June 27 (Bloomberg) -- Barack Obama’s proposal to end a business tax break worth $72 billion is among the tensions the president may confront as he meets today with Senate Minority Leader Mitch McConnell in an effort to revive bipartisan talks over reducing the debt.
Ending the so-called last-in-first-out, or LIFO, provision, a method of accounting for inventory costs, was among options offered by White House officials for raising $400 billion in revenue over 10 years during seven weeks of negotiations led by Vice President Joe Biden, three persons familiar with the issue said on the condition of anonymity because they weren’t authorized to comment publicly.
“We think this is part of simplifying the tax code” and leveling the playing field for companies, White House press secretary Jay Carney said today. He used the example of an oil company that bought oil when prices lower and sells it when the price is higher, declaring its profit based on the higher price. “We just don’t think that’s right,” he said.
Approximately 12 percent of the companies on the S&P 500 Index have a total of $62 billion in LIFO reserves in 2010, and energy companies account for more than 82 percent of these reserves, according to an analysis by Bloomberg Government. They make up 8 of the top 10 firms with the largest LIFO reserve.
Republicans want a multitrillion-dollar debt-reduction package as part of a vote to increase the nation’s $14.3 trillion borrowing limit by Aug. 2. The LIFO provision was among possible revenue increases that Republicans opposed when the Biden talks, which included two Republicans and four Democrats, collapsed last week. Biden criticized Republicans for trying to keep President George W. Bush-era tax breaks while advocating cuts in Medicare.
“We’re never going to solve our debt problem if we ask only those who are struggling in this economy to bear the burden and let the most fortunate among us off the hook,” Biden said at the Ohio Democratic Party’s annual dinner at the Greater Columbus Convention Center June 25. “Not only is it unfair to do what they’re calling for, but I think it borders on being immoral.”
An administration official told reporters June 24 that House Majority Leader Eric Cantor and Senator Jon Kyl, the chamber’s No. 2 Republican, walked out because they were unwilling to accept any tax increases.
Oil and Gas Subsidies
Among these were ending subsidies for oil and gas companies and breaks for corporate jets and tax breaks for Americans earning more than $500,000 a year, according to Representative Chris Van Hollen, a Maryland Democrat who participated in the talks.
Obama and Republican leaders now must bridge the divide as pressure builds for a deal. Moody’s Investors Service this month said it will put the U.S. government’s Aaa credit rating under review for a downgrade unless there’s progress on raising the debt limit by mid-July. Pacific Investment Management Co. LLC Chief Executive Officer Mohamed El-Erian said on CNN that a short-term U.S. default on its debt might have “catastrophic” legal consequences.
Administration officials including Treasury Secretary Timothy Geithner have said they are confident a debt-limit deal can be reached by Aug. 2. Still, Democrats and Republicans so far are dug in on their negotiating positions.
McConnell said his goal at today’s White House meeting is to get agreement from Obama that tax increases won’t be part of the negotiations.
‘Seen the Consequences’
“We have seen the consequences of giving Washington a blank check,” McConnell said today on the Senate floor. “My message to the president is simple: It’s time for Washington to focus on fixing itself. It’s time Washington take the hit, not the taxpayers.”
Democrats aren’t backing down. House Minority Leader Nancy Pelosi yesterday said tax subsidies for companies must be on the table.
Cantor “walked away from the table because he doesn’t want to deal with the special interest tax subsidies,” Pelosi said on CNN’s “State of the Union.”
House Speaker John Boehner and McConnell have said Republican conditions for raising the debt ceiling include no tax increases, spending cuts and a government spending overhaul.
California Representative Kevin McCarthy, the third-ranking House Republican, not only rejected any tax increases, he insisted that limits on Medicare must also be included in a bipartisan deal.
Obama has “got to get off the golf course, and he’s got to get engaged,” McCarthy said in an interview on Bloomberg Television’s “Political Capital with Al Hunt.”
The outcome of the tax subsidy issue hinges on whether Republicans decide to break with Americans for Tax Reform’s Grover Norquist, who insists that any elimination of tax breaks must be accompanied by an equal reduction in taxes elsewhere. Forty of 47 Republican senators have signed Norquist’s no-tax-increase pledge.
The LIFO proposal “does put the lie to the idea that Obama and Democrats only wish to tax high-income earners,” Norquist said in an e-mail.
The White House official who briefed reporters said that two separate bipartisan commissions, including the president’s fiscal commission, recommended at least $1 trillion in revenue beyond the expiration of the Bush tax cuts.
The official also cited more than 10 bills signed by former President Ronald Reagan, a Republican, from 1982 through 1988, that included revenue increases along with spending cuts, as well as a 1990 agreement that included more than one-third revenue and two-thirds spending reductions.
Ending LIFO in 2012, which the White House considers a loophole in the code, would raise $72 billion by 2016, according to the nonpartisan Congressional Budget Office. The accounting method assumes that the less expensive inventory remains on hand for calculating taxable income.
As part of his Feb. 14 budget, Obama proposed $357 billion in revenue raisers, many of which were offered by White House officials as part of the Biden talks.
While it included strengthening research and development tax credits as well as other pro-business initiatives like funding for the next generation of broadband, it also included repealing LIFO and deductions for oil and gas companies worth $46 billion.
Repealing LIFO “would be tantamount to a retroactive tax on the savings a company accrued over time,” and could be “devastating” to some companies, according to a March 2 letter to members of Congress from a group of trade associations, including the American Forest & Paper Association and the National Association of Manufacturers.
Democrats are trying to telegraph a renewed commitment to creating jobs and a focus on the manufacturing sector.
Following a June 23 meeting with a group of Fortune 500 chief executives, Schumer and other Democratic leaders said they’re open to new tax preferences for employers, including a partial payroll tax holiday and tax credits for manufacturing and research and development.
In his weekly radio address on June 25, Obama touted a $500 million government program to help companies and universities develop new manufacturing technologies.
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