Deficit Panel Plan Stirs Special-Interest Anger

Businesses as a whole have a lot to gain from the deficit-cutting plan proposed today by the National Commission on Fiscal Responsibility and Reform.

The plan would reduce federal deficits by $4 trillion through 2020 through a combination of spending caps, health care cost containment measures, and tax changes. Without such action, the nation’s debt would reach unsustainable levels, causing interest rates to soar and crowding out private investment. The United States could even find itself in the position of Greece or Ireland—essentially bankrupt.

That, obviously, would be bad for business.

The presidentially appointed commission’s plan not only prevents that scenario, it also benefits businesses by overhauling the tax system. It would make U.S. companies more competitive with their global counterparts by reducing the corporate tax rate and exempting income earned abroad. It also would reduce individual income tax rates—which apply to most small businesses—with a top rate of no more than 29 percent, compared with the current top rate of 35 percent (39 percent next year if Congress allows the Bush-era tax cuts to expire.)

In return for these tax cuts, however, the plan calls for eliminating the 75-plus tax breaks that benefit specific types of businesses. Every year, the federal government loses more than $1 trillion because of tax expenditures. By paring these to a bare minimum, the tax base would be broadened enough to raise revenue needed to reduce the deficit and lower overall tax rates.

This would “make America one of the best places to start and operate a business,” said commission co-chairman Erskine Bowles, who headed the Small Business Administration and served as White House chief of staff during President Bill Clinton’s administration.

“That will create jobs,” Bowles said.

The plan largely follows the draft proposal released by the commission’s co-chairmen three weeks ago. The biggest change was a suggestion that Congress consider a temporary payroll tax holiday this fiscal year to boost economic growth, as long as this is accompanied by future deficit reductions. This incorporates a proposal made by commission member Alice Rivlin, a former White House budget director, and former Senator Pete Domenici, a Republican from New Mexico. Rivlin said she would vote for the commission’s plan.

It’s not clear whether Bowles and the commission’s other co-chairman, former Republican Senator Alan Simpson, will get the 14 votes they need from the commission Friday to ratify their plan and send it to Congress. But two business leaders on the panel, Honeywell International chairman and CEO Dave Cote and former Young & Rubicam Brands CEO Ann Fudge, are on board.

Fudge agreed the current tax system is making U.S. companies less competitive globally. “We are indeed slipping,” she said.

The commission’s plan, however, won’t be supported by businesses who stand to lose tax breaks that they’ve lobbied hard to get and keep. Simpson said he expects to hear a lot of complaints back home in Wyoming, which is a major oil, gas, and coal producer. These industries would lose various tax breaks and subsidies under the commission’s plan.

Executives from these industries are going to ask him what on earth he was doing, Simpson said. His reply: “Lowering your tax rate, Jack. What’s your next problem?”

The housing industry is mobilizing to protect the home-mortgage interest deduction. The commission proposes ending that break for second homes and capping the deduction at $500,000. Ron Phipps, president of the National Association of Realtors, said any changes to the home-mortgage interest deduction “could critically erode home prices” and even “tip the economy into another recession.”

The National Association of Federal Credit Unions is upset the commission lumped the tax exemption for credit unions with other tax expenditures. More than 90 million credit union members would “suffer greatly if credit unions lost their tax exemption,” said NAFCU president Fred Becker.

This is just the tip of the iceberg—we’ll hear lots more complaints from other industries about the commission’s proposal to roll back their tax breaks. Congress will have to decide what’s more important: reforming the tax system to create a better business climate for everyone, or retaining breaks that benefit favored industries.

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Kent Hoover is the Washington bureau chief for bizjournals.