Corporate tax breaks worth more than $150 billion over a decade could be threatened in U.S. budget negotiations, if lawmakers choose to adopt a flurry of White House proposals to boost revenues from business in order to reach a deal.
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Talks to avert the fiscal cliff —a $600 billion combination of tax rises and spending cuts that could tip the U.S. economy into recession if Congress cannot agree to stop them — are moving into higher gear in the wake of the first White House summit on Friday between President Barack Obama and leaders in Congress.
Democrats are insisting on new revenue — and Republicans have said that they could accept higher taxes under certain conditions.
But while most of the discussion has focused on extracting higher levies from the individual side of the tax code, especially from the wealthiest Americans, some corporate tax provisions are also in the firing line.
Some of these tax preferences could be trimmed in a two-step agreement, which is the likely framework for a deal that includes a downpayment on deficit reduction upfront, including new revenues, before instructions for broader tax and spending reform are set for 2013.
Business tax breaks may be particularly vulnerable if Congress looks to them as part of a package of measures to avoid "sequestration" — the automatic reductions in the budgets of U.S. government agencies, including a big slice out of the Pentagon.
The White House and congressional leaders are embarking on high-stakes talks to avoid a looming fiscal cliff.
Mr. Obama met with a group of U.S. chief executives last week to discuss the fiscal cliff talks, and on his way to Thailand over the weekend called a number of his traditional allies in the business community to discuss the need for a "balanced deficit reduction solution," according to a White House official. Mr. Obama phoned Warren Buffett, the billionaire investor, Tim Cook of Apple, Jamie Dimon of JPMorgan Chase, Jim McNerney of Boeing, and Craig Jelinek of Costco, the official said.
Many chief executives say they would be willing to sacrifice some of their favored tax breaks in exchange for sweeping corporate tax reform in 2013 that would lower the tax rate from its current level of 35 percent — one of the highest in the developed world.
But they would be deeply disappointed if some of their tax preferences were limited pre-emptively, before the corporate tax reform process gets under way.
"Any significant tax code changes should only be made within the context of comprehensive tax reform," said Matt Miller, vice-president for tax and fiscal policy at the Business Roundtable, the executive lobby group. "It's necessary to preserve any corporate tax base-broadening for the bigger deal on tax reform.
Among the tax preferences at risk include $28 billion in deductions benefiting fossil fuel companies, including oil, gas, and coal companies. Another is a special accounting method known as "last in, first out," used for inventory valuation by manufacturers and distribution companies, which if repealed would save $77 billion for the U.S. government.
The application of low capital gains tax rates to private equity, hedge fund, venture capital, and real estate profits — known as carried interest — could also be curtailed, for a $13 billion gain to federal coffers. Favorable depreciation rules for corporate jet owners and tax benefits on corporate life insurance policies, worth nearly $18 billion, could also be limited or eliminated.
Some of these provisions were already on the chopping block in failed budget negotiations last year, meaning they could be quickly dusted off again.
But Republicans on Capitol Hill are the most likely to object to raising revenue from corporate tax breaks in the fiscal cliff talks. "Some of those business provisions spur investment in manufacturing in America," Kevin Brady, a senior Republican on the Ways and Means committee, the tax-writing panel in the House of Representatives, told the FT.
"Cherry picking a few tax provisions here and there both on the individual and the corporate side makes it more difficult to do tax reform down the road," he said.