A rift has opened in the U.S. business community over whether tax increases should be an important part of the government’s strategy for tackling the federal deficit and heading off destabilizing changes in tax and spending policies set to kick in at the end of the year.

Thomas Donohue, president of the U.S. Chamber of Commerce, speaks at the organization's headquarters in Washington. (Bloomberg)

The latest salvo was fired Wednesday when a coalition of business trade associations and advocacy groups warned Congress against agreeing to a deal that leans on new tax revenue. The group, which includes the Chamber of Commerce, the National Federation of Independent Business, and the National Association of Manufacturers, urged lawmakers to put deep cuts in federal spending at the center of any plan to reduce the deficit.

This group, dubbed the Tax Relief Coalition, is pushing back against a rival campaign led by prominent chief executives who called on Congress late last month to include increased taxes, alongside spending cuts, in efforts to tame the national debt. Among the companies involved in the rival campaign are the leaders of Honeywell, JPMorgan Chase, UPS and Aetna.

The escalating dispute comes two months before the United States is set to face a “fiscal cliff” of sharp tax hikes and spending cuts that will automatically take effect unless the White House and Congress agree on plans to avoid it. Many economists have warned that the combination of tax hikes and spending cuts could knock the wind out of a U.S. economy still struggling to recover.

Much of the disagreement among business leaders focuses on the recommendations of a bipartisan panel, known as the Simpson-Bowles commission, for addressing federal deficits. Although the chief executives of Honeywell, JP Morgan Chase and their allies have endorsed the panel’s recommendations as a starting point for Congress, the Tax Relief Coalition rejected the approach, saying that spending on programs like Social Security and Medicare is the main problem.

“Because of the significant imbalance in entitlement programs, we also believe that any serious reform must include significantly more in spending reductions than in revenue,” the Tax Relief Coalition said in a statement. “Unfortunately, Bowles-Simpson does not achieve that objective.”

The coalition also objects to Simpson-Bowles because the recommendations assume that Bush-era tax cuts for wealthy taxpayers will expire at the end of this year. The coalition is urging Congress to extend the tax cuts for all taxpayers, which is the position of presidential candidate Mitt Romney and Republican lawmakers. President Obama and his Democratic allies have said they want to see the tax cuts extended for most taxpayers but be allowed to expire for the wealthy, raising rates on income over $250,000 a year.

Jade West, a senior vice president at the National Association of Wholesale-Distributors and a spokesman for the Tax Relief Coalition, said the Simpson-Bowles plan is nothing less than “tax increase.” She said the willingness to boost tax rates for upper-income taxpayers was “a political decision as well as a policy decision. It is clearly President Obama’s position.”

The Chamber of Commerce raised similar concerns about the approach endorsed by the chief executives of Honeywell, JPMorgan Chase and others who are willing to increase taxes to get a budget deal. “Raising taxes on successful small businesses and individuals, investments, and capital gains would discourage capital accumulation and job creation,” says Bruce Josten, the chamber’s executive vice president.

Members of the Tax Relief Coalition say the rival executives do not represent all businesses and are worried that the public may believe that they do. West said the chief executives who have spoken favorably of Simpson-Bowles represent big corporations. Although the Tax Relief Coalition includes companies such as Exxon Mobil and Koch Industries, small businesses make up the majority of companies that the group represents, she said.

West said that allowing the Bush-era income-tax cuts to expire for top-end earners would hit some of these small businesses because these firms tend to file their taxes under the individual tax code rather than the corporate code. If there’s a deficit-reduction proposal being considered that fails to go far enough in protecting individual tax rates, “the small business community will rise up in arms,” she predicted.

As a result of these concerns, some members of the coalition want to see all of the Bush-era tax cuts extended even before Congress begins to develop a plan for cutting the federal deficit.

That’s in sharp contrast to the chief executives, who have argued that extending tax cuts without linking this to a bigger deficit-reduction package would be a mistake. Honeywell chief executive David Cote has said this would amount to “muddling through the middle.”

Maya MacGuineas, who is coordinating the chief executives’ campaign known as Fix the Debt, warned that the country needs a so-called grand bargain to get the government’s finances back on a healthy footing. Avoiding the fiscal cliff at the end of the year is not enough. “The notion of extending everything for a year without a big comprehensive deal is so dangerous,” MacGuineas said.

She added that differences between big corporations and small businesses on taxes should be expected. “Talking about the business community speaking as one voice is impossible, as there are as many business perspectives as people perspectives,” MacGuineas said.