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Businesses are apprehensive that lawmakers could downgrade many of the changes they’re hoping to see in tax reform to short-term tax cuts that won’t grow company profits in the long run.
A bill that blends some permanent tax changes with temporary cuts likely won’t generate the long-term 3 percent annual economic growth Republicans are hoping for. It also means the legislation will be more focused on cutting taxes than on overhauling and simplifying the tax system.
As disagreement continues over how to pay for lower tax rates and more generous expensing provisions, the majority of the bill could end up being temporary, congressional aides and lobbyists told Bloomberg BNA.
But the revenue offsets to pay for the temporary rates, such as eliminating the deductibility of interest expense, would be a permanent change. Most companies won’t welcome short-term gains paid for by losing certain deductions forever, said Jane Rohrs, a director for the Federal Tax Accounting Periods, Methods & Credits Group at Deloitte Tax LLP.
“Permanence is really critical, but what that means is that it has to balance over time,” House Ways and Means Committee Chairman Kevin Brady (R-Texas) told United Parcel Service Inc. employees Aug. 22. “We are working to make the hard choices to make sure tax reform grows, leapfrogs us, and balances us within the budget so our businesses and our families can count on it.”
Lawmakers will have to come up with revenue to pay for tax cuts, even temporary ones. Brady and others haven’t gotten specific about which business deductions and credits they would eliminate to pay for lower rates, but many companies are telling congressional offices that if the corporate rate isn’t below 30 percent, the exercise isn’t worth it. The 2014 tax reform proposal from former Ways and Means Chairman Dave Camp (R-Mich.) failed, in part, because businesses decided the tax preferences they would have to give up weren’t worth a 25 percent tax rate.
A tax bill that doesn’t get the rate below 25 percent, even on a temporary basis, will be viewed as a disappointment, Isaac Boltansky, senior vice president and policy analyst at Compass Point Research and Trading LLC, said. A bill that has a tax rate in the high 20s could receive a lot of pushback, because many companies pay an effective rate that is “securely” below that, he said.
If Republicans aren’t able to agree on a bill that cuts the rate below 27 percent or 28 percent, the laws of self-preservation will start to kick in and they will frame the tax bill as a “down payment” on larger tax reform as they head into the 2018 midterms, Boltansky said.
Many in the tax community agree that temporary tax changes don’t make for good policy. If you are doing temporary tax cuts to get economic activity, you are “basically wasting your money,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.
Businesses usually don’t increase their output from a short-term tax cut. If depreciation allowances are more generous for a period of time, companies will make more investments those years, but will make fewer when they can’t write off as much of the purchase. In the long term, they’re doing what they were already going to do, Gleckman said.
For conservatives, the goal of tax reform is to lower the corporate tax rate, move to a territorial tax system, and get full expensing for businesses, Mattie Duppler, a senior fellow at the National Taxpayers Union, said. None of those things are as pro-growth as possible if they are only temporary, she said.
Lawmakers are looking at a temporary corporate tax cut that would cut the rate to the mid-20s, but then increase it to 30 percent after several years, GOP aides have said. Publicly traded companies are likely to frown on an increasing rate, which could create market uncertainty, Rohrs said.
The tax rate affects a company’s earnings per share, a key metric used by investors and analysts to measure performance. In the early years, the company would have higher earnings, but would face pressure to continue to have the same level of profits, even if the tax rate goes up, she said.
Sectors, including technology, pharmaceuticals, and utilities, are more susceptible to fluctuating tax rates, said David Sites, an international tax partner at Grant Thornton LLP. For regulated industries, such as insurance and utilities, how they price their products depends on cash flow. Businesses involved in a lot of research and development have to make long-term decisions about how to spend that cash and whether to do it inside or outside the U.S.
Michael Greenwald, a partner at Friedman LLP, said that knowing what is and isn’t taxable, such as interest expense and investments, is more important for permanence than the tax rate.
“If I borrow long term and suddenly interest isn’t deductible, that’s not a good answer,” he said. “Business decisions are not made year-to-year.”
The U.S. Chamber of Commerce is still pushing for permanent tax reform, because that gives businesses the certainty they need to make decisions, Caroline Harris, the Chamber’s vice president for tax policy, said in a statement sent to Bloomberg BNA. But, “without seeing the full package, it’s difficult to judge specific provisions,” she said.
The business and tax policy communities are aligned on the importance of permanent tax policy, but Republicans aren’t, especially because many view tax cuts as the path of least resistance to a political win after the legislative agenda has stalled all year.
Before leaving for recess, Rep. David Schweikert (R-Ariz.) told Bloomberg BNA that his main priority this fall will be explaining to his colleagues why a tax bill needs to be permanent. If the rate reductions are temporary, they don’t generate economic growth, he said.
“I’m the guy who will show up with some charts and say, ‘look, here is our experience from the early 2000s with lowering rates,’” he said. “We got a nice bounce out of it for four years, and then it fades away.”
But temporary provisions don’t always stay that way. A number of the changes and cuts made by the 1986 Tax Reform Act were rolled back in subsequent years. Most of the temporary tax cuts made in 2001 and 2003 during President George W. Bush’s administration became permanent in 2012, because many Democrats and Republicans didn’t want to vote for a tax increase.
“Everything is permanent until Congress undoes it,” Greenwald said.
To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com
To contact the editor responsible for this story: Meg Shreve at email@example.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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