“We certainly are not happy,” said Dorothy Coleman, chief tax lobbyist for the National Association of Manufacturers. “There are certainly a lot of red flags in there that are really very concerning to us.”
Part of the problem, Coleman and others said, is what’s missing from the trio of “discussion drafts” offered by Senate Finance Committee Chairman Max Baucus (D-Mont.). The proposals would end the practice of indefinitely deferring U.S. taxes on foreign earnings, impose an immediate 20 percent tax on roughly $2 trillion in profits accumulated overseas and sharply curtail the ability of businesses to quickly deduct certain expenses, such as advertising.
While Baucus released reams of paper detailing the potential pain of tax reform, he has so far failed to give businesses a concrete idea of the potential pleasure. Baucus says his ideas will generate enough revenue to let him lower the 35 percent rate significantly without losing money for the U.S. Treasury, but he has declined to propose a new rate, saying only that he is aiming to get it under 30 percent.
“These are staff drafts to get reaction. What’s the business community think? What do policy people think? What’s the community that’s interested in tax reform think?” Baucus said as he released the first of the three drafts. “Then let’s assess where we are at that point.”
A specific rate is key to assessing the proposals, many tax lobbyists said. Baucus’s counterpart in the House, Ways and Means Committee Chairman Dave Camp (R-Mich.), has said he is aiming to push the corporate rate down to 25 percent, although he has yet to release full details of his tax plan.
President Obama has set a corporate target of 28 percent, but the Treasury Department has released only a sketchy white paper on how to get there.
With the release of full-fledged legislative proposals, Baucus has advanced tax reform a bit further. But instead of pleasing the business community, his proposals may instead serve as a wake-up call on the true cost of reform, some tax analysts said.
Assuming the rate ultimately winds up in the “high 20s or low 30s,” Baucus’s proposals would probably increase the tax burden on the foreign earnings of U.S.-based companies, said Marc Gerson, a tax expert at Miller & Chevalier, a Washington law firm. “Any way you slice it, you look at this and say there’s going to be a higher tax burden on international operations.”
Particularly worrisome to many companies is Baucus’s proposal to automatically tax accumulated profits. Under current law, U.S. taxes on profits earned overseas can be deferred until those profits are brought home. Partly as a result, many companies have chosen to park billions of dollars in foreign accounts.
Some of those profits have been legitimately reinvested in plants and equipment abroad, tax lobbyists said. “If you have to pay a 20 percent tax all of a sudden, not every company would have that cash on hand,” Coleman said.
Moreover, Baucus has said he is not inclined to plow those one-time proceeds — estimated by his staff at around $200 billion — into rate reduction. Aides argued that it would make no sense to permanently reduce the tax rate based on temporary proceeds, which must be fully paid within eight years.
Making that money available for other purposes could also make tax reform more appealing to Democrats, who have called for new investments in job creation and infrastructure. But it would make tax reform more expensive for business. John Engler, president of the Business Roundtable, which represents the chief executives of some of the nation’s largest multinationals, quickly issued a statement panning the proposal.
“We appreciate the leadership . . . to move tax reform forward,” Engler said. “Unfortunately, we do not believe that the staff’s international discussion draft supports that goal because it would make many American companies even less competitive than their non-U.S. counterparts.”
Given the reaction to the Baucus proposals, some lobbyists and other tax analysts said the prospects for completing the first overhaul of the tax code since 1986 may actually have dimmed. Baucus has set a Jan. 17 deadline for comments but has yet to schedule a committee vote.
In the House, Camp acknowledged that he will not release his own reform legislation this year, after Republican leaders asked him not to distract attention from the botched rollout of Obama’s health-care law.
Both Baucus and Camp are planning to proceed in the new year. But with congressional elections looming next November, the hard choices required by tax reform may only become less appealing.
“It’s getting pretty late in the game,” said Eric Toder, an expert with the independent Tax Policy Center. “It’s hard to imagine how they’re going to get it done before it gets swamped by the midterm elections.”