Fit to Be Tied

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

At the opposite extreme, some argue for revenue enhancement. “All else being equal, reform that’s revenue neutral makes some sense,” says the Center on Budget and Policy Priorities’s Marr. “But the problem is that all else is not equal. The United States is on an unsustainable fiscal path, and that will require gut-wrenching choices. It does not make sense to take corporate taxes off the table.”

There are at least two other potential stumbling blocks to a revenue-neutral approach. First, the biggest tax incentives apply to most U.S. corporations rather than specific industries, so eliminating them could cause widespread pain and pushback from the business community.

Second, even eliminating every corporate tax expenditure probably wouldn’t get the corporate tax rate down to a level the White House or the business community would like to see. Martin Sullivan, an economist and contributing editor with Tax Analysts, a nonprofit publisher of tax news and analysis, said at a recent House Ways and Means Committee hearing that it might not be possible to get the statutory rate below 30% and still remain revenue neutral.

Still, not everyone in the business community is irreversibly opposed to the concept. “I don’t fear revenue-neutral corporate tax reform,” says David Lewis, vice president of finance and corporate finance for $23 billion pharmaceutical firm Eli Lilly and Co. “But for me, the devil is clearly in the details. You have to look at the trade-offs you make. If we could achieve a lower rate, a territorial system, and have innovation incentives — on a revenue-neutral basis — it would be worth doing.”

A Role for the CFO?

Hodge says CFOs could give the reform effort more momentum by agitating for change not just in Washington but also with the nation’s governors.

“The federal corporate tax rate is a millstone around the necks of the 50 states,” he argues. “If every state were to become like Nevada and eliminate state-level corporate income taxes, each would still essentially be imposing the highest corporate tax rate among industrialized nations because our federal rate is that high. So governors need to start getting engaged on this issue, and CFOs, because they are on the ground in those states and typically have pretty good relationships with governors, can go a long way toward stirring up chatter outside the Beltway. The pressure has to come from more than just the business community and its stakeholders.”

Despite the increased talk of corporate tax reform and the many factors that argue in its favor, political and tax analysts say it is unlikely to happen quickly. Before President Reagan was able to shepherd the 1986 tax legislation into law, for example, the Treasury Department released two comprehensive reform proposals in 1985 without success. It wasn’t until the eve of his 1986 reelection that Reagan was able to forge a bipartisan agreement on meaningful change.

Some analysts argue that something could happen before the next Presidential election, but Mark Weinberger, global vice chairman of tax for Big Four accounting firm Ernst & Young and former assistant secretary of the Treasury for tax policy under President George W. Bush, isn’t among them.

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