Democrats and Republicans in the U.S. Congress are using the run-up to the April 17 tax-filing deadline to test some of the arguments they want to deploy during a broader tax-code rewrite.
Both parties are offering temporary tax incentives designed to spur small-business growth. They’re pulling different policy levers to appeal to the same favored group during tax season, with Democrats proposing targeted tax breaks and Republicans backing rate cuts.
Senate Democrats yesterday unveiled a $26 billion tax cut plan for companies that make capital investments and expand their payrolls. House Republicans tomorrow are set to push through the Ways and Means Committee a 20 percent tax cut that would direct $45.9 billion to businesses with fewer than 500 workers.
“They’re good symbols of the two different approaches, but I think they’re also unlikely to be bridged,” said Todd McCracken, president of the National Small Business Association in Washington.
Lawmakers of both parties favor benefits for small companies in part because mom-and-pop businesses are among the most popular institutions in the country. A 2011 Gallup poll found that 79 percent of Americans trust small business owners to come up with ideas for job creation, outpacing both parties’ leaders in Congress, who polled at less than 45 percent.
McCracken said benefits from the temporary proposals would be countered by the uncertainty they create and the complexity they require.
“All the temporary tax provisions that we’ve seen enacted and talked about the last few years really has crystallized in small business owners’ minds the need for a total overhaul of the tax code,” he said. “You realize more and more this is no way to run a railroad.”
Lawmakers in both parties say they want to rewrite the U.S. tax code to make it simpler and more consistent. While they do that, they are proposing short-term tax breaks.
The Democratic proposal, released by Senate Majority Leader Harry Reid and New York Senator Charles Schumer, would revive a tax break that expired at the end of 2011. Companies would have another year in which they could write off 100 percent of capital investments.
That 100 percent write-off could benefit larger companies able to accelerate their investments to take advantage of it. Companies including Textron Inc. (TXT:US) and Time Warner Cable Inc. (TWC:US) are lobbying for the tax break, according to Senate records.
Expanding Payroll Benefit
The Democrats’ plan also would provide a 10 percent income- tax credit for the first $5 million that a company adds to its payroll in 2012, either through wage increases or hiring. The cap, which limits the benefit to $500,000, directs the largest percentage benefits to smaller companies.
Schumer and Reid emphasized that their bill would reward companies that are growing and investing.
“This is the kind of legislation that should not be a fight,” Reid, a Nevada Democrat, told reporters during a conference call yesterday. “This a place where Democrats and Republicans should be able to find common ground.”
The Republican proposal, introduced by Majority Leader Eric Cantor of Virginia, would let companies deduct 20 percent of their profits. It would prevent companies from qualifying based on certain types of passive income, and it limits benefits to 50 percent of wages paid to employees who aren’t owners.
Cantor’s bill could benefit larger companies that are able to generate significant profits with relatively few employees. He emphasized that his bill would provide cash to business owners to reinvest in their companies.
There is some overlap between the proposals. Republicans included the capital investment provision in a bill the House passed in December 2011 that extended a payroll tax cut through 2012. It was dropped during negotiations with the Senate.
Neither proposal includes provisions to prevent the budget deficit from expanding. Senate Democrats said they want to work with Republicans on that issue.
Both parties’ policies have drawbacks, said Alan Viard, a resident scholar at the American Enterprise Institute, a Washington group that favors strengthening free enterprise.
In the long run, he said, the House rate cut is the better approach as long as it doesn’t increase the deficit. The House plan doesn’t work as well as temporary policy.
‘Already in Place’
“It’s not the most powerful approach,” he said. “It rewards investments that are already in place.”
The Senate bill would be somewhat more effective in spurring short-term growth, Viard said. Still, administering the credit for payroll growth could be complicated and reward companies that don’t change their behavior.
“Some of the firms that get a tax break here would be firms that would have increased their payroll anyway,” he said.
Douglas Holtz-Eakin, who in 2008 advised Republican presidential candidate John McCain on economic policy, said he prefers the rate cuts, if they are offset by spending cuts.
Neither the House nor Senate bill is better than a tax-code overhaul, he said.
“You can say the same things about both efforts, which is that they are reflective of the genuine importance of small business to creating jobs,” Holtz-Eakin said. “Neither has a snowball’s chance in hell of being passed.”
The Cantor bill is H.R. 9.
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