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All That Lard Could Clog Tax Reform


For four years, American business snapped to attention and saluted as President George W. Bush persuaded Congress to enact three big tax cuts aimed largely at slashing rates for individuals. True, lower top brackets helped CEOs personally, as did trims in the capital-gains levy. But as each Tax-Cut Express pulled out of Union Station, business lobbyists were left behind.

No longer. On Oct. 11, Congress loaded a corporate gravy train with a $137 billion bill bursting with business tax breaks. Ostensibly, it was designed as a replacement for a $5 billion-a-year subsidy for U.S. exporters, a provision the World Trade Organization has ruled illegal. Instead, it became a vehicle for years of pent-up business demand for tax breaks, many of them not even remotely related to the original intention -- helping out U.S. manufacturing. In the frenzy, railroads, barge operators, makers of fishing tackle boxes, NASCAR track owners, even foreign gamblers who hit it big at U.S. dog tracks -- all cashed in. Says one Senate tax aide: "I wouldn't want to be the lobbyist who failed to get something in this bill."

But take a good look at this year's 633-page tax bill, and you may see a relic in the making. You may also spy trouble ahead for any effort at tax reform.

The future for such traditional porkathons as the inaptly named American Jobs Creation Act of 2004 is increasingly cloudy. A President John Kerry, who has vowed to take up Arizona Senator John McCain's call for a blue-ribbon commission targeting corporate welfare, would likely go after many industry-specific breaks as he searches for tax revenue.

And even if George W. Bush is reelected, there could be lean years in Gucci Gulch before another round of business tax reductions comes along. Faced with a $415 billion deficit and obliged to make good on a vow to cut the red ink in half, Bush will be hard-pressed to cut corporate taxes anew.

Indeed, the real battle in a second Bush term may be over tax reform. If the President is intent on restructuring the revenue code, he will have to do so in a way that does not increase the deficit, economists say. That means a bill that closes egregious loopholes while it reduces tax rates on individuals. "From now on," says a top business lobbyist, "the battle will be about keeping what you've got."

Quixotic Mission?

Some reformers are upbeat. Says Chris Edwards, director of tax policy studies at the libertarian Cato Institute: "If Bush really gets behind reform, it has a chance."

But other longtime reformers are glum, insisting that the business feeding frenzy shows that trying to halt the drive for loopholes is quixotic. The 2004 bill "demonstrates that there is no appetite for fundamental reform," says John Endean, president of the American Business Conference, which represents midsized companies.

The hallmarks of tax reform are simplicity, fewer loopholes, and lower rates. But the corporate bill muddies the tax code with scores of complex new breaks. And while it does cut rates for manufacturers, it does so modestly and slowly. The top bracket would be pared gradually from 35% to 32%, but it would take until 2010 -- a tax code eternity.

With the election just days away, the White House let Congress run hog-wild. That decision could come back to haunt Bush if he ever mounts a serious drive to clean up tax laws.

The tax bill Congress passed on Oct. 11 might be a giant Christmas stocking for U.S. corporations, but it tightens the compensation rules for executives who run them. Honchos with deferred-compensation plans will face new measures designed to halt the sort of abuses seen when Enron Corp. was collapsing and top brass pulled out deferred-compensation money before it went bankrupt.

Execs who elect in advance to take their plan distribution when they leave a company will have to wait an extra six months if they're a key employee (an officer or anyone earning over $130,000). Also, says tax attorney Bruce J. Shnider of the Minneapolis firm Dorsey & Whitney, provisions allowing execs to withdraw money anytime if they accept, say, a 10% penalty will be banned.

Gone, too, will be plans that automatically pay out if a company's credit rating slips below a certain level, Shnider says. Also, the bill outlaws foreign trusts that make it harder for creditors to get at the otherwise vulnerable deferred comp. (An exec due such money is treated as an unsecured creditor in a bankruptcy.)

The new rule also sets how far in advance an exec must decide how much to defer, under what circumstances distributions can be taken, and how they will be paid, says compensation consultant Paula Todd of Towers Perrin. Those who do not comply will be subject not just to interest but also to a 20% penalty, adds Shnider.

Still unclear is the impact on some types of equity compensation such as discounted stock options, stock appreciation rights, and restricted stock units.


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