The 'Mother of All Tax Bills'

Democrat Charles Rangel proposes elimination of the alternative minimum tax and an overhaul of corporate taxes, pitting businesses against one another

by Eamon Javers

House Ways & Means Committee Chairman Charles Rangel (D-N.Y.) touted his proposal as needed tax reform. Bloomberg News

It's being called the "Mother of All Tax Bills" on Capitol Hill, and it might just set off the mother of all battles within the business community next year. House Ways & Means Committee Chairman Charles Rangel (D-N.Y.) unveiled a long-awaited tax proposal on the morning of Oct. 25 that featured a two-pronged assault on the tax code. For companies, Rangel's plan would lower the top corporate tax rate from 35% to 30.5%. And for individuals, Rangel's plan would eliminate the alternative minimum tax (AMT), a levy that was put in place decades ago to make sure the wealthy paid their fair share of taxes but now impacts many workers in the upper middle class.

Together, the two proposals would cost more than $1 trillion, which under House rules Rangel must pay for by raising taxes in other areas. "It has been more than 21 years since Congress and the Administration rolled up their sleeves to discuss tax reform, and during that time the tax code has become a jumbled mess of outdated and inequitable provisions that cry out for simplification," Rangel says.

The corporate rate cut is likely to spark the biggest business fight. That's because in order to cut the overall rate, Rangel has targeted three massive corporate tax preferences for elimination. Under the plan, some companies who benefit the most from those will end up paying higher taxes, while the rest of Corporate America will pay less. "This plan will split the business community all asunder," says one person familiar with the drafting of the proposal.

Let the Lobbying Begin

Rangel's plan won't pass this year, and it is questionable whether such a sweeping proposal could move in 2008, a Presidential election year that will likely be bitterly partisan. But the details announced on Oct. 25 could form the basis for a Democratic tax proposal in 2009, when there will be a new occupant in the White House—possibly a Democrat. Rangel is a close political ally of Democratic Presidential front-runner Senator Hillary Clinton (D-N.Y.).

Businesses will lobby against one another furiously on the proposal, in the hopes of framing the debate well before the showdown in 2008 or 2009. Says R. Bruce Josten, executive vice-president at the U.S. Chamber of Commerce, the battle over this bill will likely pit those companies now paying a relatively high effective rate against those that benefit from deductions and loopholes to win a low effective rate for themselves. "This will be shades of 1986 all over again," says Josten, referring to the year in which the last major tax overhaul was completed. "These people will know very quickly who got screwed."

Proposal Breakdown

The details of Rangel's proposal show where the fault lines will be: To compensate for the estimated $360 billion, 10-year cost of lowering the overall corporate tax rate, Rangel will target three main tax breaks enjoyed by business.

• The plan would repeal a domestic manufacturers' tax credit that was created in 2004. That would raise $115 billion over 10 years.

• It would change the tax rules regarding foreign income for U.S. companies. The Rangel plan would require companies to defer deductions on certain overseas business expenses until the money is repatriated to the U.S. That would raise $106 billion over 10 years.

• Rangel would eliminate a method of accounting for the value of inventory called "Last in, first out," or LIFO. That would raise $106 billion over 10 years.

Each of those proposals accounts for about $100 billion in estimated savings for the government. And each one has a passionate constituency that is poised to fight any changes. On LIFO, for example, an ad hoc group of companies led by lobbyists at the National Association of Wholesaler-Distributors (NAW) has banded together to fight past iterations of the proposal, and has been successful each time. "It's an opposition force much larger than I think many of the tax writers on the Hill imagine," says Jade West, senior vice-president of government relations for NAW. "We're horrified by this, and we're energized. We will generate thousands of 'Dear Charlie' letters against it."