Republicans Balk at Obama Business Tax Breaks They've Backed

Business tax breaks for R&D and capital investments are two proposals Republicans backed in the past, but don't like as part of Obama's plan to spur growth

(Bloomberg) — In a letter to President Barack Obama seven months ago, 10 Republican senators led by Utah's Orrin Hatch urged him to use tax relief to bolster the U.S. economy and create jobs.

Top on their list: extend and improve a research and development tax credit for businesses. "We urge you to help us enact a strong research incentive to keep us first in the world," the senators wrote.

Another tax break long popular with Republicans would let companies immediately deduct the cost of capital investments. In 2008, House Republican leader John Boehner of Ohio described it as giving employers "greater incentive to invest and create jobs for more Americans searching for work."

Obama this month offered both proposals as part of his push to spur economic growth. Now, with House and Senate elections looming on Nov. 2, Obama's proposals are getting a chilly reception from Republicans. They say Obama's plans are flawed because he would also let the Bush-era tax cuts for the wealthy expire and increase taxes elsewhere.

"There's tremendous pressure on the Republican leadership,since things look so favorable for picking up seats, not to give the Democrats some type of advantage," said Lee Edwards, a fellow at the Heritage Foundation, a Washington-based policy research group that promotes limited government.

"In today's partisan atmosphere, it's difficult to come together on a solution like this," he said.

Permanent Extension

With the U.S. unemployment rate at 9.6 percent heading into November's elections, Obama called for permanently extending and expanding the research tax credit at a cost of about $100 billion over 10 years.

Presidents Bill Clinton and George W. Bush during their terms also backed a permanent extension of the tax credit, which Congress extends only temporarily because of its high cost.

Obama additionally wants to let companies fully deduct the cost of purchasing equipment such as tractors, wind turbines and computers. It's a more generous deduction than one that applied in 2008 and 2009 that allowed businesses to deduct 50 percent of their capital investment costs using so-called bonus depreciation. The president's proposal would cost about $30 billion over 10 years, the administration estimates.

'Proven Incentive'

The National Association of Manufacturers, headed by Republican John Engler, the former governor of Michigan, in July urged Congress to extend bonus depreciation. In a statement, the group said it is "a proven incentive for manufacturers of all sizes to invest in new, more efficient equipment, stimulating much-needed economic growth and job creation."

Bonus depreciation was a feature of stimulus measures adopted in 2002, 2003 and 2008 under Bush, who touted its benefits in 2006 while visiting a manufacturing company in Cincinnati. "They've expanded because of the bonus depreciation schedule," Bush said. "The tax cuts encourage them to buy equipment, and when you buy equipment, you expand your business."

Senator John McCain of Arizona, Obama's Republican opponent in the 2008 presidential contest, made both tax breaks part of his economic plan during the campaign.

Bigger Debate

As of now, Obama's proposals aren't likely to get help from congressional Republicans, who are focused on the bigger debate with Democrats over extension of the income tax cuts enacted during the Bush administration.

Both parties want to extend the cuts for individual income up to $200,000 and up to $250,000 for couples filing jointly, or about 97 percent of all taxpayers, according to data from the U.S. Internal Revenue Service. Republicans want to keep the cuts for those in the higher income brackets, which Obama opposes.

Raising taxes for the wealthiest Americans will defeat the purpose of business tax incentives, some Republicans say.

"A permanent research tax credit and allowing businesses to write off 100 percent of their investment in equipment are good ideas, but any positive impact on the economy would be crushed by tax increases on other parts of the economy," said Hatch in statement following a Sept. 8 economic speech by Obama in Cleveland outlining his plans.

"These aren't necessarily bad proposals," Boehner said in a statement ahead of Obama's speech. "But they don't address the two big problems that are hurting our economy — excessive government spending and the uncertainty that Washington Democrats' policies, especially their massive tax hike, are creating for small businesses."

Hatch Effort

Hatch sought unsuccessfully on Sept. 16 to add a measure making the research tax credit permanent to a small business assistance bill that passed the Senate. In blocking Hatch's proposal, Democrats said it would have required the overall legislation, held up by Republicans for months, to go back to committee.

Hatch's move was another "in a series of delays thrown up in front of this bill," said Democrat Max Baucus of Montana, chairman of the Finance Committee. Baucus said he planned to bring up the research credit, which expired at the end of 2009, later this year after lawmakers had more time to work on it.

Obama has suggested his proposals be paid for by eliminating certain tax breaks for companies that send jobs overseas. That has fueled Republican opposition to his initiatives.

"If the offsets for this new package are other tax increases, then it's a non-starter," Senator Charles Grassley of Iowa, the Finance Committee's top Republican, said in a Sept. 7 statement. "To Republicans' ears, a tax cut never sounds great when it comes from a Democrats' mouth, because they always assume there will be a catch," said Jack Pitney, who teaches politics at Claremont McKenna College in Claremont, California.

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