Corporate tax benefits may vanish under Obama

A report released today by PricewaterhouseCoopers suggests that corporations may face tax increases as well as reductions as a result of President-elect Barack Obama’s economic stimulus package. That conclusion may dampen expectations based on recent news reports focusing on the tax breaks that the package proposes for business. The audit firm’s analysis, entitled “Tax policy in transition: 2009 tax legislative outlook,” noted that with the federal budget deficit likely to reach a proportion of GDP not seen since World War II because of Mr. Obama’s stimulus plan, there may be pressure for tax reform to be “revenue neutral,” and that “business taxes could increase to pay for some of the cost of individual tax relief” as well as a reduction in the top corporate rate. The PwC paper noted that much the same thing happened following the last major change in the tax code, the 1986 Tax Reform Act. While higher GDP growth would lead to higher tax revenues, PwC warned that political pressure to close remaining deficits would rise along with an improving economy. “As the economy begins to recover, there may be renewed focus on the need to control federal budget deficits,” the report said. Mr. Obama’s economic stimulus proposal calls for tax credits for hiring, among other corporate breaks. And the audit firm’s analysis notes that Rep. Charles Rangel of New York, chairman of the Congressional committee that initiates tax legislation, last year proposed a reduction in the top corporate rate from 35% to 30.5%. But to make up lost revenue from such tax breaks, PwC said Congress might adopt Mr. Rangel’s other proposals from last year, such as the repeal of the domestic manufacturing deduction and the “last-in, first-out” inventory accounting method, the deferral of deductions allocable to foreign-source income, and the restriction of the use of foreign tax credits. “That last proposal has generated considerable concern within the business community,” PwC noted. The report noted that those changes would account for most of the revenue “offsets” under Mr. Rangel’s proposal to cut the top corporate rate. The firm added that the elimination of accelerated depreciation on capital investment was also a possibility, if only because Mr. Rangel was expected this year to propose a further reduction in the rate to 28%. PwC also cited Mr. Obama’s general proposals during the election campaign relating to “tax havens” as well as his specific revenue-raising provisions, such as codification of the economic substance judicial doctrine and taxation of “carried interest” received by hedge fund and private equity managers as ordinary income rather than capital gains. Finally, the report took note of Mr. Obama’s campaign promise to close a “CEO pay deductibility loophole” as well as the so-called “tax gap”—the difference between what taxpayers owe and the amount they actually pay. The tax gap previously has been estimated by the IRS to be $345 billion. Prior tax gap proposals have focused on increased information reporting and withholding.