No Relief in Sight, say Washington Watchers

Pro-business tax reforms likely to be put on hold -- or dumped. CFOs thrilled.
Alix StuartFebruary 4, 2002

Pining for tax relief from Congress? Don’t get your hopes up. Granted, with Congress back in session optimists still have their fingers crossed, even though such juicy tax provisions as the repeal of the alternative minimum tax (AMT) were scuttled when the economic stimulus package went down in December.

“The tax provisions that were in the close-to-consensus [stimulus bill] will be a starting point, but how soon legislation will emerge and whether it will be retroactive remains a very open question,” notes Timothy McCormall, executive director of the Tax Executives Institute Inc.

So what’s to become of the orphaned tax provisions? A popular theory is that they will be wrapped into a larger tax bill. Then again, the near-term outlook on the recession, the budget deficit, and the war on terrorism could do more to sideline provisions than any political maneuvers.

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One of the package’s top provisions for businesses was the repeal of the AMT, which requires taxes even from companies with a net loss. While critics say the AMT overtaxes companies, outright repeal isn’t likely, because “right now [the repeal] is surrounded by bad politics,” says Clint Stretch, director of tax policy for Deloitte & Touche. He expects relief will come through smaller, incremental measures like adjustments to the depreciation allowances and time limits on carrybacks and carryforwards.

Also on the chopping block was an accelerated depreciation incentive for IT investments that would last through 2003. Backed by the likes of IBM, AOL Time Warner, Intel, and Dell, the bill could pass in a modified form, says Stretch, especially since it simply shifts corporate tax liabilities to the future, rather than extinguishing them altogether. A proposed five-year carryback on net operating losses could survive for similar reasons. In early January, a new proposal from Sen. Tom Daschle emerged, offering up payroll tax refunds for workers hired in 2002 and depreciation allowances of up to 40 percent of investments for the first six months of 2002.

As a leading gear-and-machinery producer, Rochester, N.Y.-based Gleason Corp. could see an increase in sales from the passage of the accelerated depreciation proposal. However, CFO John Perrotti is sanguine about the impact. “It’s likely that some portions of the package will occur,” he says, “but from a planning perspective, we’re not counting on it.” What’s more, “if a company doesn’t have the capital available, [tax relief] won’t stimulate new investments.”