Fit to Be Tied

Corporate America and Uncle Sam may finally see eye to eye on tax reform.

Consider $18.4 billion Whirlpool Corp. Last year, the appliance manufacturer took advantage of a variety of tax credits to boost its net income by nearly 11%. This year, it expects to generate about a third of its profits just from the tax credits it receives for producing energy-efficient appliances. It also has $2 billion of net-operating-loss carryforwards on its books that can be used to offset federal income tax payments as far out as 2030. Hodge calculates that if Washington were to lower the statutory tax rate to 25%, Whirlpool’s tax-loss carryforwards would immediately be worth 25% less, dinging the company’s book value. Repealing the energy tax credit would shrink its bottom line.

Whatever executives’ personal views on tax reform (Whirlpool declined a request for comment), it is hard to imagine anyone at the company being particularly eager to see tax reform of that sort, at least from a shareholder-return perspective. Nor, one suspects, would there be much cheering from the coal, private-equity, reinsurance, or semiconductor industries, all of which enjoy effective tax rates that are approximately half or less the current statutory rate.

Some banks and pharmaceutical companies are likely conflicted over the possibility of reform, too. Citigroup said in February that it could be forced to write down the value of $52.1 billion in deferred tax assets on its books, which now represent about a third of its book equity, if either the United States or Japan lowers its corporate income tax rate. A change by Japan alone, Citigroup said, would trigger a $200 million charge. And Zacks Equity Research analyst Jason Napodano has estimated that the 14 largest U.S.-based pharmaceutical and biotechnology companies could see their effective tax rate jump to 30% from 23%, collectively, if tax reform eliminated research-and-development tax credits and other breaks they now enjoy.

Getting Territorial

For reform to have a chance, political analysts generally agree that President Obama will have to make it one of his signature issues, much as Ronald Reagan did with the Tax Reform Act of 1986, assisted by the Treasury Department. “This issue needs Presidential leadership and the bully pulpit of the White House,” Hodge says.

It would also need the leaders of the congressional committees overseeing tax policy — Dave Camp (R–Mich.), chair of the House Ways and Means Committee; and Max Baucus (D–Mont.), chair of the Senate Finance Committee — to make it the centerpiece of their respective agendas. Baucus told CFO that “it is a top priority. We want to make the system more competitive and fair, and less complex.”

Obama and Geithner have held meetings with business leaders on the subject. Similarly, Camp and Baucus have held hearings on tax reform, but neither has yet made it the top priority on their agenda.

While reform advocates await the outcome of the deficit-reduction battle, which seems likely to include a cut to the corporate tax rate, a bipartisan group of six senators has been trying to push the issue forward. Even before deficit reduction became a national obsession, they were crafting a plan that would, over a 10-year period, reduce the federal debt by about $4 trillion, the target set by the President’s own debt commission, and simultaneously revamp the tax code. The group includes Budget Committee chairman Kent Conrad (D–N. Dak.), Majority Whip Richard Durbin (D–Ill.), and Tom Coburn (R–Okla.).


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