(Bloomberg) For a plan unlikely to become law anytime soon, Representative Dave Camps proposal to revamp the tax code is causing a lot of agitation among U.S. companies.
The American Petroleum Institute says accounting rule changes could depress energy production. The Financial Services Forum, representing chief executives of the nations biggest banks, warns that a tax on their companies assets would curtail lending. The National Association of Realtors objects to changes limiting deductions of mortgage interest and property taxes.
Camps 979-page draft proposal, released yesterday, would eliminate dozens of breaks and reduce rates in the most complete reconstruction of the U.S. tax system since 1986. U.S. business groups, backed by large corporations and their lobbying budgets, are escalating the political pressure on Camp and other lawmakers to prevent provisions that harm them from becoming law.
This carries with it a seriousness that many view as the start of what will be a multi-year process, said Micah Green, a partner at Patton Boggs LLP in Washington who is a lobbyist for companies such as Lloyds of London Ltd. Its the ultimate trial balloon, and either it gets shot down or continues to rise.
A clear picture of the winners and losers from Camps plan will emerge in the coming days and weeks. Generally, companies that now pay high effective tax rates will get a boost from the plans rate cuts and lose little from the vanishing breaks. Companies and constituencies that benefit from the current system would likely pay more under Camps plan.
Retailers, medical device makers and franchise businesses yesterday were supportive of the plan.
We need to carry the message that this is absolutely, critically important, said Kirt Johnson, vice president of tax policy for the Retail Industry Leaders Association, which includes Wal-Mart Stores Inc., Target Corp. and other big-box chains.
The oil, financial services, private equity and real estate industries were more critical.
A targeted tax on financial institutions, regardless of form or motivation, is misguided and utterly at odds with the fundamental objective of comprehensive tax reform, said a letter from 11 banking groups, including associations that represent Morgan Stanley and Goldman Sachs Group Inc.
The largest U.S. business groups, including the U.S. Chamber of Commerce and the Business Roundtable, applauded Camps effort as progress toward boosting economic growth while stopping short of a full endorsement.
Declarations that Camps plan is dead on arrival are disappointing, Business Roundtable President John Engler told reporters on a conference call today.
The groups that are going to struggle with this in terms of their lobbying are those that have said for a long time that they dont like the current tax code, but they dont like any proposals and theyve got none of their own, Engler said. Thats a hard position to be in.
Small-government groups such as Americans for Prosperity also praised Camps plan.
Camp, 60, is a Michigan Republican who is chairman of the House Ways and Means Committee. He said yesterday that he expects to hear plenty of objections to specific provisions and that the public wants a simpler tax system.
What they really want, and what this plan delivers, is a stronger economy, he said, citing a nonpartisan congressional study showing that the plan would boost economic growth.
Lawmakers in both parties dont expect Camps plan to become law this year. House Republican leaders have distanced themselves from the details and havent committed to allowing a vote. While the plan doesnt change the amount of revenue generated for the Treasury, Democrats want to use some of the revenue raised from limiting tax breaks to reduce the budget deficit or pay for more spending.
Senate leaders from both parties said this week that they saw little if any chance of bridging those big-picture divides. Even if they could, they would have to overcome opposition to changes in long-standing tax breaks for mortgage interest, charitable contributions and state and local taxes.
Still, Leonard Burman, director of the nonpartisan Tax Policy Center in Washington, said Camps proposal is worth studying as it will become a starting point for future tax policy. In that sense, he said, Camp has done a real service by showing the tradeoffs needed to pay for rate cuts and simplification.
Everybody knows that we need tax reform and I think anybody that pays attention knows that its hard, said Burman, who was a Treasury Department official in President Bill Clintons administration. Everybody who looks at the plan will have issues with it. Thats kind of the nature of tax reform.
For individuals, Camp would make the tax system simpler by increasing the standard deduction and the child tax credit, repealing the personal exemption and limiting or removing many deductions. The percentage of taxpayers who itemize would fall to about 5% from about 30%.
Taxpayers could no longer deduct state and local taxes, moving expenses, tax preparation fees, student loan interest or alimony payments, among others.
They could deduct mortgage interest on the first $500,000 of principal, down from $1 million now. They could only deduct charitable contributions that exceed 2% of adjusted gross income.
Camp would create a three-bracket structure with a top rate of 35%, compared with the top rate of 39.6% today. For married couples in 2015, that means 10% on the first $74,800 of taxable income and 25% on taxable income up to $464,200.
Above that, a very different set of rules would be in place. A 10% tax would apply on a base that includes the value of employer-sponsored health insurance, contributions to retirement accounts and municipal bond interest while excluding manufacturing income and charitable contributions.
High-income taxpayers would also lose the benefit of the 10% bracket, the standard deduction and the child tax credit.
Those changes amount to hidden taxes that make the rate cuts for top earners less advantageous than they seem, Burman said. The loss of such benefits helps ensure that the tax burden doesnt shift away from top earners, according to the nonpartisan congressional Joint Committee on Taxation.
Dividends and long-term capital gains would have a 40% exclusion, leaving effective rates for the highest-income taxpayers little changed.
Taxpayers would have to live in their homes for five of the past eight years instead of two of the past five to exclude capital gains from their home sale from income.
Anti-poverty groups, including the Center on Budget and Policy Priorities, warned of the potential effects from Camps proposal to shrink the earned income tax credit for low-income workers. Camp makes other changes that would benefit some low-income families, and on average, by 2017, taxes would decline for households earning under $200,000, according to nonpartisan congressional estimates.
For corporations, Camp would set the income tax rate at 25%. Thats down from todays 35% rate, which is the highest in the industrialized world.
The plan would repeal accelerated depreciation, require the amortization of research and advertising expenses and impose a quarterly 3.5 basis-point tax on the assets of the biggest banks and insurers.
It also includes a series of miscellaneous changes that will receive more scrutiny, such as an end to the National Football Leagues tax exemption, new tax rules for real estate investment trusts and limits on deducting gambling expenses.
Tony Fratto, a former George W. Bush administration official, is among some Republicans who see Camps plan as countering the partys philosophy on taxes and even echoing proposals made by President Barack Obama.
Hes made a populist lurch to try to win friends, and I think it lacks credibility and doesnt advance the cause, Fratto said in a telephone interview yesterday. He is a partner at Hamilton Place Strategies in Washington, a firm that advocates for big banks and insurance.
The big cost is that Democrats are going to accept things like a bank tax, Fratto said. I can see the Obama administration pocketing things like that and saying its a quote-unquote Republican idea, when really its just Dave Camps idea.
U.S.-based multinational companies would have lighter taxes on certain future profits outside the country. They would have to pay a one-time tax on accumulated earnings under the current system, with a higher rate for cash and equivalents than for hard assets such as factories.
The plan would push people into Roth-style retirement plans that rely on after-tax money instead of tax-deferred accounts. New contributions to standard individual retirement accounts would end.
Private equity managers and others who receive profits as carried interest would pay $3.1 billion more over the next decade, with a portion of income that is now considered capital gains becoming ordinary income with higher rates. The plan excludes real estate professionals and is a smaller tax increase than the one Obama has proposed.
Even if it doesnt move forward this year, making our members priorities known is important, Chris Whitcomb, tax counsel for the National Federation of Independent Business, said in a telephone interview.
The NFIB, which represents small businesses, opposes Camps plan because many of its members dont benefit from the corporate-rate cut.
This could serve as a benchmark for reform, Whitcomb said, and its important for everyone to take it seriously.
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