Industries Give Surprising Support to Senate Tax Plan

Although it takes aim at droves of special interests, the far-reaching tax plan approved Wednesday by the Senate Finance Committee is meeting unexpectedly warm business support and only isolated resistance.

Business opposition had threatened to derail tax overhaul in committee, and the change of heart bodes well for the bill’s chances of surviving next month’s scheduled vote on the Senate floor with few major changes.

Few lobbyists have embraced the tax bill, which would destroy some cherished tax breaks even as it slashed the top corporate tax rate from 46% to 33%. But they have retreated from early forecasts that the business-sensitive Senate would be easily persuaded to restore the breaks.

Opposition Limited

Fierce, do-or-die opposition appears mostly limited to parts of the real-estate and investment industries, which could be hard hit by repeals of generous tax-shelter, capital gains and retirement-benefits clauses.

But a host of other industries--light manufacturers, high-tech firms, retailers and other service-oriented businesses--see the tax plan as either a bottom-line winner or a wash. And the outrage of other potential losers such as heavy manufacturers has been muted by President Reagan’s endorsement of the Senate bill and by the stunning 20-0 vote that swept it out of the Finance Committee.

“You have to be realistic and realize that tax reform is something whose time has come,” said one heavy-industry lobbyist who sees little to love in the bill. “We’re going to take a hit. We know it.”

A second said that the political chemistry changed dramatically after the Senate committee’s stew of oil-state Democrats, Western conservatives and urban liberals congealed in support of sweeping tax change.

“It was easy to oppose when we thought it was going to come out of committee with a 13-7 vote.” he said. “But 20-zip is different. A lot of people who thought they would fight it to the death have now got to look at the numbers.”

Foes of the bill argue that it would raise corporate taxes by $108 billion. But even that is substantially more generous to business interests than the White House’s original tax proposal or the tax package passed by the House last December.

Called Best of Packages

“A bill is going to pass,” Finance Committee chairman Bob Packwood (R-Ore.), a chief author of the Senate measure, warned opponents Thursday. “And if what they want is the House bill with a $145 billion raising (of corporate taxes), that’s their decision.”

That argument makes sense even to some groups, such as factory owners, that find little to cheer about in the bill. The Senate tax overhaul is “the best of all the packages” Congress has devised, said Sara Ross, spokeswoman for the National Assn. of Manufacturers.

Meeting Friday at Hot Springs, Va., leaders of the Business Council, a group of corporate chief executives, were almost unanimous in their praise of the Finance Committee bill.

“If the Senate Finance bill passes in its present form, it’s the best version of tax reform we’ve seen so far,” said Du Pont Chairman Edward G. Jefferson. “Much better than the House bill,” added council Chairman Ruben F. Mettler, who is also chairman of TRW.

Broadens Tax Base

The breadth of support may stem in part from the bill’s own broadening of the corporate tax base. For while business taxes would rise, the burden would fall largely on those firms that have basked under extraordinarily generous tax treatment--heavy industries that received investment tax credits, for example, and major manufacturers that employed accounting devices to escape most or all of their tax liability.

The Senate legislation would save more than $145 billion over five years by repealing the 6% to 10% tax credit for investing in new plant and equipment. It would raise another $20 billion to $30 billion by imposing a minimum corporate income tax of 20% on half of a company’s profits and pick up $50 billion by simplifying a tangle of accounting practices that have allowed companies to defer tax payments.

The changes might be devastating to smokestack industries, some of which have spent lavishly on rebuilding on the pledge that they could make up the expense in avoided taxes. But the Finance Committee softened the blow by phasing in the repeal of the investment tax credit and loosening the depreciation rules on business equipment beyond even the current generous provisions.

Real Estate Vulnerable

For many businesses, changes in the individual tax code would hurt more than the increase in corporate taxes. Real estate and the home-building industry head the list.

The Senate bill would abolish tax shelters that have funneled billions of dollars worth of personal investments into office buildings, apartments and resorts. The depreciation schedules for real estate would be stretched out by more than a decade, forcing investors to wait far longer to recoup all the tax benefits from developing property.

What’s more, the Senate bill would abolish the special tax treatment for capital gains. That would make the sale of real estate no more profitable in tax terms than opening a savings account or moonlighting on a second job.

“We’re afraid the bill would hurt people who are investing in real estate,” said Liz Johnson, spokeswoman for the National Assn. of Realtors, the major real estate agents’ lobby. If investment funds dried up because of tax changes, she warned, rents would rise for low- and middle-income people.

The National Assn. of Home Builders is gloomy as well, forecasting a 50,000 yearly drop in new home starts, a 350,000 decline in apartment-unit construction and a resulting tax loss of $2.3 billion if the Packwood bill becomes law.

Payments Up Front

Among the group’s woes, said President Robert Bannister, is an obscure accounting change that would force developers to pay taxes up front when they finance a buyer’s home purchase, instead of stretching out taxes as the buyers’ installment payments are mailed in. That will drive up financing rates and crimp single-family home sales, Bannister claims, but the loss of tax shelters will do the most damage to apartment building.

Would Have to Carry Losses

Real estate projects often run up big early losses, as units are sold and rented before they turn a profit--if they ever do. Under the tax-shelter changes--which would be phased in over five years--investors no longer would be able to deduct those early losses from wages and other ordinary income, but instead would have to carry them on paper until one of their real-estate projects turned a profit.

That, Bannister complained, “not only changes the (tax) rules in the middle of game but in effect makes them retroactive.”

The mutual fund industry is equally upset about the possible loss of one of its biggest boons--the individual retirement account, which 28 million taxpayers already have used to finance their retirement and--not coincidentally--take a tax deduction of up to $2,000 a year.

IRAs in Dispute

The Senate bill would limit deductions for IRA contributions to those persons who are not covered by other pension plans, roughly where the accounts stood before 1981. Others would be allowed to contribute to IRAs, but only the “inside buildup” of interest and other gains would be shielded from taxes.

The IRA change would be a $27-billion money-maker for the tax bill over five years. Packwood and some other finance panel members say the accounts were designed to help people without pensions but have ballooned into a dodge for upper-income workers.

L. Erick Kanter of the Investment Company Institute, the mutual fund lobby, disputes that. The IRA program, he said, “differs from most of the tax shelters in that, when you take the money back out, it is taxed.”

Kanter calls the tax-revenue losses from IRAs “a short-term cost” that will vanish as future retirees begin withdrawing and spending their cash hoards. Unlike most special-treatment pleas, that message has carried to the full Senate, which may look more kindly on changing the IRA rules than on most other requests.

But Kanter will be more or less alone in the battle. “We just aren’t going to be mounting a major effort on the IRA issue,” said a spokesman for the American Bankers Assn., which, like other business organizations, already likes the Senate bill more than the House version.

‘Simple Equity Issue’

Slightly less unhappy about the Senate bill are auto dealers, who fear the impact on car buyers of the repeal of deductions for loan interest payments and sales taxes.

“It’s a simple equity issue: basically, we don’t see why a taxpayer ought to be able to deduct interest on a second home, but not a first car,” said a spokesman for the National Automobile Dealers Assn., one of Washington’s more influential trade lobbies. The group says that the loss of interest deductibility alone could cost consumers $1,000 on the purchase of an $11,900 average car.

Local dealers are unfazed by the argument that the Senate bill’s tax cut will give that money, and more, back to taxpayers. “It’s just another stab at hurting the public by way of (taxing) business with them,” said Kevin Collins, an executive in six Louisville, Ky., dealerships. “They’ll still buy. But they’ll postpone buying.”

Not so, say auto makers. The loss of the investment tax credit would hurt, conceded General Motors Corp. Chairman Roger B. Smith, but “it’s time to quit using tax policy as an economic tool. When you see the top rate down to 27%, 6 million people off the tax rolls . . . people are going to have more money. You can’t look at just one piece of the elephant.”

Other erstwhile opponents of tax overhaul also are lowering their voices. Major railroads used investment tax credits to help cut industry taxes to about 4% of profits. The Senate bill takes away the credits and imposes an effective 10% minimum tax.

Called More Realistic

But “the Packwood plan is much more realistic in terms of depreciation than the House bill,” said Frank Wilner, an executive of the Assn. of American Railroads.

In financial businesses, bankers face higher taxes but are happy to keep a break for money used to cover loan losses. The Securities Industry Assn., the stockbrokers’ trade group, fears that repeal of lower capital gains taxes will cut stock purchases--and commissions--but concedes that lower tax rates might boost investment, too.

Department store chains, which have never reaped the tax credits given to heavy industry, are euphoric over the Senate bill’s lower tax rates, although some dislike the same installment-credit tax changes that anger home builders.

The electronics industry, another high-tax business, “thinks the world of those tax rates” in the Senate bill. “They’re great,” said Kenneth Hagerty, a vice president of the Electronics Industry Assn.

Also contributing to this story were staff writers Robert A. Rosenblatt in Washington and Oswald Johnston in Hot Springs, Va.