Obscure GOP Plan May Be Tax Windfall for Business : Congress: Some House Republicans are troubled by eye-opening cost estimates. But they’re backing it anyway.

Even most Republicans claim not to understand it, but an obscure provision in the GOP tax plan that appears headed for approval by the House today could mean an enormous windfall for large U.S. corporations, create a new form of tax shelter and add more than $100 billion to the national debt.

Some of the Republicans who have seen the eye-popping official congressional cost estimates of the provision privately wish it would go away.

But “neutral cost recovery,” inserted into the House GOP’s “contract with America” largely at the urging of a Republican lawmaker from Michigan, is now one of the unheralded beneficiaries of the House leadership’s decision to faithfully stick to the contract’s every detail.

Neutral cost recovery would allow business to sharply increase their tax write-offs when they invest in new factories and equipment. But in a budgetary sense, neutral cost recovery is anything but neutral, its critics complain. In fact, Treasury Secretary Robert E. Rubin said in an interview Tuesday that the Clinton Administration considers it to be one of the most dangerous tax provisions in the GOP contract, and he predicted that its passage would lead to a surge in new tax shelters.

“And its impact on the (federal budget) deficit just explodes in the future,” he added.

Still, House Republican leaders, despite some misgivings, are sticking with neutral cost recovery and a host of other controversial tax provisions because they are in the contract.

*

“We are doing something different here, we are actually going to do what we said we were going to do,” said House Ways and Means Committee Chairman Bill Archer (R-Tex.), the GOP’s chief tax writer in the House.

“Frankly, I didn’t put together the tax provisions in the contract during the campaign,” he said. “I think everybody has different ideas about what they would have put into it, but the fact is this is the contract we signed.”

“All I know about neutral cost recovery is that it was in the contract,” added a senior aide on the Ways and Means Committee. “And that means it is going to pass.”

Treating the contract like gospel has allowed House Republicans to proclaim that they are living up to their campaign promises. But at the same time, the strategy has made it difficult for congressional leaders to correct the contract’s flaws or to develop a more coherent economic agenda.

“The contract is not as carefully drawn as it should have been, it’s not as coherent as the agenda we had during the early (Ronald) Reagan years,” conceded Stephen Entin, a tax specialist with the conservative Institute for the Research of the Economics of Taxation. “Frankly, the contract is kind of a grab bag.”

Neutral cost recovery is designed to give U.S. corporations a greater incentive to buy new machinery, equipment and factories by giving them new tax benefits for such investments.

Tax law now allows companies to deduct the value of such investments from their profits over periods of time ranging up to 10 years. Critics of the current tax system argue that by the time companies have waited for 10 years to write off the full value of their investments, inflation has eroded the value of the deductions.

Neutral cost recovery would adjust the deductions for inflation--and then adjust them again for the lost investment return a company could have earned if it had received a full tax break in the year it purchased the equipment.

The bottom line: Corporations would receive tax deductions that, over time, would far exceed the value of their initial investments in plants and equipment. A company that bought a high-tech machine for $100,000, for example, might be able to write off $150,000 from its taxable income over the following 10 years.

Republicans freely admit that the main attraction of neutral cost recovery is that its costs to the Treasury would not be felt until after the end of the 1990s. Under Congress’ traditional projections of budget impacts, the provision would save $17 billion during its first five years.

*

But in the following five years, it would cost the Treasury more than $100 billion, making it one of the most expensive provisions of the entire contract.

The Administration and other critics warn that the House tax bill is laden with a wide array of hidden time bombs of this sort--provisions that could distort the tax system and lead to sharply rising federal budget deficits.

In fact, while a $500-per-child tax credit for families has garnered most of the attention, the Republican tax bill includes a series of tax breaks for corporate America. In addition to neutral cost recovery, they include a proposal to cut the capital gains tax rate by 50% and then index the tax for future inflation; a plan to provide accelerated write-offs specifically for small businesses, and a provision that would gradually repeal the alternative minimum tax, which was designed to make sure that corporations couldn’t use tax shelters to avoid paying any federal taxes.

But neutral cost recovery has raised the ire of tax experts in the Administration far more than the other provisions.

“I think this provision is absolutely outrageous,” said one senior Administration official. “It is so rich for business that most businesses are reluctant to get out in support of it. They are afraid that once people see just how much this will do for them, there will be a backlash.”

“What this does is amazing,” added a senior Treasury official. When combined with the overlapping GOP contract provision to repeal the alternative minimum tax on corporate income, the neutral cost proposal will “spawn a whole new tax shelter industry,” the official added.

In the short run, the proposal would actually increase federal tax revenues, but only because the legislation would require corporations to give up some related tax benefits in order to qualify for the neutral cost tax relief in later years.

The neutral cost recovery issue may be a political sleeper, but it has still spawned intense debate among budget and tax experts, one that has led to wildly varying cost estimates.

The plan’s Republican proponents see it as a showcase to prove their argument that tax cuts can pay for themselves. Dismayed by the grim estimates from Congress’ Joint Tax Committee, the official arbiter of the costs of tax proposals, House Republicans hired an outside consultant to prove that neutral cost recovery would lead to an explosion of new investment and economic growth, and that it would raise so much new tax revenue in the process that it could almost single-handedly balance the federal budget.

Rep. Nick Smith (R-Mich.), the original sponsor of the neutral cost recovery bill and the man who made sure it got into the contract during last fall’s campaign, says the study shows that provision will raise $597.2 billion in new tax revenues over its first five years alone.

“This is one of the best items in the contract,” said Dan Mitchell, a tax and budget policy expert at the Heritage Foundation, a conservative think tank. “This would end the bias against capital investments in the tax code.”

By contrast, the Joint Tax Committee says the provision will raise only $16.7 billion over its first five years and will cost $105.5 billion in the following five years as companies begin to take advantage of its escalating deductions. The Treasury Department, meanwhile, estimates that it will cost $120.4 billion over 10 years.

The costs of the plan are so high that few Republican observers say they believe that it will survive once the tax bill reaches the Senate.

*

What’s more, corporate lobbyists stopped pushing hard for the measure once the Ways and Means Committee added a provision to the tax bill, at the urging of other business lobbyists, that calls for the repeal of the alternative minimum tax.

That would reduce tax liabilities for many of the same businesses that would benefit from the neutral cost recovery measure, and most business lobbyists seem convinced that a repeal of the alternative tax has a better chance of success in the Senate.