Bloomberg News

Corporate Jet Tax Gets Six Obama Mentions, Nicks Deficit

June 30, 2011

(Updates with senators’ reactions starting in sixth paragraph.)

June 30 (Bloomberg) -- President Barack Obama’s proposal to end a tax break for corporate jet owners, a repeated refrain in his news conference yesterday, would achieve less than one-tenth of 1 percent of his target for reducing the federal deficit.

Such a change would put $3 billion into the Treasury over a decade, said two congressional aides familiar with the proposal. Democrats want to require companies that use jets for business purposes to write off the cost over seven years, instead of the five years allowed under current law, said a congressional aide and a White House aide. Airplanes used for charter or commercial flights already must be depreciated over seven years.

Obama mentioned the corporate jet break six times, criticizing Republicans’ unwillingness to include tax increases in legislation to raise the federal debt ceiling. Republicans are pressing for spending cuts in the measure, which must be passed before Aug. 2, when the Treasury Department projects that the U.S. will no longer be able to meet its debt obligations.

“It would be hard for the Republicans to stand there and say that the tax break for corporate jets is sufficiently important that we’re not willing to come to the table and get a deal done,” Obama said during the White House news conference.

It would take much more than eliminating a break for corporate jets to complete the deal. The $3 billion proposal would generate 0.075 percent of the $4 trillion in deficit reduction that Obama is seeking through a combination of spending cuts and tax increases.

Stirring Reaction

Obama’s comments on jets continued to stir reaction today.

Utah Senator Orrin Hatch, the top Republican on the Senate Finance Committee, disparaged Democratic efforts to scale back tax breaks for corporate jets, yachts and charitable contributions by wealthy people.

“We get $3 billion out of private planes?” Hatch told reporters. “Over 10 years? Give me a break.”

Ending such tax breaks won’t “do anything about the real spending programs that really are driving us into bankruptcy,” he said.

Hatch disputed the notion that Republicans would be put at

political risk by opposing elimination of the tax breaks as Democrats strive to find revenue to cut the deficit.

‘Cheap Politics’

“We aren’t defending anybody,” he said. “We are saying that it’s cheap politics to selectively pick out people that the Democrats don’t like and then try to punish them by taking away various tax expenditures that may be good in certain cases.”

Democratic Senator Ben Cardin of Maryland disagreed, telling reporters: “Add them all up, there’s substantial numbers.”

“Every billion, of course, is important,” he said.

The head of a key business aviation trade group said his members have been unfairly targeted by the president.

“We’re obviously very upset that our industry is being singled out for what we view as political purposes,” said Pete Bunce, president of the Washington-based General Aviation Manufacturers Association. The group’s members include subsidiaries of General Electric Co., Boeing Co., and Textron Inc.

Bunce noted that Obama was at an Alcoa Inc. plant in Bettendorf, Iowa, on June 28, emphasizing the importance of the company’s products to airplane manufacturers.

‘Scratching Our Heads’

Now, Bunce said, “he’s going after a segment of the aviation industry that uses Alcoa’s products. We’re just scratching our heads.”

Obama mentioned corporate jet owners along with oil companies and hedge fund managers as those who should pay more in taxes, setting them in opposition to recipients of college scholarships and medical research grants who could lose benefits under Republican-sponsored budget cuts. Obama had featured provisions affecting those groups in his proposed fiscal 2012 budget; the corporate jet provision wasn’t included.

Democrats are trying to probe the limits of Republicans’ insistence on avoiding tax increases, particularly after 33 Senate Republicans voted June 16 to end tax breaks for ethanol production.

“It’s only fair to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys,” Obama said. “I don’t think that’s real radical. I think the majority of Americans agree with that.”

Previous Proposals

Previous administration proposals to encourage business investment have benefited the aircraft industry. Under the tax law that Congress passed in December 2010, companies purchasing new equipment -- including jets -- can deduct the entire cost of equipment purchases in the first year instead of taking depreciation deductions over time.

“It seems to me that the tax policy here is all over the map,” said Gary Horowitz, an attorney at Wiley Rein LLP in McLean, Virginia.

Horowitz and other lawyers who advise companies on airline purchases said the proposed change would affect business decisions about when to buy aircraft. The change could cause companies to delay purchases or buy smaller planes than they would have purchased otherwise.

The difference in depreciation schedules is a longstanding feature of the tax code.

“I’ve been doing this for a long time, and that’s been in the code as long as I can remember,” said Harry Ekblom, a partner at Sullivan & Worcester LLP in Boston.

1986 Overhaul

As part of the 1986 overhaul of the tax code, Congress incorporated the depreciation schedules into the new law and gave the Treasury Department the ability to change the “class life” of assets that would “reasonably reflect the anticipated useful life,” according to the law.

That portion of the law was scheduled to take effect in 1992. Congress repealed it in 1988, preventing the Treasury Department and the Internal Revenue Service from changing the rules.

“The current tax depreciation system is not conducive to economic growth, simplicity or fairness,” Thomas Neubig, who set up the depreciation office at Treasury, said in 2005 congressional testimony.

Neubig, who is now at Ernst & Young LLP in Washington, said in his testimony that the current depreciation schedules are largely based on a Treasury Department study of corporate income tax returns from 1959.

Neither the five-year nor seven-year schedule reflects the actual economic life of an airplane.

“They last decades,” said Dan Hubbard, a spokesman for the National Business Aviation Association in Washington.

Shawn Vick, executive vice president of Wichita, Kansas- based Hawker Beechcraft Acquisition Co., said Obama’s proposal “just seems out of step with the stated goals” of promoting job growth and strengthening the economy.

--With assistance from James Rowley in Washington. Editors: Jodi Schneider, Leslie Hoffecker

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Andrew Zajac in Washington at azajac@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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