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Obama Tax-Cut Winners Include Companies; Muni Borrowers Could Be Losers

A tax framework announced by President Barack Obama creates more winners now than losers by boosting workers’ pay, aiding the jobless, rewarding companies for investing in equipment and saving wealthy families billions of dollars in capital gains, dividend and estate taxes.

The potential losers include cities and states poised to give up the Build America Bonds program, technology and energy companies that may forgo a manufacturing tax credit, and future generations of Americans that will be faced with as much as $1 trillion in debt as a result of the legislation.

Obama yesterday announced a compromise with congressional Republicans that sustains all of the Bush-era tax cuts through 2012 and sets the federal estate tax at 35 percent for two years. Obama said he secured a 13-month extension of federal jobless aid, a 2 percentage-point cut in payroll taxes for one year, and accelerated tax benefits for companies that buy equipment.

The deal “is primarily dictated by politics,” said former Texas Representative Bill Archer, a Republican who was chairman of the House Ways and Means Committee from 1995 to 2000. “This is the first concrete pillar for Obama’s re-election. I think he took a long look at this and decided it was a hell of a lot more positive than doing nothing.”

Photographer: Matthew Staver/Bloomberg

The tax framework includes a 13-month extension of federal jobless aid. Close

The tax framework includes a 13-month extension of federal jobless aid.

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Photographer: Matthew Staver/Bloomberg

The tax framework includes a 13-month extension of federal jobless aid.

In the long run, Archer said, “the only real loser is the amount of debt we’re going to have to face in the future.”

Expiring Tax Breaks

While Obama identified many areas of agreement, the fate of dozens of expired or soon-to-expire tax breaks, about 80 percent of which benefit businesses, remained uncertain.

Senior administration officials who briefed reporters yesterday said tax provisions that are often temporarily extended are likely to be in the package. That includes a research credit used by thousands of companies and a provision allowing tax deferral of profits from overseas lending activities that benefit U.S.-based multinational corporations such as General Electric Co.

Treasury Secretary Timothy Geithner has asked for a detailed review of those tax breaks, which include subsidies for restaurant renovations that help companies such as McDonald’s Corp., builders of Nascar stock-car racetracks, and producers of rum such as Diageo PLC. Most expired Dec. 31, 2009. If included in the final measure, such provisions likely would be renewed for this year and 2011, Iowa Senator Charles Grassley said today.

A renewal decision would mean a one-year extension for business provisions expiring at the end of this month, including a 45-cent per gallon tax credit for ethanol production.

Build America Bonds

Other soon-to-expire provisions, including the Build America Bonds program, are still being negotiated, said Senate Finance Committee Chairman Max Baucus. The program has been the fastest-growing segment of the U.S. municipal bond business and has been a source of underwriting fees for companies including Goldman Sachs & Co. and Bank of America Corp.

Also uncertain is the future of the advanced energy manufacturing program, which has provided tax credits to companies investing in battery technology. The administration has been seeking a $5 billion infusion into the program.

Companies including Dow Corning Corp., EI DuPont de Nemours & Co., GE and United Technologies Corp. took advantage of an initial $2.3 billion for the program in the stimulus legislation. GE was selected for $90 million in tax credits, according to White House records.

Expensing Benefit

One of the biggest benefits for companies would be an expensing proposal. Under the proposal, companies in 2011 could deduct the full cost of investments in equipment instead of following typical depreciation schedules. The tax benefit will be available even for planned investments.

Caroline Harris, chief tax counsel at the U.S. Chamber of Commerce, said the expensing item “itself is not going to affect demand, but people’s economic situation is going to affect demand.” Lower tax rates would likely spur consumer spending.

Campbell Fittings Inc., a Boyertown, Pennsylvania, manufacturer of industrial hose couplings and fittings, would benefit from the expensing provision, said executive vice president Joe McGlynn. Its inclusion in Obama’s plan was a “bit of a surprise for me, a pleasant surprise,” he said. If included in a tax package, it would allow his firm to buy four machines and hire up to 12 workers in the first quarter of 2011, he said.

The tax agreement lacks revenue-raising offsets. Among other things, it doesn’t include higher taxes on the carried interest earned by private-equity fund managers and certain real estate investors. Many Democrats had been seeking to tax this compensatory income as ordinary income, not capital gains.

The deal would preserve tax rates reduced in 2001 and 2003 for all Americans. The temporary reduction in payroll taxes would be worth a maximum of $2,136 per worker.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Richard Rubin in Washington at Rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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