a certain amount of pain in order to establish a flatter system, and they never expected it to be easy.

In fact, Camp has been encouraging critics to make their cases publicly.

To the extent that he wanted to draw potential problems out of the shadows, he’s done it.

In addition to the Chamber, the Biotechnology Industry Organization and the Wood Machinery Manufacturers of America are among the groups that have come out in opposition to closing favored deductions and exemptions that they say are vital to their businesses.

But Republicans don’t have a prayer of winning support from President Barack Obama and the Democrats who run the Senate if a tax-reform proposal ends up cutting revenue, so they’ll most likely have to go after those breaks to lower the rate.

The Chamber’s letter asks for preservation of so-called cost-recovery provisions. One of them, known as accelerated depreciation, cost the government $52.3 billion in 2011 and is one of the most expensive business tax expenditures.

For that reason, it is both a prime target for lawmakers who are looking for loopholes to close in service of a lower rate and a key break for many of America’s biggest companies.

BIO told Ways and Means that “tax reform that is defined only by a broader tax base and a lower tax rate will not do enough to spur innovative, early-stage research in these emerging companies.”

The group — which represents more than 1,100 pharmaceutical, agriculture, science and technology companies, including Pfizer and Johnson & Johnson — is more interested in tax credits for research and development and securing more flexibility to write off their tax bills any net operating losses.

“These research-intensive biotechs are at the front end of a development timeline that will take over 10 years and cost them more than $1 billion,” CEO James C. Greenwood wrote in a letter posted on the committee’s comment page. “Virtually all of this process will take place before a company has product revenue, so lowering tax rates and broadening the tax base will not help small biotech companies in the near term.”

Wood Machinery Manufacturers of America, a group of 150 cabinet and furniture makers, made a similar case, asking Ways and Means to make permanent a bonus depreciation provision that allows small businesses to deduct up to $500,000 spent on machinery, property and other equipment.

When POLITICO asked WMMA legislative counsel John Satagaj if his group of corporations and small businesses would oppose tax reform should lawmakers elongate depreciation to lower the corporate tax rate, he answered, “I don’t know” since it “would have a significant impact on [our] effective rate.”

Big Oil is another prime example of an industry that values its tax breaks more than the lower tax rate lawmakers have identified.

“We see the value in a lower rate, sure; but for us, we’re constantly building mini-factories every time we drill a hole, so we have to be able to recover all those costs,” an oil and gas lobbyist said in an interview.

The lobbyist was referring to a deduction that allows petroleum companies to quickly write off labor costs and other expenses associated with building thousands of new rigs every year.

American drillers will be “completely screwed if Dave Camp goes after” that break, he added.

Experts say manufacturers have the most to lose in tax reform because they have one of the lowest effective industry tax rates at 17 percent in 2008, thanks to tax deductions such as accelerated depreciation that favor their industry.

Manufacturers can also deduct 9 percent of their taxable income — just because they make it in America. That break, at $8.9 billion, is another one of the most expensive loopholes.

The National Association of Manufacturers, which represents a vast array of manufacturing companies, says it supports lowering the tax rate to 25 percent but also wants credits for research and development made permanent as well as a “robust” capital cost recovery system.

“We don’t want to see a net increase for manufacturing as an outcome of tax reform,” Carolyn Lee, NAM’s senior director for tax policy, said. “We need to reduce the overall tax load or at the very least, stay where we are and receive permanent security.”

Tiberi says the divide over whether to emphasize lower rates at the expenses of loopholes even splits industries. He spoke with rival pharmaceutical companies, and while one told him it would be willing to give up R&D credits for the lower rate, the second said it would oppose reform.

But Tiberi said he is confident that enough businesses will support the committee’s tax reform efforts, even if it goes after beloved breaks. And whether it gains enough steam to become law, Brady said he is certain the Ways and Means Committee will produce a bill this year.