After years of talk and legislative promises, companies, economists and politicians from both sides of the aisle agree that an overhaul of the tax code is necessary and long overdue.
But a day before the release of a tax plan from the White House and congressional leaders, ideological and corporate fault lines are already emerging that promise to threaten efforts to write and ultimately pass legislation.
There is broad agreement so far in the call for tax reform, including the need for a lower corporate tax rate, but the specifics of the policy will almost certainly fracture that united front into different interest groups — each fighting to preserve specific tax cuts essential to their industries.
“We’ve been lobbying on tax reform since 1986, to be honest with you,” said Jim Tobin, chief lobbyist for the National Association of Home Builders. “In tax reform, someone’s got to win, and someone’s got to lose.”
Even though the specifics of the plan aren’t known, some of the possible divisions are already apparent, as industries prepare to fiercely defend deductions or tax credits or fight new provisions that could hurt their industries.
For example, the Trump administration has suggested it might seek to provide middle class tax relief by doubling the standard deduction — an amount everyone gets to deduct from their taxable income. But that could discourage some people who are able to deduct more from their taxable income by taking multiple individual deductions — especially the mortgage interest deduction — from continuing to do so. Real estate agents and home builders, two of Washington's powerful lobbies, worry that shrinking the role of the mortgage interest deduction in the tax code would harm home-buying and plan to fight that idea strenuously.
On the business side, “full expensing,” a provision to allow companies to deduct the total cost of capital expenditures at one time, could help push telecom companies or manufacturers to invest in equipment. But it is an expensive provision that is almost always talked about in tandem with eliminating the ability to deduct business interest — a tax break dearly held by real estate and finance companies.
To help pay for it all, Republicans are eyeing eliminating the state and local tax deduction, which could be a hard sell in states with high taxes.
The essence of the debate is that although there is agreement that the tax code is overly complicated — and that the corporate tax rate is too high — that is where the common ground ends.
Questions such as how much in taxes companies should pay, how much individuals should pay and what kinds of personal and corporate deductions should be allowed are all potential battlefields.
“I think that the areas of disagreement and contention are pretty significant,” said Michael Strain, a resident scholar at the conservative American Enterprise Institute. “The question of how to pay for a rate reduction is very contentious. You’ll see many Republicans who are okay with paying with it through a higher deficit — and many Republicans who are opposed to that. In addition, I think there are very powerful interest groups that have a lot at stake in a lot of the deductions and exclusions that could be closed to pay for it. You’ll see a lot of push back.”
Analysts expect nearly every aspect of the tax proposal could face some kind of attack. “There will be hundreds, if not thousands of pages [of legislation]. That’s when every company, every constituent, every state is going to get really involved and say, ‘No, we don’t like this, we like that,’” said Ron Graziano, a global accounting and tax strategist at Credit Suisse HOLT.
That pressure has already killed off one of the year’s most significant new reform ideas, one supported by House Speaker Paul Ryan. Under the “border adjustment tax,” companies would have been taxed based on where they sold their goods rather than where they produced them — meaning imports sold in the U.S. would be taxed, but exports would not.
The idea was fiercely opposed by retailers, and in July, the “Big Six,” the group of White House officials and lawmakers leading the tax reform effort said they had “set this policy aside to advance tax reform.”
“Who knows what’s going to be in the next one?” Graziano said. “Somebody is going to be negatively affected again.”
What’s known publicly about the tax plan — and the plan itself — is in flux. Republicans are targeting a corporate rate of 20 percent — a large drop from the current rate of 35 percent, but still above Trump’s goal of 15 percent. The plan will also reportedly allow “full expensing” of capital outlays, but only for five years — a possible way to cushion the brunt of its estimated $2.2 trillion cost over a decade if it were permanent.
That leaves lots of questions, but even in the early days, the business community is bending over backward to stay on the same message: focus on lowering the corporate tax rate.
“The corporate tax rate issue is so important that every company ought to be conscious of it; every American ought to be conscious of it,” said James Pinkerton, co-chair of the RATE Coalition, a lobbying group that represents major companies that primarily operate in the U.S. and tend to pay a high tax rate.
At an event held by the Business Roundtable last week, AT&T chief executive Randall Stephenson said his company, which he described as the “heaviest capital investor” in the country, would still put a lower rate before the benefits of full expensing.
“If you’re after competitiveness, priority one is the tax rate,” Stephenson said. “If you take away accelerated or bonus depreciation, the biggest ox that gets gored in the United States of America is AT&T. ... Would we make that trade for a 20 percent corporate rate? Our taxes would go up in the short run, but over the long term, if you get this economic stimulus we’re talking about, we’ll make that trade all day long.”
That message may fracture once a bill lays out which industries make sacrifices and which ones benefit.
“It’s just not possible to do tax reform and make everybody happy — even if you start from the premise of, ‘We’re going to lower tax rates,’ because the [company] profiles are so different,” said Edward Kleinbard, a law professor at the University of Southern California and the former chief of staff to Congress’s nonpartisan Joint Committee on Taxation. “Unless you simply just give away the store entirely, and destroy any pretense of deficit awareness.”