Groups cool on tax reform: Businesses see favorite loopholes being shut down

Author: Josephine Hearn

Published: November 16, 2004

Business groups are voicing concern that President Bush's proposed reform of the tax code will do some of them more harm than good.

Despite a flurry of interest in a sweeping overhaul of the code, such as with a flat tax or a national sales tax, business organizations have yet to voice support for a fundamental change.

Many industries have well-established preferences built into the tax code that a broad reform effort could jeopardize. The real-estate industry and nonprofit groups, for instance, have benefited from tax deductions for mortgage interest and for charitable donations.

"The mortgage-interest deduction is a long-standing part of U.S. homeownership policy. It's an incentive for people to become homeowners, and we've seen that homeownership has all sorts of economic and societal benefits. We want to make sure our concerns are understood' in the upcoming debate, said Steve O'Connor, vice president of government affairs at the Mortgage Bankers Association.

Groups representing a broad range of industries, such as the U.S. Chamber of Commerce, the National Association of Manufacturers (NAM) and the National Federation of Independent Business (NFIB), have remained largely silent on fundamental tax reform while they study the issue and develop a consensus among their members.

The Chamber, the NAM, the NFIB and the American Farm Bureau Federation have not responded to a request by Rep. John Linder (R-Ga.) to weigh in on his proposal (H.R. 25) to replace the 91-year-old personal income tax with a national sales tax of 23 percent, a Republican House aide said.

"We welcome the whole opportunity and initiative to look at tax code. As to what to replace it with, that requires a lot of study,' said Dorothy Coleman, vice president for tax policy at NAM. "Moving to a different tax system will have an impact on the economy. Transition is a huge issue. Any effort would have to be revenue-neutral and would have to avoid creating winners and losers.'

Experts said that any sweeping change in the tax code would inevitably create winners and losers among businesses, depending on how each company has structured its finances.

In the book, The Flat Tax, conservative economists Robert Hall and Alvin Rabushka analyzed the effect of a flat tax on two leading companies, General Motors and Intel.

Under a flat tax, Intel's 1993 tax bill would have dropped from $1.2 billion to $280 million, while General Motors' would have increased from $110 million to $2.7 billion, because GM carries more debt than Intel.

Stark differences between companies over a flat tax divided the business community in the '90s, when GOP presidential candidate Steve Forbes and then-House Majority Leader Dick Armey (R-Texas) fueled the debate over a flat tax.

"The very sharp image I have from the mid-'90s is the business community split all over the place, and that's no accident. Tax plans affect different companies,' said William Gale, a tax expert at the Brookings Institution. "I think you're going to find significant business opposition to any fundamental tax proposal.'

Most companies have yet to determine how they would fare under current proposals such as Linder's. Many are waiting for the formation of a presidential commission on tax reform, which is expected early next year. The administration is identifying members of the bipartisan commission now, said Treasury Department spokesman Rob Nichols.

President Bush has identified tax reform as a "key priority' for next year.

The retail industry, represented by the National Retail Federation (NRF), has already expressed apprehension about Linder's sales-tax proposal. If such a proposal were implemented, "consumer spending would decline among all brackets,' said NRF tax counsel Rachelle Bernstein, drawing on a study done for the group in 2000 to analyze a similar proposal.

"Based on our study done at the time, the economy would decline for three years following implementation of a sales tax. Consumer spending would be down eight years following implementation of a sales tax. Many retailers would probably go out of business if that were the case,' she said.

Retailers are also concerned about having the added burden of collecting a sales tax, a responsibility that would hurt smaller mom-and-pop stores more than large chains, Bernstein said.

A flat tax would also have drawbacks for retailers if it functioned like a consumption tax, Bernstein said.

Yet Bernstein and other business representatives were supportive of simplifying the tax code to make it less burdensome to businesses.