Guess who’s opposed to corporate tax reform: Corporations

The U.S. Chamber of Commerce, which represents many of the nation’s largest companies, is a big backer of corporate tax reform, preaching the virtues of a “smarter, streamlined tax system” that will supposedly invigorate American businesses and create badly needed jobs.

The U.S. Chamber also opposes tax reform. It’s one of dozens of groups fighting to protect a popular tax break known as “last-in, first-out” accounting, or LIFO, which lets many firms value their inventories in a way that minimizes their tax bill. That provision is one of dozens of tax breaks that would probably have to go if the tax code were to be reformed. Yet it saves U.S. firms about $8 billion per year, which is why the U.S. Chamber and other heavyweight business lobbying groups are fighting to keep it.

The prospects for corporate tax reform are supposedly the best they’ve been in years, since business-friendly Republicans are set to take over both houses of Congress next year and both parties are talking about the need to stop fighting and do something productive. Rep. Paul Ryan, one of the top Republicans in the House, said recently that he thinks a bill to lower corporate rates and eliminate loopholes will pass Congress in 2015. President Obama has said he’d sign such a bill if it meets key criteria.

Yet there’s a huge and surprising barrier to passing corporate tax reform: the many big companies that would seemingly benefit from it the most. Many CEOs have been pushing for a simpler tax code that's more predictable and easier to comply with, as have trade groups representing much of corporate America, including the U.S. Chamber, the Business Roundtable and the National Association of Manfuacturers. Those same groups, however, are also lobbying vigorously for tax breaks deemed beneficial to select business interests--which is why the tax code is so labyrinthine in the first place. "The politicians could come to a deal if industries weren’t competing against each other,” says Frank Clemente, executive director of the nonprofit public-interest group Americans for Tax Fairness. “It’s really tough to lower tax rates if you want to do revenue-neutral tax reform.”

Broadly understood, corporate tax reform would include lower marginal tax rates along with “base broadening,” which means dozens of tax breaks would be slashed or eliminated, making it much harder for companies to avoid taxes. President Obama favors lowering the top corporate tax rate from 35% --  the highest rate among developed countries -- to 28%, as long as a reform bill would close loopholes that now allow businesses to skirt billions in taxes. Republicans want to cut the top rate by more -- to 25% or lower -- but they agree with Obama on the basic principles of reform. Of the many intractable problems in Washington, fixing the convoluted corporate tax code is one that actually has a modicum of bipartisan support.

Closing beloved loopholes

Standing in the way, however, are corporate interests that may have more to lose from closed loopholes than they have to gain from lower tax rates. Earlier this year, for instance, Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, drafted a bill called the Tax Reform Act of 2014, which provides a good idea of just how many loopholes would have to be closed for a tax reform bill to have bipartisan support and a chance of becoming law. Lowering the corporate tax rate from 35% to 25%, as Camp proposed, would cut federal tax revenue by about $680 billion over 10 years. To cover that shortfall and other costs, Camp’s plan targets nearly 150 other corporate tax breaks for elimination, reduction or change, ranging from arcane provisions affecting a handful of firms to those that would impact thousands of businesses. All told, Camp’s plan would cut about $1.3 trillion in loopholes and other tax breaks over 10 years, according to analysis by the nonpartisan Committee for a Responsible Federal Budget.

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The specter of serious reform has already energized the business lobby and generated intense behind-the-scenes efforts to keep in place tax breaks businesses have long relied upon. The current battle over “tax extenders,” for instance, is corporate tax reform writ small. Lawmakers have been dickering over whether to extend 50 or so tax breaks, mostly for businesses, that are supposed to be temporary but tend to get renewed over and over thanks to diligent corporate lobbying. If Congress lets them expire by the end of the year, it would boost federal tax revenue by about $45 billion over 10 years. But lobbying groups have spread political donations lavishly among both parties, and lo and behold, the House recently passed a bill to keep the extenders going. Expect the Senate to follow once the obligatory verbal lashing is over.

Such set-piece drama over a relatively small set of tax favors reveals how bipartisan agreement can wither when a lot of money is at stake. Camp and Obama, for instance, both want to kill the LIFO accounting provision. Yet recent talk of LIFO's demise triggered a clarion call among lobbying groups and the creation of an organization called the Save LIFO Coalition, whose membership includes top trade groups from industries as varied as energy, manufacturing, retail, jewelry, grocery and healthcare, plus the U.S. Chamber and the Business Roundtable. So while many corporate leaders say they favor tax reform, many of them are also pushing hard to sustain the loopholes reform is meant to close.

If tax reform actually happened, the few breaks that survive would most likely be those that favor the broadest set of big, powerful firms. One of those is known as the “GE loophole” because General Electric (GE) lobbies most intensely for it and benefits most from it, according to a report earlier this year from Americans for Tax Fairness. The so-called “active financing exception,” or AFE, limits the amount of tax U.S. firms must pay on overseas profits and helps GE keep its U.S. tax bill near or at 0, though GE does pay state, local and payroll taxes in the United States. Americans for Tax Fairness scoured lobbying records and identified 373 U.S. companies and trade groups that lobbied to keep AFE between 2011 and 2013. In addition to GE, those spending the most lobbying for this one tax break include Goldman Sachs (GS), AT&T (T), Pfizer (PFE), General Motors (GM), Microsoft (MSFT), Prudential (PRU) and Sanofi (SNY).

Perverse incentives

Some tax breaks, such as the research tax credit, are considered sound policy by many economists because they give companies incentives to spend money in ways that benefit the broader economy. Yet the proliferation of such breaks since 1986, the last time the tax code was reformed and simplified, has also created perverse incentives that leave many firms better off under a rigged, opaque system than under a simpler, more transparent one. Why, for instance, would GE favor tax reform that lowers tax rates if it already benefits from loopholes that push its tax rate close to 0?

Business leaders would no doubt rally behind corporate tax reform that lowered rates while leaving some of the biggest loopholes intact—but public opinion probably won’t allow that. Corporate income taxes are already low on a historical basis, accounting for just 11% of federal revenue; individual income taxes account for 46% (with payroll taxes and many smaller levies and fees making up the rest). With corporate profits strong but household incomes depressed, voters seem to be in no mood for “reform” that amounts to more corporate giveaways. Maybe we should learn to love the loopholes that we have.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.