Prized tax break stumbling block for reform

Revamping the tax system for U.S. businesses was supposed to be the easier part for Republicans and Democrats.

But dig a little deeper, and it’s clear that the two parties will have problems making the numbers work on the corporate tax side, even though they have more agreement there than when it comes to taxing individuals. 

{mosads}The largest of those math problems is accelerated depreciation, which allows businesses to write off the cost of investments more quickly than they actually decrease in value. Economists say the incentive is good for growth, and neither party is particularly keen on paring it back. 

But as former House Ways and Means Chairman Dave Camp (R-Mich.) found out last year, it’s awfully difficult to get the top corporate rate from 35 percent to 25 percent without broadening out expensing schedules. 

“That’s where the money is,” said William Gale of the Brookings Institution. 

Gale, who worked on George H.W. Bush’s Council of Economic Advisers, noted that slicing two breaks in particular – accelerated depreciation and the deduction for business interest – would do the most to reduce the corporate tax rate. 

“Even getting the rate down to 28 or 30 looks really hard without them,” Gale told The Hill. 

The Obama administration renewed its push this week for business tax reform, with Treasury Secretary Jack Lew making the case that the differences on individual taxation are too stark right now to make a deal. 

Top Republicans have said they’re willing to consider the idea, as long as a tax revamp suitably took care of the businesses that pay taxes through the individual system. And both Obama and Sen. Joni Ernst (R-Iowa), who gave the GOP response to the State of the Union this week, insisted that Washington needs to come together to get rid of tax loopholes that favor the well-off. 

But as accelerated depreciation shows, the most expensive tax breaks are often both broadly popular and serve a policy goal favored by lawmakers. That’s also true on the individual side, where the most costly incentives include the deductions for home mortgage interest and for charitable donations. 

Those problems have befuddled officials who have tried to revamp the tax code since it was last successfully done in 1986 – when, analysts say, there were more egregious tax breaks waiting to be scrapped. 

Accelerated depreciation, which costs more than $700 billion over a decade, allows businesses to write off dozens and dozens of investments more quickly – theme parks in seven years instead of 12.5, farm equipment in seven years instead of 10 and electric plants in 20 years instead of 50, to name a few. 

Camp got rid of those faster depreciation schedules to hit his longtime goal of reducing the top corporate rate to 25 percent. The administration’s goal on that front is 28 percent, and Lew suggested this week that a streamlined system would allow businesses to worry less about their taxes. 

“The kind of approach we’ve taken will lead to a lot of individual decisions, which when you add them together, will lead to more economic growth,” Lew said at the Brookings Institution. 

But for groups on the right, Camp’s treatment of accelerated depreciation might have been the biggest drawback of his entire plan, which failed to catch fire with leaders in either party. 

Conservative groups and the Joint Committee on Taxation found that the plan could be a drag on economic growth. Ryan Ellis of Americans for Tax Reform, which keeps the anti-tax pledge signed by most GOP lawmakers, insisted that it would be counterproductive for tax writers to slash the corporate tax rate by forcing businesses to write off expenses over a longer period of time. 

Ellis argued that dynamic scoring – which tries to take into account the economic growth that comes from cutting taxes – could give more breathing room to the new Ways and Means chairman, Rep. Paul Ryan (R-Wis.), and Senate Finance Chairman Orrin Hatch (R-Utah). 

So would making a slew of temporary tax breaks permanent, which would mean that Congress wouldn’t have to find offsets to keep them in place in tax reform – or, Ellis said, cutting some tax breaks for high-earning individuals, instead of for businesses, to pay for a lower corporate rate. 

“It’s just exceedingly difficult,” Ellis said, referring to a way to keep accelerated depreciation and bring the corporatre rate down sufficiently. “I don’t see how you can do it within the traditional static scoring model.” 

Lawmakers saw it much the same way. “You can’t just throw it to the wind,” said Rep. Sandy Levin (Mich.), the top Democrat at Ways and Means – it being accelerated depreciation. 

Rep. Kevin Brady (R-Texas) added that he hoped that tax writers could learn from the problems Camp ran into when he ended the prized tax break. “It ought to be one of the last things we look at jettisoning,” he said. “I’d like to look at some other avenues.” 

The problem is, those avenues might leave lawmakers with a tax reform package they still found wanting. 

Ed Lorenzen of the Committee for a Responsible Federal Budget projected that cutting every corporate tax break and keeping accelerated depreciation would only get the top rate down to 31 percent. Lorenzen speculated that paring back the deduction for business interest could help get the rate to the mid-20s, if those dozens of tax breaks were made permanent. 

But that sort of plan would also run into a host of obstacles politically, and some analysts have sounded skeptical that dynamic scoring would be that much of a boon for would-be reformers. 

“Dynamic scoring is not going to save them,” Gale said.