President Barack Obama's proposal to end a tax break for corporate jet owners, a repeated refrain in his news conference yesterday, would achieve less than one-tenth of 1 percent of his target for reducing the federal deficit.
Such a change would put $3 billion into the Treasury over a decade, said two congressional aides familiar with the proposal. Democrats want to require companies that use jets for business purposes to write off the cost over seven years, instead of five years allowed under current law, said a congressional aide and a White House aide. Airplanes used for charter or commercial flights already must be depreciated over seven years.
Obama mentioned the corporate jet break six times, criticizing Republicans' unwillingness to include tax increases in legislation to raise the federal debt ceiling. Republicans are pressing for spending cuts in the measure, which must be passed before Aug. 2, when the Treasury Department projects the U.S. will no longer be able to meet its debt obligations.
“It would be hard for the Republicans to stand there and say that the tax break for corporate jets is sufficiently important that we're not willing to come to the table and get a deal done,” Obama said during the White House news conference.
It would take much more than eliminating a break for corporate jets to complete the deal. The $3 billion proposal would generate 0.075 percent of the $4 trillion in deficit reduction that Obama is seeking through a combination of spending cuts and tax increases.
‘Singled Out'
“We're obviously very upset that our industry is being singled out for what we view as political purposes,” said Pete Bunce, president of the Washington-based General Aviation Manufacturers Association. The group's members include subsidiaries of General Electric Co. (GE), The Boeing Co., and Textron Inc.
Bunce noted that Obama was at an Alcoa Inc. plant in Bettendorf, Iowa on June 28 emphasizing the importance of the company's products to airplane manufacturers.
Now, Bunce said, “He's going after a segment of the aviation industry that uses Alcoa's products. We're just scratching our heads.”
Obama mentioned corporate jet owners along with oil companies and
hedge fund managers as those who should pay more taxes, setting them in opposition to recipients of college scholarships and medical research grants who could lose benefits under Republican-sponsored budget cuts. Obama had featured provisions affecting those groups in his proposed fiscal 2012 budget; the corporate jet provision wasn't included.
Ending Tax Breaks
Democrats are trying to probe the limits of Republicans' insistence on avoiding tax increases, particularly after 33 Senate Republicans voted June 16 to end tax breaks for ethanol production.
“It's only fair to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys,” Obama said. “I don't think that's real radical. I think the majority of Americans agree with that.”
Previous administration proposals to encourage business investment have benefited the aircraft industry. Under the tax law that Congress passed in December 2010, companies purchasing new equipment -- including jets -- can deduct the entire cost of equipment purchases in the first year instead of taking depreciation deductions over time.
“It seems to me that the tax policy here is all over the map,” said Gary Horowitz, an attorney at Wiley Rein LLP in McLean, Virginia.
Depreciation Schedules
Horowitz and other attorneys who advise companies on airline purchases said the proposed change would affect business decisions about when to buy aircraft. The change could cause companies to delay purchases or buy smaller planes than they would have purchased otherwise.
The difference in depreciation schedules is a longstanding feature of the tax code.
“I've been doing this for a long time and that's been in the code as long as I can remember,” said Harry Ekblom, a partner at Sullivan & Worcester LLP in Boston.
As part of the 1986 overhaul of the tax code, Congress incorporated the depreciation schedules into the new law and gave the Treasury Department the ability to change the “class life” of assets that would “reasonably reflect the anticipated useful life,” according to the law.
That portion of the law was scheduled to take effect in 1992. Congress repealed it in 1988, preventing the Treasury Department and the
Internal Revenue Service from changing the rules.
‘Not Conducive'
“The current tax depreciation system is not conducive to economic growth, simplicity or fairness,” Thomas Neubig, who set up the depreciation office at Treasury, said in 2005 congressional testimony.
Neubig, who is now at Ernst & Young LLP in Washington, said in his testimony that the current depreciation schedules are largely based on a Treasury Department study of corporate income tax returns from 1959.
Neither the five-year nor seven-year schedule reflects the actual economic life of an airplane.
“They last decades,” said Dan Hubbard, a spokesman for the National Business Aviation Association in Washington.
Shawn Vick, executive vice president of Wichita, Kansas- based Hawker Beechcraft Acquisition Co., said Obama's proposal “just seems out of step with the stated goals” of promoting job growth and strengthening the economy.
Lengthening depreciation “could weaken our industry when we're at a point where we're just starting to see improvement,” Vick said.
--Bloomberg News--
