News: Analysis & Commentary: TAX POLICY
THE GOP'S TAX CUTS ARE FALLING OFF THE TABLE
A curious thing is happening to the huge individual and corporate tax cuts that are a centerpiece of the House GOP's Contract With America: Despite all the goodies, support among business and the general public is downright tepid. Many corporate executives say they'd much rather see Congress cut the deficit than taxes; they figure lower interest rates produced by deficit reduction would be more helpful than a modest drop in taxes. That's one reason Senate Republicans are rapidly losing interest in ambitious tax-cutting.
As a result of the shift, lawmakers may have to retool key provisions of the $200 billion revenue bill--which would cut taxes on capital gains, expand individual retirement accounts, provide a more generous depreciation schedule for business, and hand most families a $500-per-child tax credit. Even House Speaker Newt Gingrich (R-Ga.), chief author of the contract, hints that changes may be afoot. "I don't know of any backing down or backing off at all yet," he says, but adds: "None of these bills have to necessarily pass as written."
How will things turn out? The family tax credit and the individual capital-gains cut will still pass the House, although the $120 billion child credit could well be trimmed or delayed as Republicans struggle to find spending cuts needed to finance it. Now slated to go to families earning $200,000 or less beginning in 1996, the credit could be phased in or offered only to those with a lower income. Plans to index capital gains for inflation and cut the rates in half may survive the House, but the Senate is likely to be less generous with either the rate cut or indexing.
Business provisions of the contract are in worse trouble. The cut in corporate capital-gains taxes--now estimated to cost at least $16 billion over five years--faces growing opposition. And the new depreciation system for capital equipment may be dumped. House Ways & Means Committee Chairman Bill Archer (R-Tex.) says the provision "has little or no support from the people who supposedly would benefit the most."
That's true for much of this bill. While Corporate America rarely passes up a chance to latch on to tax-cut bills, it has shown little enthusiasm for this one. And polls show that 60% of the public would prefer that Congress cut the deficit rather than trim taxes. In recent hearings around the country, House Budget Committee members have heard the same message. One reason may be deep public skepticism over whether they'll ever see the benefits of the proposed tax breaks. "People don't support it because they don't believe it," says political analyst Kevin Phillips.
In the business community, there are some pockets of strong support--bankers and stockbrokers are pushing hard for generous new IRA deductions, and natural-resource companies love corporate capital-gains tax cuts. But for the most part, business is going through the motions merely as a courtesy to the GOP majority in Congress. "We're being good soldiers," says one veteran corporate lobbyist. "But the truth is, there ain't a whole lot in this."
"NO PRESSURE." For many companies, other issues in the Republican contract take precedence over tax cuts. For instance, the National Association of Manufacturers has set regulatory and legal reform as its top priorities, with tax cuts well down on their wish list. In late January, the U.S. Chamber of Commerce polled its members on their legislative goals and got much the same response. Of their top 20 priorities, tax items ranked 12th, 14th, and 15th, well behind such issues as unfunded mandates, paperwork reduction, and the balanced-budget amendment to the Constitution. Says one Senator who strongly backs tax cuts: "If you ask, they say they strongly support it, but they don't care if you do it. There's no pressure from business to cut their taxes."
The contract makes some deficit-conscious execs downright uncomfortable. As much as Katherine M. Hudson, chief executive gf Milwaukee-based industrial products maker W.H. Brady & Co., likes tax breaks, she wants spending cuts to come first: "We need some sort of deficit reduction in place so that tax cuts don't make the overall situation worse."
The American Business Conference, which represents fast-growing midsize companies, also favors a capital-gains cut. But ABC President Barry K. Rogstad prefers that Congress tackle consumption-based reform instead of tinkering around the edges of the tax code. "I would much rather they do this
kind of thinking in a broader package," he says.
Representatives of big, capital-intensive industries are even less enthusiastic. The depreciation plan, for example, was supposed to be a boon for such businesses. But for companies that are constantly purchasing equipment, the cost-recovery proposal creates big problems. Gripes one lobbyist: "You're always in a cash-flow crisis under this thing."
Some businesses would rather see Congress water down the alternative-minimum tax, which often hammers companies when profits slide. Archer seems sympathetic. "We need to try to find some way to ameliorate the negative impact of the AMT on job creation," he says.
But financing AMT relief might be tricky. Under the curious rules of budget accounting, dropping the depreciation proposal would cost $18 billion over five years. So companies can't trade the plan for AMT relief. One option: Companies would forgo unused AMT deductions in return for future elimination of the tax.
Still, the bottom line is clear: So long as business and the public are cool on tax cuts, much of the GOP package could fade away by the time a bill reaches President Clinton's desk next fall.
CONTRACT BLUES WHAT THE CONTRACT PROMISED
The GOP may not be able to deliver on some tax promises in its Contract With America, partly because business backing for some measures is eroding
-- Establish a $500-per-child tax credit for families earning $200,000 or less
-- Cut the capital-gains tax in half and index it for inflation
-- Set a new business depreciation scheme as an incentive for capital investment
-- Expand IRA eligibility
LEGISLATION THAT NOW IS LIKELY TO PASS
-- The credit may be phased in or limited to families with a lower qualifying income
-- The rate cut could be scaled back or indexing could be watered down
-- The scheme likely will be dropped; business is pushing for relief from the alternative-minimum tax instead
-- Some version should passBy Howard Gleckman, with Richard S. Dunham in Washington and Richard A. Melcher in Chicago