With election looming, White House, GOP tiptoe towards tax overhaul

Corporate tax reform is creeping back into the picture, although experts predict the election will chase the issue off the agenda this year.

Congressional Republicans and the White House are flirting with plans to overhaul the corporate tax system. But any perceived progress is expected to stall out despite a push from business groups to lower the 35 percent corporate tax rate, the highest among industrialized nations.

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Within the next few weeks — possibly by the end of February — the Obama administration is expected to unveil a "broad framework" on corporate tax reform, and Treasury Secretary Timothy Geithner said this week he "wants to bring down the rate to an average of our major competitors."

While there is clearly a bipartisan desire to move forward on corporate reform, tax experts aren't expecting a major overhaul to happen this year — although lawmakers and the administration are laying the groundwork with these early conversations.

Clint Stretch, managing principal of tax policy at Deloitte Tax, acknowledged the difficulty in reaching an agreement on a major tax package, but said these early conversations are "consensus building" and an important part of the process.

Geithner took a beating this week over how much detail the administration would provide in its much-anticipated plan — the Treasury secretary said it ends "dozens" of special tax preferences and would be enough to start discussions.

"So we'll have a chance to begin that debate with you and we're going to give you a fair amount of texture, although not a fully articulated legislative proposal because we want to preserve some room to come together on this," Geithner told Ways and Means Republicans this week.

"There is, I hope, more room for common ground on this and we need to use this opportunity now to start to lay the foundation for the fundamental change ahead."

Changes in tax policy — corporate and individual — are "very badly needed" but far from easy to accomplish, Stretch said.

The problems in moving forward are large — first, the business community must agree to what it wants and, while there is general agreement that the corporate tax rate should drop to somewhere between 25 percent and 28 percent, lowering the rate would shift pressure — and probably mean a tax increase — to make up the difference in lost revenues to the individual side of the tax code.

"The challenge is with the math," Stretch said in an interview with The Hill. “Who pays for it is the biggest question and the most severe problem."

A Joint Committee on Taxation report released in November said that eliminating every corporate tax credit and deduction would generate only enough revenue to reduce the corporate tax rate to 28 percent — short of the 25 percent desired by businesses and proposed by Republicans.

That raises questions about what else Republicans plan to cut to pay for such a large corporate-rate reduction.

"What that something else is, is hard to see," Stretch said.

Policymakers could consider a value-added tax — an unpopular option on Capitol Hill that is politically difficult outside of a presidential election year. 

"There are no good tax increase ideas," he said. "If we have to raise revenues and deal with debt we may have to enact a bad idea."

In October, House Ways and Means Committee Chairman Dave Camp (R-Mich.) provided a draft that would lower the corporate tax rate from 35 percent to 25 percent and switch the United States to a territorial system of taxing offshore profits, in which corporations would find 95 percent of their foreign earnings exempted from American taxation. 

Camp has called the tax rate a "dubious distinction" that makes it that much harder to attract businesses and keep business investments at home. 

Business groups and corporations gave the plan a warm reception.

If lawmakers opt to take up the corporate tax overhaul separate of the individual code, there are a range of technical concerns beyond differences of opinion between the parties on how to make a new system work — including the additional burden that such a plan could put on individual taxpayers. 

Many lawmakers are already pushing for a comprehensive package that includes corporate and individual changes to the tax code. 

At the same time, when policymakers consider a major tax overhaul within the realm of budget-balancing and deficit-cutting, they will have to address rising and unsustainable Medicare costs, Stretch said. 

"I think we are going to have to get to comprehensive tax reform, individual and corporate," Geithner said during a hearing on Capitol Hill. "I don't really see a way to meet the nation's challenges effectively without doing that."

"So it's coming, it's inevitable, it's necessary and we can't keep putting it off," he said.

Still, there is room to do incremental reform on the business side, but it must be "very creative" and it will take a "sales job" to move it, he said.

Rep. Jim McDermott (D-Wash.), a member of the House Ways and Means Committee, said Friday that he thinks an agreement could be reached by the end of next year, even with differences between the parties.

The gap between Democrats and Republicans was illustrated during discussions last summer over the debt-limit increase, where "we found it impossible in that discussion despite — despite a lot of effort to close the gaps between us," said Geithner, who will leave his position at the end of Obama's first term.

Last year, Treasury was moving along with a corporate tax plan, but it stalled out when business groups expressed concern about the loss of some coveted tax breaks.