January 26, 2011 9:20 pm

Brutal battle looms over tax loopholes

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Barack Obama’s call for Congress to cut the corporate tax rate and close special “loopholes” for individual industries has set the stage for a long and brutal lobbying fight on Capitol Hill.

It could also lead to a realignment of the biggest “winners” and “losers” of the US tax code.

The US president was short on details in his State of the Union address about the kinds of tax breaks he would like to see abolished to pay for the first overall reduction in the corporate tax rate in 25 years, a move that he said would enhance competitiveness.

The US rate stands at 35 per cent, the second highest in the Organisation for Economic Co-operation and Development.

Anne Mathias, tax analyst at WRG, said companies already domiciled in US tax havens, as well as pharmaceutical groups such as Pfizer and technology groups such as Hewlett- Packard, which have been able to sustain effective tax rates in the low 20s by taking advantage of special tax provisions, might have the most to lose.

Companies that could see benefits in a tax revamp were those focused on US sources of revenue that did not rely heavily on foreign subsidiaries, including large US retailers such as Best Buy and Gap Inc, and food and healthcare companies.

“This is an insanely complex system, and the only way to lower the corporate rate without increasing the deficit is to eliminate enough loopholes so that companies with very low effective tax rates have to pay more,” she said. “Any legislative effort is going
to have to be a balancing act.”

Gene Sperling, Mr Obama’s chief economic adviser, acknowledged on Tuesday that reaching an agreement in Congress and – to some extent – within the corporate community, would be a Herculean task politically.

“Everyone wants to cut someone else’s tax loophole,” he said.

The US Congress is not only divided on the tax issue along partisan lines, but also by the regions, industries and large corporations that members represent.

Lawmakers representing corn-growing states from both sides of the aisle would be hard pressed to agree to a cut in ethanol-related subsidies, while those representing Silicon Valley would probably try to protect provisions that allow tech companies to skew high taxation on intellectual property to low-tax countries.

An administration official on Wednesday said the president would continue “outreach” to stakeholders over the coming months.

“Revenue-neutral, rate-lowering corporate tax reform that removes special tax incentives for certain activities and investment will improve the allocation of capital in the economy, which should improve growth,” the official said.

The White House has not been shy about its intention to target $4bn in tax subsidies for the oil and gas industry, which Mr Obama said ought to be diverted
to pay for investments in “clean energy technology”.

But the administration is not likely to call for the reduction of billions of dollars in tax credits and deductions for research, because that is an area Mr Obama has said ought to be expanded.

Many Republicans want the US to return to a territorial – rather than worldwide – system of taxation that would end taxes of profits generated by companies abroad when they are brought back into the US.

Dave Camp, the Republican chairman of the House ways and means committee, the chief tax writing body, said he was disappointed that Mr Obama did not address the needs for tax reform for small business.

He did not comment on the president’s call for an end to special interest tax cuts.

Clint Stretch, managing principal of tax policy at Deloitte Tax LLP, said the gulf between the administration’s vision of tax reform, and that of the resurgent Republicans in the House of Representatives, might be too wide to achieve real reform.

As with most policy issues in Washington, the momentum for change might ultimately come down to whether enough influential businesses believe an overall cut in corporate tax would be worth the price of abandoning the tax benefits they already enjoy, and whether they can convince lawmakers to agree.

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