The administration's new tax bill, now in preparation at the Treasury Department, promises to increase the divisions on tax policy among the manufacturing, service and high-technology sectors of business.
The National Association of Manufacturers yesterday defended a key business tax break that is in serious jeopardy: the accelerated-depreciation provisions enacted in 1981 in President Reagan's initial tax program.
Treasury officials have proposed to Treasury Secretary Donald T. Regan that the 1981 Accelerated Cost Recovery System (ACRS) be eliminated and replaced with new depreciation rules that presumably would be less generous for many businesses. Regan has not made a final decision on this issue, or the other tax proposals expected to go to the president early next month.
Paul Huard of the NAM said it would be "lunacy" to alter ACRS. "Every year since it was passed, it's been changed, and business has to rearrange its plan. That's throwing the basic industries to the dogs," said Huard, NAM's vice president for taxation and fiscal policy.
The U.S. Chamber of Commerce also is defending ACRS as having encouraged business investment and thus having helped to fuel the current economic recovery.
But Ronald K. Shelp, an official of the Coalition of Service Industries, said his group is divided on whether to fight to keep ACRS. "Without necessarily wanting to change the structure to do away with the incentives manufacturers have, there is a feeling that there's a bias in the tax system against service companies and high-tech companies and that this bias ought to be changed."
The accelerated-depreciaton rules proposed by Reagan and adopted by Congress in 1981 have helped to create huge disparities in tax rates among various kinds of businesses. Those that regularly make large capital investments -- such as aerospace and chemicals -- have lower rates than service or some high-tech industries.
The thrust of Treasury tax writers is to reduce those disparities by eliminating some major tax preferences, broadening the tax base while lowering individual and corporate rates. "It's unlikely you could expand the base further than we have," one administration official said.
But Huard said this attempt to "flatten" the tax system by narrowing the range of marginal tax rates would be stopped cold next year by special-interest opposition.
"I think all the modified-flat-tax proposals are going to founder like a rock," he said. "You can't broaden the base without aggravating extremely large constituencies."
But among service companies -- in the banking and insurance industries, for instance -- there is growing concern that the administration's flat-tax reforms may lead to a drawn-out deadlock in Congress next year, several business leaders said yesterday.
A deadlock over reform could delay a resolution of the other key issue -- whether to raise taxes to shrink the deficit.
Among some service sectors, the top priority is strong, early action next year to reduce the deficit, Shelp said.
"I've heard people express a lot more concern over the deficit than over tax reform. The deficit is a serious problem that has to be grappled with," Shelp said.
A top executive of one of the largest financial services companies, who asked not to be named, said the banking and insurance industries would trade a higher tax rate for a credible deficit-reduction proposal, believing that would mean lower interest rates.
This official speculated that there could be a sharp drop in financial markets if it becomes clear that the administration's tax plan does not help shrink the deficit by raising tax revenue significantly.
"The Wall Street consensus was that the president was really posturing for the elections" in campaigning against a tax increase, but now Wall Street is worried he really meant it, the official said.