US: Economic Stimulus With Corporations in Mind

Late last winter, when President Bush was shaping his $1.35 trillion tax cut, corporate lobbyists were told to wait, their turn would come. And now, their turn is here.

The $100 billion tax-cut bill narrowly passed by the House this week and sent to the Senate has been lauded by the White House as a broad stimulus package that will pull the United States economy out of a stall made worse by the terrorist attacks. But it also allows the Bush administration to deliver on its promise to corporate lobbyists.

Just 30 percent of the proposed tax relief would go to individuals, with the rest helping corporations, including large, prosperous ones like I.B.M. and General Electric, which have done well even in the economic downturn. And though one of the bill's costliest provisions is intended to produce a rebound in capital spending by businesses, such a recovery is far from certain.

Charles Gabriel, the senior Washington analyst at Prudential Securities, said it was no surprise that the House bill heaped the biggest rewards on corporations. "It's political payback of sorts," he said. "To get his tax cut through earlier this year, Bush had to sedate the K street lobbyists, telling them, `Don't worry, there will be another bill coming through.' Now you've got another green light for a tax bill, and there's a presumption that it will be skewed toward corporate tax cuts."

Corporate pleading for tax cuts is nothing new, of course, particularly if a bill is viewed as the last gravy train pulling out of the Washington station for a while. What emerges from the Senate is almost certain to be a less generous proposal. Still, the administration's argument that the bill is broad-based is weakened when so much goes to a handful of wealthy corporations.

Furthermore, the effort to stimulate the economy could be belied by the immense pressure the bill would put on state governments -- which by law must maintain balanced budgets. Under one of the bill's major provisions, concerning the depreciation of equipment, states would experience significant declines in tax revenues even as they face surging unemployment and other costs.

Conservatives say giving tax breaks to business is not a payoff to campaign contributors, but a vital and efficient way of stimulating new investment, protecting jobs and shoring up corporate earnings and stock prices.

"You can't restore a dysfunctional economy without helping business stabilize and recover," said Representative Bill Thomas of California, the Republican chairman of the House Ways and Means Committee and the main author of the bill.

"The creative range of tax adjustments in this bill will free up money that businesses would otherwise have to send to the I.R.S. so they can channel it back into the economy through salaries, training and investments like equipment instead."

The depreciation provision -- at a cost of $39 billion in the first year -- would allow companies to accelerate the amount they write off against income for new equipment bought in the next three years. The allowance for such write-offs, which reduce corporate taxes, has been 15 percent. Under the bill, it would rise to 30 percent in the year of purchase.

The idea of accelerating depreciation was backed by the National Association of Manufacturers, a lobbying group. Still, its inclusion in the bill surprised some analysts. Tom Gallagher, a political economist at International Strategy and Investment, said: "This has been kicked around in the fairly small tax policy community. Nobody really thought it had much of a chance until now."

Proponents of the plan, many of whom are technology companies that either hope to sell more equipment because of the change or want to pay less for the gear they need to buy, say that it will encourage companies to increase capital spending, which has plummeted this year.

Chris Edwards, director of fiscal policy at the Cato Institute, argued that the new economy requires a new depreciation schedule. "Computers are written off over five years, but they often become obsolete much earlier than that," he said. Allowing a 30 percent write-off in the first year lowers costs and raises returns on new investment. "The core of the economic slowdown has been business investment," he said, "so it makes a lot of sense to aim a lot of tax stimulus at investment."

But some analysts question whether such a stimulus will have the desired effect given that inventories of equipment remain high and manufacturers still have excess capacity -- idle plants. Jack Ciesielski, an accounting authority and editor of The Analyst's Accounting Observer, said: "The increase in depreciation would stimulate capital spending. But the problem is, if the consumer's not buying, what's more capital spending going to produce?"

The three-year term of the accelerated write-off plan mystifies some tax specialists. Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a liberal research group in Washington, pointed out that a one-year plan would provide a much more immediate economic boost, because companies would rush to take advantage of it. Under the current proposal, the urgency to invest would not occur until 2003 or 2004, presumably when the economy is healthy again.

The effect of the increased depreciation on states is what really worries Mr. Greenstein, who noted that most states follow federal rules on write-offs to calculate their own corporate income taxes. By his reckoning, 44 states and the District of Columbia would lose an average $5 billion each in corporate and individual income tax revenues in each of the three years the plan is in effect.

"Since they have to balance their budgets in recession, nearly every dollar that states lose as a result of this federal tax cut would have to be made up as either tax increases or program cuts," Mr. Greenstein said. "If a depreciation is in the package, it ought to include an offsetting relief to the states."

Given the slim margin with which the House bill passed, the aggressive depreciation plan could be toned down in the Senate. Max Baucus, the Montana Democrat who is chairman of the Senate Finance and Appropriations Committee, has proposed giving companies a bonus depreciation of 10 percent for just one year. Senator Baucus's bill would cost $70 billion in the first year.

Perhaps the biggest boon for businesses would be the repeal of the alternative minimum tax on companies since 1986 and refunds to cover what the companies have paid in those taxes during that time. All in all, the House bill would dispense about $25 billion in tax rebates to large corporations, one-quarter of the bill's first-year cost.

According to Citizens for Tax Justice, an advocacy group that is critical of corporate tax breaks, I.B.M.'s rebate check would top $1.4 billion, while General Electric would receive $671 million. Last week, I.B.M. said it could meet investors expectations for fourth-quarter results. G.E. earned $9.8 billion in the first nine months of the year, a 6.8 percent increase from the comparable period in 2000.

Sending $25 billion in checks to profitable corporations may not pass the Senate. But the repeal of the minimum tax, which became law in 1986 to make sure that profitable corporations pay some taxes regardless of the breaks they receive, could survive. That is because in recent years, while more individuals, even those with modest incomes, have been skewered by the minimum tax, corporations have found ways to pay less of the tax, according to Robert McIntyre, director of Citizens for Tax Justice. In 1998, for example, corporations paid $3.3 billion under the law, down from $8.1 billion in 1990. Individuals, on the other hand, paid $5 billion in 1998, up from $830 million in 1990.

The number of taxpayers qualifying for the minimum tax numbered 132,000 in 1990, and Mr. McIntyre estimates that 2.3 million people will pay the tax this year. The surge makes a repeal expensive, of course.

"Repealing the corporate A.M.T. and eliminating taxes on some of our wealthiest corporations would be both unfair and grossly insulting to America's hardworking taxpaying families," Mr. McIntyre said.

Another aspect of the House bill that aids a small but powerful group of large multinational corporations is the plan to make a temporary tax break for companies with financial operations permanent. The tax break lets companies shield income earned in those businesses from taxes by shifting money to offshore subsidiaries.

Last year, the tax break, known as the exception for active financing income, cost the government $3.8 billion in taxes. If it became permanent, it would cost $21 billion over the next decade, Mr. McIntyre said. It works this way: companies that lend money to customers buying their goods -- G.E. or the Ford Motor Credit Corporation, for example -- can offset the income tax they owe on the interest payments they receive by putting enough money in an offshore entity to generate the same amount of income tax-free.

One lobbyist, who spoke about this tax break on the condition of anonymity, said, "It wasn't industry specific, but it certainly was big multinationals that would benefit, while domestic companies would not."

Even though the House bill has White House support, lawmakers in the Senate are sure to examine whether these proposals will provide the stimulus that the economy needs, or if they are a way for corporations to get their tax-cut wishes in the name of economic growth.

"We're seeing very creative efforts to take a longstanding agenda of corporate tax cuts that had never been presented before as stimulus measures and dress them up as though they somehow had significant stimulative effects," said Mr. Greenstein of the Center on Budget and Policy Priorites. "And most of them don't."

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