Corporate tax reform is coming to town

December 21st, 2012

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Those hoping for a fiscal cliff deal this year won’t get their wish before Christmas. But if Santa does deliver a year-end budget deal a few days late, it’s increasingly likely that it will pave the way for corporate tax reform in 2013.

The reasons to wish for corporate tax reform—and the obstacles in its way—were the topics of debate at an idea forum hosted by Third Way and the RATE Coalition on December 5th. Senator Tom Carper (D-Delaware), RATE Coalition Co-chair Elaine Kamarck, Time Warner Cable Senior Vice President & Chief Tax Officer Mark Schichtel, and Pacific Gas & Electric (PG&E) Vice President Melissa Lavinson discussed the push to lower the corporate rate, as well as the challenges involved.

1.      Experts agree the rate is too high and rules too complex.

In his opening remarks, Senator Carper identified lower tax rates as a target for reform. Both corporate and individual rates, he said, are too high compared to those of other countries. “We want to lower the corporate statutory tax rate to help make American enterprises more competitive,” Carper said.

The panel discussion following Carper’s remarks echoed his concern. Kamarck, who is also a lecturer at Harvard’s Kennedy School of Government, said the 35% federal corporate tax rate is drawing more attention because the United States has lost to international competitors not just manufacturing plants, but also corporate headquarters. This year, one company moved its headquarters from Cleveland to Dublin, Ireland—where the corporate tax rate is 12.5%.

In addition to the high rate, steep compliance costs and uncertainty in the code are motivating companies to advocate for tax reform. Lavinson explained that the temporary nature of many tax expenditures complicates PG&E’s decisions on large capital projects, such as multistate transmission lines, which are planned five to ten years in advance. “If you’re giving us [deductions] year by year, that’s going to be difficult to factor into the overall cost of a project,” she said.

2.      Businesses must help Congress broaden the base.

In his remarks, Carper also called on businesses to seek agreement on how to offset rate reductions with cuts to tax expenditures. “If the business community comes to us with a hundred different voices, it’s going to be hard for us,” Carper said. “Those of us in Congress would benefit from broader agreement from the business community.”

While disagreements among businesses persist, consensus on tax reform issues is growing. Schichtel said that large, capital-intensive companies like Time Warner Cable had been silent on corporate tax reform in the past. More recently, however, such companies have shown willingness to give up tax expenditures in exchange for a lower rate. “It does look like the stars are starting to align,” Schichtel said. “I think that willingness across both sides of the aisle as well as in the business community is really starting to come together.”

Reform will force tough decisions, though. For example, one base-broadening idea, to end interest deductibility, did not win praise from the panel. Lavinson said eliminating the ability to deduct interest would impair the ability of utilities like PG&E to raise capital, resulting in higher rates for customers. Schichtel added that ending interest deductibility would hurt markets, reduce investments in infrastructure, and weaken U.S. competitiveness. More broadly, he did note, “if there is a serious proposal, everyone is going to look at it carefully, and if it is globally competitive and if it’s equitable across business sectors, then I think we’re at a good starting point.”

3.      International tax questions shouldn’t derail reform.

One of the most contentious corporate tax issues before Congress is the tax treatment of overseas profits. Proponents of switching to a territorial tax system, which most OECD countries have, say it would encourage U.S. corporations to bring home profits held overseas. Skeptics claim that a territorial system would encourage companies to move more production overseas. RATE Coalition companies have not agreed upon the international tax issue, Kamarck said, in part because the most recent repatriation holiday in 2004 did not deliver as many had hoped.

Kamarck said skepticism of a territorial system also exists in Congress: “On the Democratic side of the aisle, there’s a lot of suspicion about the international [tax questions].” Schichtel added, “Folks hoped that [the international tax system] will pay for itself,” but noted that “to the extent that you use domestic pay-fors to buy down the rate, it will benefit everyone.”

International tax issues and picking which expenditures to cut are tough questions. But the cost of finding solutions will pale in comparison to the benefit: a more competitive tax code that spurs businesses to create American jobs.