Corporate Welfare to Give Some

Tax relief for the middle class is coming next year. Guess who’ll pay for it? Corporations, and their shareholders, will foot a large share of the bill.

“The whole issue of corporate welfare will be on the table in 1997,” says Linden Smith, managing director of the Peat, Marwick accounting firm that tracks tax legislation on Capitol Hill.

The term “corporate welfare” refers to a long list of tax breaks, spending subsidies and special services provided to specific industries by the federal government. Both the Progressive Policy Institute, a Democratic think tank, and the CATO Institute, a Republican think tank, contend the U.S. Treasury could save more than $200 billion over five years by repealing, or reducing, all of those programs.

Such major surgery won’t happen in a single legislative session, if ever. However, this year’s presidential campaign set the stage for a serious assault on the corporate welfare state--particularly those embedded in the Tax Code--next year. Both President Clinton and Republican challenger Bob Dole wooed middle-class voters with promises of tax relief, promises that will be kept in one form or another in 1997.

All but certain to be enacted are a new per-child tax credit for families, expanded income limits to permit more households to contribute to tax-deferred individual retirement accounts, and capital gains tax relief on profits from the sale of residences, among other possibilities.

The problem is that the goodies will have to be approved in the context of achieving a balanced budget by 2002, the goal agreed to by both parties. The price tag on the tax relief already proposed by Clinton amounts to about $110 billion over six years, and that’s before Congress gets into the act.

Republicans are sure to make a strong push to extend the reach of the capital gains tax rollback to include some benefit for investors as well as homeowners. Dole’s platform included a plank to cut the 28% capital gains tax in half. Party leaders also plan to hold hearings on more radical change, such as a flat tax to replace the present graduated income tax. Still, observers agree nothing more is likely to come of that next year.

Instead, Democrats and Republicans will zero in on the list of corporate tax breaks to recoup revenue lost in lightening the tax burden on the middle class. The politics are irresistible. As Ken Kies, staff director of the Joint Committee on Taxation, put it in a recent speech to the National Assn. of Manufacturers: “Consider the position that a member of Congress is going to be put in; the trade-off is corporations versus giving child credits to middle-class taxpayers.”

Clinton’s last budget pointed the way by proposing Tax Code changes designed to collect about $40 billion for the Treasury over six years. Some were adopted by the 104th Congress, such as disallowing the deduction for interest paid by an employer on borrowings against the cash value of insurance on the lives of employees. The Republican budget had its own list.

Some Tax Code changes sure to be considered next year:

* Set stricter limits on the amount of foreign taxes paid by multinational corporations that can be deducted from their U.S. tax bills.

* Require investors to average the cost of shares bought in the same company at different times and different prices in figuring their capital gains on sales of some of the shares. Currently, they may assume the shares sold were the ones bought at the highest price.

* Restrict the deduction allowed for interest paid on borrowings by corporations that invest in tax-exempt bonds.

Unfortunately, the revenue raised by closing corporate “loopholes” that Democrats and Republicans can agree on isn’t expected to be nearly enough to pay for the middle-class tax relief they’re likely to approve. By the end of the 1997 legislative session, predicts Susan Tanaka, an analyst at the Committee for a Responsible Federal Budget, “they’ll be scraping the bottom of the barrel.”

That means they’ll have to look beyond corporate welfare to other parts of the budget to find the balance of the savings needed to pay for middle-class tax relief. The exploding cost of Medicare health insurance for the elderly and other social programs that benefit people directly are an obvious target.