The sweeping changes in business taxes proposed by the Treasury Department are intended to eliminate major differences in effective tax rates among industries. Treasury officials said their goal was not to increase taxes on income from capital so much as it was to make the tax burden more uniform on different types of economic activity.
But by 1990, when all of the provisions were fully effective, corporate income taxes would be $45 billion higher as a result, while individual taxes would be $38 billion lower, according to Treasury estimates.
Even those figures mask the size of some of the changes. Replacement of the current accelerated cost recovery system (ACRS) for writing off capital investments in business equipment and structures would increase the tax bill of businesses using ACRS by $81 billion in 1990. Elimination of the investment tax credit -- a credit of up to 10 percent of the purchase price of qualifying equipment -- would boost individual and corporate taxes another $38 billion.
Those increases would be offset by a cut in the top corporate income tax rate from 46 percent to 33 percent, while eliminating all lower rates, that would reduce Treasury's tax take by $51 billion.
With changes in tax liabilities of that magnitude sloshing around in the system, it was hardly surprising that representatives of a number of industries reacted strongly to the Treasury plan. So far, among those industries that had managed to sort out the likely impact, the reaction was largely mixed or negative.
Treasury Secretary Donald T. Regan urged business people not to reject the changes out of hand. Instead, they should have their accountants figure out exactly how the package would affect them and then make their judgments.
So far, Treasury has not made enough details available for any such precise accounting, or perhaps even ballpark estimates. For one thing, no information will be available until next week about details of the new schedule for writing off investments to replace ACRS, which in dollar terms is the biggest change of all.
Moreover, it will remain difficult to calculate some of the potential general effects, such as a lower level of interest rates that some economists said could follow the proposed adjustment of interest income for inflation. Lower rates could offset some of the loss of depreciation allowances associated with replacement of ACRS.
Nevertheless, mere presentation of the sweeping package has already begun to affect some investment decisions. At a meeting of the Securities Industries Association in Boca Raton, Fla., Robert E. Linton, chairman of Drexel Burnham Lambert, said his firm has already scratched two deals because of the Treasury plan. One involved second homes in the Southwest and the other a real estate shelter proposal he said would not now sell to customers.
Here are some of the industry reactions to the Treasury proposal: Retailers
Verrick O. French, executive vice president of the National Retail Merchants Association, said his association is weighing the pros and cons and has no overall position as yet. As one of the industries with the highest effective tax rates, retailing should benefit from the rate reduction to 33 percent.
Repeal of the investment tax credit would not hurt very much, because retailers' major investments are more likely to be in buildings, to which the investment tax credit does not apply. However, the write-off period for structures likely will be raised to 30 or 35 years from the 18-year period that will apply beginning next year, and that would hurt, French said. Banks, S&Ls, Insurance
Officially, trade associations for both savings and loans and banks say the program is far too complex to enable them to have a coherent response. Treasury estimates that a series of specific changes would increase taxes on financial institutions, including life and property and casualty insurers, by about $12 billion a year, some of which would be offset by the drop in rates.
The largest effect of any proposal on the industry would be the disallowance of a full deduction for interest incurred to invest in tax-exempt securities, a $5 billion item, according to Treasury. Repeal of the right of depository institutions to deduct additions to their loan loss reserves would increase their taxes by nearly $2 billion.
However, many financial analysts think restrictions on reserve additions already are too stringent, especially at a time of concern about the health of savings institutions. Elimination of the deductibility of the reserve additions would make it financially less attractive for banks and S&Ls to add to their reserves -- and might, as a result, contribute to the long-term instability of the system, industry observers said. On the other hand, the industry as a whole is writing off more loans than it is adding to reserves, so the impact in 1984 would be negligible. S&Ls have made so little money in recent years that elimination of the reserve would have little short-term impact.
Phil Briggs, executive vice president of Metropolitan Life Insurance Co., said, "The taxation of employe benefits is of major concern to us. It would probably hurt our business." Steel
U.S. Steel Corp. Chairman David M. Roderick said the changes in the investment tax credit and accelerated depreciation programs "would have a substantially adverse effect on capital spending and business planning in basic industries. We believe this would be regrettable. Capital generation as provided in these two provisions is needed so that basic industries can more fully participate in the current economic recovery." The industry now has close to $1 billion on the books in tax credits that it hasn't been able to use because of its low profits. Autos
General Motors Corp. Chairman Roger B. Smith yesterday praised Regan's proposal as a move "in the right direction" toward tax reform. "GM believes that the tax system should be as neutral as possible so as not to distort the allocation of resources within the economy. Also, there is a need for simplification," Smith said. Machine Tools
The economic recovery and the fast write-offs associated with ACRS have combined to increase greatly investment in equipment such as machine tools. Loss of ACRS would hurt the industry, which is also hard hit by a rise in imports of the types of equipment it produces. James H. Mack of the National Machine Tool Builders Association said he is "disappointed the Treasury Department chose to scale back ACRS, the centerpiece of the 1981 tax bill." Equipment Leasing
Paul Finfer, president of Finalco, a Fairfax County equipment leasing company, said the tax plan will "hurt very badly." If adopted, it would cause the leasing industry to change its business for the third time in four years and add to the cost of leasing, he said. Taking away investment tax credits, reducing depreciation and lowering tax rates at the same time will increase the cost to the lessee because owners' benefits are materially reduced, he said. High-Tech, Venture Capital
Bruce Holbein, spokesman for Digital Equipment Co., declared, "High-tech companies are, on the whole, delighted with any move toward lower rates, and we're particularly delighted to see an extension of the R&D tax credit. . . .
"It's true that high-tech companies are paying nominal or no dividends . . . so to a degree, the Treasury proposal would tend to diminish the value of our stocks. But for the more established companies, we stand to profit from a significant reduction in our tax rates."
He said his support was qualified because he has not yet sorted out the implications of foreign tax issues. "High-tech companies have to internationalize their businesses, to manufacture and sell around the world. So the treatment of income from foreign subsidiaries . . . and other related issues . . . are critical. We have to study these."
On the other hand, the venture capital industry is dead set against the change in capital gains treatment, contending this will eliminate a vital incentive for its investors.
Dan Kinglsey, executive director of the National Venture Capital Association, said, "If you raise the rate on capital-gains taxation, and reduce the differential in the reward for risky versus less risky investments the whole thing comes to a screeching halt." Transportation
Richard Briggs, vice president of the Association of American Railroads, said, "We're a capital-intensive industry that requires about $1.30 in net investment to reap $1 worth of annual sales. A typical manufacturing firm is 45 cents for $1. So we're three times as capital intensive.
"Elimination of the ACRS and investment tax credit would have a very deleterious effect on the industry. It's just terrible news. . . . We would think some other alternatives are more greatly in the public interest."
Another railroad expert quipped, "Obviously the loss of accelerated depreciation could hurt us. We benefit greatly by deferred taxes, and to the extent you actually have to pay them, it smarts."
In noting that the tourist industry "is likely to rally" against certain provisions, one airline expert said, "Airlines are a capital intensive industry that has had its stability enhanced considerably by the investment tax credit and accelerated depreciation. Annual airplane investment is about $4 billion." Restaurants
The National Restaurant Association opposes Treasury proposals to eliminate income tax deductions, including the deduction on business entertainment meals. "The Treasury Department should study the impact of its proposal more carefully," said Harris O. Machus, association president. "A reduction in the deductibility of business entertainment meals will have a negative impact on the economy, deprive the U.S. Treasury of a significant amount of revenue and reduce revenues on the state and local levels as well."