Special Interests Gird for Tax Reform Debate

Sen. Bill Bradley (D-N.J.) and Rep. Jack Kemp (R-N.Y.), new partners in the cause of tax reform, recently called a press conference where they produced 11 business leaders who were willing to give up a host of popular tax deductions in the interest of stimulating the economy.

Meanwhile, scores of House members, marching to the beat of a different lobby--one concerned that reform will deter investment--appealed to President Reagan not to tamper with the current tax code’s exemption on much of the profits from capital gains. That provision, they argue, encourages creation of the high-technology companies that many see as the cornerstone of American enterprise in coming years.

Armed With Analyses

Special interests of all stripes--those who want to simplify the tax code and those who like it the way it is--have girded for an intense national debate on tax reform. Their lobbyists are armed with sophisticated economic analyses that show that the policies they advocate would benefit the economy. Only incidentally do they acknowledge that these policies would also benefit them.

Who wins and who loses in this campaign will go a long way toward determining whether, as Kemp proclaimed, “1985 is the year for tax reform.”

The Treasury Department has proposed a package that would vastly simplify Form 1040 and substantially lower tax rates, and Bradley and Kemp are co-sponsors of separate Democratic and Republican tax reform plans. President Reagan and most members of Congress have yet to stake out their positions, and the special interests are working them over--all in the name of the national interest.

Oil companies are arguing that the nation’s dependence on foreign oil would be dangerously increased if, as the Treasury Department has proposed, domestic oil and gas drillers lose their tax incentives to explore for new supplies. They hardly have to add that they would be hit with a markedly higher tax bill themselves.

Landlords and property developers make their argument on behalf of poor and middle-income apartment-dwellers who, they warn, could be hit with staggering rental increases of 40% to 60% and more under the Treasury’s proposal. That is because the Treasury plan would curtail the tax deductions available to those who finance apartment construction--a feature that would also do considerable financial harm to the investors themselves.

Not all special interests are out to torpedo tax reform. But then, not all would lose from it.

Top executives of K mart and Ralphs Grocery Co. joined Bradley and Kemp’s news conference to endorse the concept, arguing that the lower tax rates for both corporations and individuals would stimulate business activity. Those two retail chains, which can take advantage of relatively few corporate tax breaks, now pay more than 40% of their profits in taxes; under the Treasury plan, they would pay less than 33%, the new top corporate rate.

Likewise, members of the American Business Conference, a coalition of fast-growth firms, are demonstrating increasing support for tax reform. These companies also pay a relatively large share of their profits in taxes, and John M. Albertine, the conference president, said they long for lower tax rates.

‘Stepping on Big Feet’

President Reagan triggered the current lobbying blitz more than a year ago when he declared the current labyrinth of tax rules grossly unfair and he instructed the Treasury Department to propose a more uniform and simplified system with dramatically lower tax rates for individuals and businesses.

Nobody objects to lower tax rates, but tax reform also means the end of some cherished tax breaks enjoyed by individuals and businesses--usually wealthy individuals and politically powerful businesses. In the blunt Chicago political idiom of Rep. Dan Rostenkowski (D-Ill.), chairman of the tax-writing House Ways and Means Committee, tax reform means “stepping on some big feet.”

The big feet are not going to let the government walk all over them. Bradley complained: “The special interests will try to frighten people by telling them what they’ll lose without ever telling them that they get lower rates in exchange.”

Effect on Rents

At a press conference called by the National Leased Housing Assn., for example, Donna Denman, the organization’s president, said tax reform could make “the rental burden . . . become impossible for many families.”

The Treasury’s package would also restrict the individual tax deduction for charitable contributions, and the organized charities warn of dire consequences for colleges, hospitals and museums. The charities themselves also stand to lose money.

Some business interests are particularly exercised about the Treasury’s plan because it would shift some of the tax burden back to them after years of declining corporate taxes. The Treasury’s combination of lower tax rates and fewer tax breaks for both individuals and businesses would cut individual taxes by 7% over five years but increase business taxes by 30%.

The Treasury’s proposal, by scaling back the tax breaks for buying new machinery, would fall particularly hard on industries that spend heavily for equipment, such as steel, autos, chemicals and utilities. Paul Huard, vice president for tax policy at the National Assn. of Manufacturers, said those provisions would not only harm the NAM’s members but also depress economic activity.

Hard-Pressed Firms

In fact, some business lobbyists warn that manufacturing firms, already hard pressed to meet foreign competition, may well move manufacturing plants to other countries--and take their jobs with them--if Congress restricts tax breaks for investment. “Companies with any mobility can put a plant in Canada, write off their expenditures in a couple of years, and ship their products here,” said Huard of the NAM.

Other experts disagree. “We can’t see any reason the Treasury tax proposal would encourage us to invest abroad,” Robert Mattson, IBM’s director of taxes, said through a spokeswoman.

Lobbyists are taking their message wherever they think it will do the most good. Jack Graves, president of the Oklahoma Independent Petroleum Producers, met with President Reagan recently to deliver a fearful prediction that 3,000 of his 7,000 members would consider dropping out of business if tax reform costs them their incentives to explore and drill.

Bond dealers are drafting appeals custom-tailored to each member of Congress to protest the proposed loss of the tax exemption for interest earned on industrial development bonds issued by local governments.

‘Collecting the Specifics’

“We’ve spent an awful lot of time collecting the specifics of real deals in real districts,” said Heather Ruth, executive director of the Public Securities Assn., whose members prepare bond sales for state and local agencies and governments. Among the myriad services financed with industrial development bonds in California are repairs at the Port of Oakland, waste disposal in San Francisco and housing in Mission Viejo.

“There’s no denying we are a special interest, and state and local officials also are a special interest,” Ruth acknowledged. But more important, she insisted, is the financial threat posed to state and local agencies, which would be forced to pay higher interest rates to attract buyers for taxable bonds. Local taxpayers, in turn, would be compelled to pay millions of dollars in higher property or sales taxes.

To offset the special interests, Bradley has established his own lobbying arm, the Fair Tax Foundation, which is promoting the reform plan he developed with Rep. Richard A. Gephardt (D-Mo.).

‘Knee-Jerk Reaction’

Fueled by approximately $20,000 in royalties from a book by Bradley and by donations prompted by television talk-show appearances by Bradley, Kemp, and Gephardt, the foundation has volunteers collecting signatures for petitions to Congress and will soon begin a mail campaign to raise more support and money.

Allied with Bradley are a handful of business groups. Some, like K mart and Ralphs Grocery Co., believe that tax reform would directly benefit them.

“The knee-jerk reaction is to oppose the Treasury proposal,” said Pete McConnell, president of the Electronic Industries Assn. “Many of our members might pay higher taxes, but the package, as a whole, if it really improved the economy, would benefit us all. That’s worth supporting, but I’m afraid not many people are willing to make that leap.”

‘Heads Above the Trenches’

Some have already made it. At the Bradley-Kemp press conference, Robert N. Noyce, vice chairman of Intel Corp., and George Scalise, vice president of Advanced Micro Devices, said their companies’ higher tax bills would be acceptable because the national economy would flourish under a simplified tax code.

Similarly, J. McDonald Williams, managing partner at Trammell Crow, a major Dallas real estate and property management firm, said today’s generous tax breaks distort the economic climate in the real estate industry--even though the industry benefits greatly.

But the weight of the lobbying is on the negative side, and it is making its impact. “Congressmen traditionally aren’t in the business of making enemies,” said Rep. Bill Frenzel (R-Minn.), a Ways and Means Committee member. Every special interest organization “has got complaints about losing preferences,” he added, “and this isn’t an area where most members want to put their heads above the trenches.”

On the other hand, California Rep. Robert T. Matsui (D-Sacramento), another Ways and Means Committee member, believes that the fault lines that divide the business lobbyists may help open the way for reform. “That split,” he said, “gives us on the tax-writing committees some freedom to maneuver.”