CQ TODAY PRINT EDITION
May 11, 2009 – 7:28 p.m.
Tax Plan Calls for Corporate Hikes
By Joseph J. Schatz, CQ Staff
The more the business community sees of the Obama administration’s tax plans, the less it likes.
As the White House completed its multipart budget release Monday with fresh details on a plan to scale back tax advantages for businesses operating overseas, a proposed tax hike on the life insurance industry and a bid to eliminate an unintended tax break claimed by paper companies, industry groups pushed back with forceful rhetoric, trying to convince lawmakers that President Obama’s tax agenda is bad for business.
“While the administration would have the public believe that these tax increases are good for the American people, nothing could be further from the truth: The facts clearly demonstrate that expansion by U.S. business abroad leads to more and better-paying jobs in America,” John J. Castellani, president of the Business Roundtable, said in a statement urging Congress to reject the “unprecedented” tax hikes.
The biggest surprise in Monday’s release — a suggested $12.7 billion tax increase on life insurance companies — drew an immediate rebuke from the American Council of Life Insurers, the industry’s trade association.
“Seventy-five million American families rely on the products offered by life insurers for their financial and retirement security,” Frank Keating, the group’s president and CEO, said in a statement. “This is absolutely the wrong time to make it more expensive for families to obtain the security and peace of mind our products provide.”
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The proposal, would, in part, limit a “dividends-received deduction” claimed by many insurance corporations that get dividends from other domestic firms. The deduction can be unfairly inflated by the insurance companies, according to the IRS.
Plugging a Gap
Obama’s plan is intended to raise some of the money needed for an overhaul of the health care system. Earlier this year, the White House proposed paying for that plan with a cap on the deductions that can be claimed by taxpayers in the two top tax brackets, but estimates of the revenue that change would bring in have fallen. To help make up the difference, the administration proposes to raise nearly $210 billion over the next decade by cutting back tax advantages for companies operating internationally.
Also falling in the revenue-raiser category are proposed modifications to the estate and gift tax that would raise $24.2 billion. The bulk of that money would come from a proposed limit on the “valuation discounts” used to reduce the value of some estates, for tax purposes, when they are transferred within a family. A Treasury official argued that the provision would affect only 0.3 percent of estates transferred each year.
However, Senate Finance Chairman Max Baucus , D-Mont., already has said that he would prefer to pay for health care changes with savings wrung from the health care system.
In fact, a group of representatives from the health care industry has prepared a plan for Obama aimed at reducing the growth of health costs for the next 10 years.
The tax proposal came a week after the administration announced that it wants to raise $60.1 billion over 10 years by barring companies from claiming deductions for domestic expenses related to foreign earnings until they bring those profits home. The proposal would alter the “check-the-box” rules that allow companies to choose how some of their foreign subsidiaries are treated for tax purposes, a move that would raise $86.5 billion over 10 years.
The White House also proposes multiple changes to the foreign tax credit, totaling $43 billion.
Severe or Moderate Bite?
The proposal has prompted a backlash from multinational corporations. In a background briefing Monday, Treasury officials defended the plan — which makes deferring taxation on foreign income less attractive — as “moderate,” and challenged the business community to meet the White House halfway.
“There is a balance you need to strike in [tax] deferral issues,” a Treasury official told reporters.
Included among the new international tax proposals in Obama’s budget are provisions that would:
• Prevent companies from using equity swaps to avoid paying withholding taxes on dividends. This would raise $1.4 billion over 10 years.
• Repeal so-called 80/20 rules, which effectively allow companies to shield from taxes interest and dividends from subsidiaries that have 80 percent of their business overseas. This would raise 1.2 billion.
• Limit so-called earnings-stripping by foreign-controlled firms that add debt and other costs to their U.S. subsidiaries’ balance sheets to drive down their profits and tax liability. This would raise $1.2 billion.
The Finance Committee’s ranking Republican, Charles E. Grassley of Iowa, expressed some concerns. “On shutting down tax shelter types of activities, I’ll be right there with the president,” he said in a statement. “But if the proposal is in effect a job-killing tax increase on domestic businesses for no good reason, then the president will lose my support.”
Fuel Tax Credit
The White House also is taking aim at paper companies that have been claiming a 50-cent-per-gallon tax credit, enacted as part of the 2005 highway law (PL 109-59) and expanded in a 2007 tax law (PL 110-172). The intent of the credit was to encourage the use of alternative fuels in the production of electricity.
The credit is offered to companies if they mix an alternative fuel with a traditional carbon-based fossil fuel, such as diesel. Paper companies have long produced energy using an alternative-fuel source — a liquid wood byproduct of the pulp-making process, also known as “black liquor.” But by adding some diesel to the mixture, they too qualify for the tax credit.
Baucus says it was an unintended effect of the law, and the administration is proposing to exclude black liquor from the tax break, a move that would raise $702 million.
However, because the tax break expires at the end of the year — and several senators from timber-rich states oppose repealing it for paper companies — it remains unclear whether Congress will act on the proposal.
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