Baucus Plan Slows Capital Write-Offs With Companies Wary

Photographer: Mandel Ngan/AFP via Getty Images

Senate Finance Committee Chairman Max Baucus. Close

Senate Finance Committee Chairman Max Baucus.

Close
Open
Photographer: Mandel Ngan/AFP via Getty Images

Senate Finance Committee Chairman Max Baucus.

Oil companies, manufacturers, advertisers and real estate investors warned that a proposal from Senate Finance Chairman Max Baucus to slow down deductions for capital assets could raise the cost of investment.

Baucus’s draft proposal attempts to match the speed of deductions for assets with their economic lives, rather than letting companies write off investments faster. The Montana Democrat would use the plan’s proceeds -- about $700 billion over a decade -- to finance a cut in the corporate tax rate.

“There’s kind of been this unspecific” effort to roll back tax breaks that’s been paired with lawmakers’ promise of rate cuts, said Donald Marron, a former economic adviser to President George W. Bush and acting director of the Congressional Budget Office. “Now the rolling back of tax breaks is becoming more tangible,” he said.

Baucus released three discussion drafts this week as he seeks to build momentum for the biggest changes to the U.S. tax code since 1986.

Whether he and his House counterpart, Representative Dave Camp, can succeed is far from clear. Camp, a Michigan Republican who is chairman of the House Ways and Means Committee, and Baucus have been stalled in their efforts by a partisan divide over whether the federal government should collect more revenue as part of the changes.

Corporate Rate

Baucus has said he wants to reduce the corporate tax rate to less than 30 percent from the current 35 percent. The rate cut and depreciation changes are intended to make the effective tax rates of companies more equal, taking breaks away from those who now benefit and lowering the rate for everyone else.

Capital-intensive companies such as Deere & Co. (DE) probably would be hurt and companies profiting from past investments such as Visa Inc. (V) would benefit.

Even with prospects for a tax-code revamp appearing dim, business lobbyists are analyzing the proposals closely and trying to build opposition to items that may resurface.

Dan Jaffe, group executive vice president of the Association of National Advertisers, opposes the part of Baucus’s plan that would require companies to deduct half of their advertising expenses immediately and the rest over five years. Currently, such expenses are immediately deductible.

‘Shot Down’

“This part of the draft needs to be shot down as quickly as possible,” said Jaffe, whose group’s members include Wal-Mart Stores Inc. (WMT) and Kellogg Co. (K) “Anybody who is not taking these proposals extremely seriously is not only misguided but is putting their head in the sand.”

The real effect on companies won’t be clear until Baucus releases a complete draft and specifies a tax rate. Accelerated depreciation is one of the largest corporate tax breaks, making it an obvious target in a rate-for-breaks tradeoff, said Douglas Holtz-Eakin, president of the American Action Forum, a small-government group.

“If you look at where you’ve got to go, there is a short list of items that can be used as base broadeners to finance other purposes, and this is one of them,” said Holtz-Eakin, a former Congressional Budget Office director.

Currently, companies’ capital assets are depreciated for tax purposes under a system that assigns an expected life to each asset and sets a schedule for how quickly companies can take deductions.

The changed system, modeled in part on rules in Canada, would group assets into four pools designed to better reflect the assets’ economic life.

Real Property

Within each pool, companies could deduct a set percentage of the value each year -- 38 percent, 18 percent, 12 percent and 5 percent. Real property would be depreciable over 43 years.

“It is a huge change for manufacturers and one we’re going to have to take a very close look at,” said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers, a Washington-based trade group whose members include Caterpillar Inc. (CAT) and Pfizer Inc. “It does raise concerns and red flags in some respects, but it’s a process.”

For public companies concerned about investors’ reaction, the depreciation change combined with a corporate rate cut would cause an immediate one-time boost to earnings. That’s because, for financial statement purposes, changes in timing of tax deductions don’t affect earnings.

Reduce Value

The corporate rate cut would reduce the value of deferred tax assets, lowering earnings. It would have the opposite effect on deferred tax losses, so the financial statement effect for any company would depend on its circumstances.

Marron, now director of economic policy initiatives at the Urban Institute, said the effect on any particular company will be determined by its mix of assets and investments. Companies profiting from past investments that are already deducted might fare best, he said.

“You’re going to win from a rate cut and not care as much about investment being more expensive,” he said.

The Baucus proposal would repeal last-in, first-out accounting, adopting an administration proposal opposed by wholesalers and oil and gas companies.

Like advertising expenses, costs related to extracting natural resources and conducting business research would be deducted over five years, instead of immediately.

If the revisions were to become law, they would make the tax code more efficient and less distortive, said Calvin Johnson, a law professor at the University of Texas in Austin.

‘Cuts Loopholes’

“The legislative process inevitably cuts loopholes into the tax base that will both increase the harm that tax does and will get congressmen re-elected,” he said.

The American Petroleum Institute, whose members include Chevron Corp. (CVX) and Parker Hannifin Corp. (PH), released a statement criticizing the plan.

Senator John Cornyn, a Texas Republican, also faulted Baucus’s plan.

“Our nation is in serious need of comprehensive tax reform,” Cornyn said in a statement. “Instead, what we’re seeing from Senate Democrats is a plan that targets oil and gas producers -- the very sectors our nation relies on for economic growth.”

Real estate investments could be affected by the repeal of the “like-kind” rules that allow tax-free exchanges of similar assets. Other changes in Baucus’s plan on foreign investment in real estate would be beneficial, Jeff DeBoer, president and chief executive officer of the Real Estate Roundtable, said in a statement.

“These tax reform proposals could greatly affect property values, economic activity, and the liquidity of investments, and could have broad unintended consequences,” DeBoer said.

For small businesses, Baucus’s proposal would make it easier to use cash accounting and expense $1 million in capital purchases.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.