Tax Reform: You Can’t Have It All

Executives implore Congress for a lower corporate tax rate, and they would even be (somewhat) willing to give up beloved tax incentives.
Sarah JohnsonFebruary 8, 2012

What tax breaks would you be willing to trade for a lower statutory corporate tax rate? Would you be open to giving up 100% expensing of capital investments, a temporary tax break that lets companies make up-front write-offs on new investments?

The answer, of course, is that it depends on your business. For senior tax executives at a Wednesday congressional hearing who work at companies that spend billions of dollars on capital investments each year, that would be a difficult incentive to relinquish. But even while not thrilled with the idea of forgoing their tax benefits, they said they would consider it, and they implored lawmakers to strongly consider significantly reducing the 35% U.S. corporate tax rate. They are pushing for a rate closer to 25%.

“It’s time for American businesses to put our industry-specific wish lists to the side and work collectively to support a more coherent and equitable approach to corporate taxation,” said Mark Schichtel, chief tax officer at Time Warner Cable.

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Executives and lawmakers agree about one thing: a simpler tax code would benefit everyone. But how to get there is a continuing, contentious debate. Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, has proposed a 25% rate. But a 28% rate appears more plausible, according to committee members who cited a fall study by the Joint Committee on Taxation. The nonpartisan panel concluded that even if all corporate tax breaks were eliminated, a 28% rate is the lowest the country could go without losing revenue.

As the discussion has intensified on Capitol Hill around tax reform, executives have grown more willing to let go of tax breaks they hold dear. Last year 71% of CFOs said they would give up exemptions and credits in favor of a reduced overall corporate rate, despite a possibility that they could end up paying more in taxes over time, according to a Duke University/CFO Magazine Global Business Outlook Survey conducted during the second half of 2011.

Camp ostensibly called the hearing to examine how accounting rules affect business tax policies, but little discussion centered around that topic. Instead, the talk was mostly about what companies would be willing to concede to garner a better tax rate. A lower levy, they claimed, would help U.S. companies compete internationally in the capital markets, and in the long run would lead to more capital investments and hires. “We need to get back to the basics, where businesses . . . make decisions based on the merits of their products and services, not what the tax code says,” said Michael Fryt, corporate vice president of tax at FedEx Corp.

Timothy Heenan, vice president of treasury and tax at gas producer Praxair, said the fairly new bonus-deprecation deduction, which lets companies defer tax payments, is one incentive for capital investments that his company would be reluctant to give up. But another matter may be more pressing: the uncertainty over whether certain tax breaks like bonus depreciation will be renewed makes it difficult to forecast the tax implications of long-term projects. “We need a consistent process we can follow,” Heenan said.