Business Fights for Capital Gains : Lobbyists Chip at Reform Plan to Retain Tax Breaks
Fists clenched, Darrell L. Wilburn leaned forward and stared at Rep. Don J. Pease (D-Ohio). “I know I’m coming on kind of strong, but this is close to my heart,” said the Sunnyvale businessman, pleading with the congressman to support keeping a special tax break for investment profits.
In just seven years, Wilburn had parlayed $8,000 in cash and a garage workshop into Step Engineering Corp., a thriving firm that sells testing instruments to computer companies. And the California entrepreneur said that he could not have done it if the tax code had not provided a break for the sometimes-enormous profits that can be earned from investing in risky young firms such as his.
Wilburn’s message apparently has reached all the way to President Reagan, who will announce his own tax reform proposal tonight. Reagan, by all accounts, has decided to scrap his Treasury Department’s original proposal to abolish the special tax break for “capital gains”--the profits from the sale of investments. And that change of heart is a triumph for “darned good old-fashioned lobbying,” said a Washington lawyer who helped put the campaign together.
It is also a lesson in the elusiveness of tax reform. For every tax break there is a swarm of beneficiaries who will fight to protect themselves from the best intentions of tax reformers.
Wilburn was part of only one of 29 fast-moving teams of lobbyists organized by the American Electronics Assn. to blitz Washington on behalf of the capital gains tax break. And the trade association is far from the only lobby group that has chipped away at the tax reform package that the Treasury Department proposed last November.
Thanks to protests by organized charities, universities and cultural groups, Reagan has softened the department’s proposal to reduce the tax deduction for charitable contributions, sources familiar with Reagan’s plan say. Likewise, business has salvaged some of the accelerated depreciation for plant and equipment that it was granted in 1981, and independent oil and gas producers have saved some of their special tax treatment.
Only the Opening Shot
At the same time, Reagan is reported to have stood by the department’s proposal to abolish the 10% tax credit for business investment and the deduction for state and local tax payments. However, the tax package that Reagan will propose tonight is only an opening shot in a battle that will shift to Congress and could continue for years. But, if every special interest ultimately fares as well as the American Electronics Assn., there may not be much left of tax reform.
In its pure form, tax reform has three goals: easing the mind-bending complexity of the revenue code, reducing tax rates for the millions of Americans who cannot take advantage of most tax breaks and ensuring that persons with the same income pay about the same amount of taxes.
The goals are interrelated. Tax rates cannot be cut unless the lost revenue is made up by scrapping or curtailing the scores of tax favors that speckle the tax code. But, those tax breaks are designed to encourage such worthwhile social and economic goals as owning homes, exploring for oil and gas and contributing to charities.
The victory for one special purpose--Wilburn’s tax break for capital gains--provides a case study in the kind of lobbying that will become increasingly common as Congress debates tax reform. Not only will Reagan not propose abolishing the capital gains provision, which sets a maximum tax rate of 20% on profits from investments, but he reportedly will ask Congress to reduce the rate to 17.5%.
Lobbyists Meet With Reagan
To turn Reagan around, business lobbyists mounted a campaign that included a meeting with Reagan himself, a letter to the President signed by 97 House members, lobbying sessions in White House corridors and many meetings with Treasury staff members.
“Having the right connections is half the story,” said Kenneth C. O. Haggerty, vice president for government affairs at the American Electronics Assn., whose corporate members regard venture capital--money invested at high risk for the sake of potentially bountiful rewards--as vital to the development of new businesses that spur economic growth and new employment.
That is the indirect benefit of the capital gains tax break. The direct benefit--the tax break itself--goes primarily to the rich. Taxpayers will save an estimated $26 billion this year from the low tax rate on capital gains, and those with incomes of more than $500,000 a year will receive 19% of those benefits, even though they will file only 0.2% of all tax returns.
The capital gains tax break excludes from income taxes 60% of the profits earned from the sale of assets--whether homes, stocks, bonds, gold, antiques, paintings--held more than six months. Because the maximum individual income tax rate is now 50%, the effective maximum tax on capital gains is 20%.
The authors of the Treasury Department’s original tax reform plan, which would have eliminated the capital gains tax break, argued that it was basically unfair to tax different kinds of income at different rates.
Lower Corporate Rates
Even before the plan became public, the American Electronics Assn. began getting hints that the capital gains provision was targeted for elimination. So, just a day after the plan was announced, the trade association issued a statement welcoming the concept of tax reform but calling for retention of the capital gains provision. The association was not totally negative toward the Treasury plan because the proposal for lower corporate tax rates would help many of its members.
“We were out there throwing sand at them, not rocks,” Haggerty said. The trade association’s measured criticism drew considerable attention in Washington, because it was among the earliest detailed reactions by any special-interest group to the Administration plan.
Broad-Based Attack
Then, the trade association and other business groups began a broad-based offensive. Some members contacted Health and Human Services Secretary Margaret M. Heckler, who, as a member of Congress through 1982, had represented a Massachusetts district with many high-technology firms and was considered a friend of industry. Heckler raised the capital gains issue with Donald T. Regan, then Treasury secretary and now White House chief of staff, at a Cabinet meeting.
On another occasion, Regan was cornered in a White House corridor by William Draper, now president of the federal Export-Import Bank and formerly an investor who had helped finance high-technology companies. Draper used flip charts to emphasize to Regan that low taxes for capital gains would help funnel money into young companies.
Treasury officials were surprised at the vehemence with which business executives argued for the capital gains preference. “They thought giving us lower tax rates would make us jump up and down and applaud,” recalled a man who participated extensively in the lobbying effort but asked not to be identified. “They seemed annoyed that we kept talking about capital gains.”
The same message was coming from 97 members of Congress whose signatures were collected by Rep. Ed Zschau (R-Los Altos) on a letter to the President. “I had some personal meetings with Administration officials, including Don Regan, pointing out the negative impact on venture capital” if the capital gains benefit were abolished, Zschau said in an interview.
Zschau had been fighting for lower capital gains taxes ever since the 1970s, when the maximum tax rate on capital gains was 49% and he had difficulty raising investment funds for his firm in Milpitas, which manufactured computer memory systems. “I had almost gone bankrupt a couple of times--it was very hard to raise money,” he recalled. “I took technology and sold it in licenses to the Japanese to meet my payroll.”
Reagan Persuaded
On Feb. 5, 28 corporate representatives conferred with Reagan and other Administration officials at the White House. Reagan, who had not endorsed his Treasury Department’s tax reform package, remarked that every cut in the capital gains tax had increased the pool of capital available for investment in new businesses and had stimulated productivity.
At that moment, John Albertine, head of the American Business Conference, figured that he was on the winning side. “As President Reagan was speaking,” he said, “I realized we were listening to a man who understands the issue, and I felt that the new Treasury tax plan would be different.”
Reagan ultimately decided that 50% of capital gains should be subject to income tax, sources say, an increase from today’s 40%. But, because he will also propose reducing the maximum individual tax rate to 35% from 50%, the maximum effective capital gains tax rate would fall from 20% to 17.5%.
Unproductive Assets
But the President still faced a political problem: Although he wanted to stimulate new businesses and job creation, he did not want to be accused of giving favorable tax treatment to the sale of unproductive assets. A low tax rate on the sale of gold or antique furniture would damage the campaign for tax reform. At Reagan’s behest, Treasury Department officials set out to try to limit favored tax treatment only to money going to productive business ventures.
Difficulties have beset Treasury technicians ever since. Half of the pages in the tax code are already devoted to defining the differences between ordinary income and capital gains, and reform is supposed to make the tax code simpler, not more complex.
Issue of Speculators
The Treasury Department’s ingenuity in writing the capital gains provision will go a long way toward determining whether Reagan wins the support of such skeptical lawmakers as Rep. Pease. Even after listening in his office to Darrell Wilburn’s fervent appeal, Pease referred disparagingly to speculators who profit from the tax code and said: “I’m not a big fan of capital gains.”
But, he added, with a bit of hyperbole, “I’m willing to make the tax rate zero for venture capital people”--investors in risky but productive enterprises--and an appreciative Wilburn jumped up and shook his hand. Pease warned, however, that “it may be a hard distinction to make.”
Opponents of the tax break for capital gains still hope that they can prevail on Pease and a majority of his colleagues to turn Reagan’s decision around.
