Bloomberg News

Steel Fights Aluminum for Breaks in Congress Rate Reform: Taxes

June 21, 2013

In the balancing act between tax rates and deductions, Congress is about to determine which industry carries more weight: steel or aluminum.

The nation’s biggest aluminum maker, Alcoa Inc. (AA:US), has broken with its steel industry counterparts and is lobbying Congress to eliminate corporate tax deductions in exchange for a cut in the tax rate to 25 percent from 35 percent, Bloomberg BNA reported.

Alcoa joined a coalition of companies called the Alliance for Competitive Taxation that says a lower statutory corporate rate is more valuable to business than myriad tax deductions. That turns on its head the conventional wisdom that manufacturers will fight to preserve corporate tax breaks.

The position stands out in a split among businesses on the issue. For the most part, members of the alliance are in service industries -- Bank of America Corp. (BAC:US) and financial institutions for example -- or in less capital-intensive industries, such as pharmaceutical, retail and technology companies, which lobbyists and tax analysts say have less opportunity to use benefits such as the Section 199 deduction for domestic production.

Diverging views among industries aren’t unusual, said Eric Toder, an analyst at the nonpartisan Tax Policy Center. Service-oriented companies and manufacturing companies took competing positions on tax deductions during the last major tax overhaul in 1986, he told BNA.

Still, divisions among big businesses blur the lobbying effort on tax reform, which the leaders of the congressional tax-writing committees aim to pass in their panels in 2013.

Territory Fight

While the National Association of Manufacturers has urged Congress to preserve some key corporate deductions, Alcoa is represented on the group’s board, as is another member of ACT, Caterpillar Inc. (CAT:US) Caterpillar’s chief executive officer, Douglas Oberhelman, is chairman of the manufacturing association’s board. Through a spokeswoman, Caterpillar declined to comment.

Toder said he found Alcoa’s position surprising.

Typically, Toder said, manufacturers want compensation through the tax code for depreciation, while banks are passthrough corporations that aren’t affected by the deductions and retailers don’t incur much capital expense.

A lobbyist with ties to manufacturing told BNA that companies with a big international presence, such as Alcoa, aren’t as concerned with deductions as with whether the U.S. moves to a territorial tax system, for instance, which would tax U.S. multinational corporations only on what they earn at home, not on profits repatriated from foreign countries.

A territorial system would be much more valuable to those companies than corporate tax deductions, the lobbyist said.

$48 Billion

An Alcoa spokeswoman declined to comment and pointed to ACT’s mission statement, which focuses on moving to a territorial system. Aluminum companies as a group don’t have a position on which approach Congress takes, said Matt Meenan, spokesman for the Aluminum Association in Arlington, Virginia.

The American Iron and Steel Institute warned against eliminating tax deductions, in an April 15 letter to the House Ways and Means Committee’s tax reform working groups.

“As you are well aware, the key proposals for a reduction in the statutory corporate tax rate call for reducing the statutory rate only to 25-28 percent and to pay for this rate reduction by eliminating all or most corporate deductions and credits,” wrote Thomas J. Gibson, the association’s president and CEO.

“This is concerning to the steel industry, and should be to the manufacturing sector as a whole,” he wrote, because some analyses indicate that eliminating deductions to pay for rate reductions would amount to a $48 billion tax increase for manufacturers, while granting tax cuts to retail and financial services industries.

Key Deductions

The steel group said some of the most important deductions are accelerated depreciation, the Section 199 deduction for domestic production and the interest expense deduction.

The Section 199 deduction should be increased, the group urged, while the qualifications are tightened to direct the benefit more specifically to manufacturers.

On interest deductibility, the association wrote, “There are a number of policymakers who have stated their support for repealing or limiting this deduction because it favors debt over equity which they believe should be reversed. We would caution those who have taken this position that the end result will likely discourage further investment in U.S. manufacturing.”

The Aluminum Association hasn’t lobbied on tax reform in 2013, according to reports filed with the House of Representatives. Alcoa has.

The steel group lobbied on tax reform and other issues, as did AK Steel Holding Corp. (AKS:US), for instance. The lobbying reports don’t break down amounts spent on specific issues.

Tough Decisions

The Alliance for Competitive Taxation cited studies questioning the value of some of the deductions. A study by the Business Roundtable reported that for a highly profitable investment, the benefit from a lower tax rate on profits would exceed that of a deduction for accelerated depreciation.

That the coalition would consist of companies from a broad range of industries reflects “their willingness to make tough decisions, including getting rid of tax breaks and preferences,” Doug Thornell, a strategist for the group, said in a statement in response to BNA inquiries.

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net


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Companies Mentioned

  • AA
    (Alcoa Inc)
    • $13.62 USD
    • 0.11
    • 0.81%
  • BAC
    (Bank of America Corp)
    • $16.36 USD
    • 0.07
    • 0.4%
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