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Washington Retail Insight

Obama Pledges to Close ‘Loopholes’ and Lower Corporate Tax Rate

By J. Craig Shearman
Washington Retail Insight
February 22, 2012

The Obama Administration today unveiled a corporate tax reform proposal that would cut the top rate to 28 percent in return for eliminating dozens of “loopholes,” setting the stage for what could be more than a year of debate despite bipartisan agreement that current high rates are hurting U.S. competitiveness in the global economy.

 “Our business tax system today is bad for economic growth and job creation in the United States,” Treasury Secretary Timothy Geithner said at a briefing for reporters. “We want to restore a system in which American businesses succeed or fail based on the products they make and the services they provide, not on the creativity of their tax engineers or the lobbyists they hire.”

Geithner said President Obama will seek to reduce the current 35 percent top corporate tax rate to 28 percent in return for “broadening the base” by eliminating a wide range of current tax credits and deductions. But Obama will also call for special benefits for manufacturing that would reduce that industry’s effective rate to 25 percent.

“The (current) rate is high in order to pay for a tax code full of special benefits for certain industries and certain activities,” Geithner said. “You can call these tax preferences, tax expenditures, loopholes, incentives or tax benefits. But whatever you call them, they are subsidies … and they are expensive.”

NRF has supported corporate tax reform that would eliminate most if not all credits and deductions rather than creating new ones, and favors an approach put forward by House Ways and Means Committee Chairman Dave Camp, R-Mich., to lower the top rate to 25 percent for both corporations and individuals. Many retailers are small businesses that pay their taxes utilizing individual tax rates.

Nonetheless, NRF welcomed Obama’s proposal as a positive step toward fundamental reform of the U.S. tax code, and pledged to work with the White House and Congress to win passage of legislation that would significantly lower rates in order to help retailers and other businesses create jobs.

“Tax reform is a monumental undertaking that can only be achieved with the backing of the President,” NRF President and CEO Matthew Shay said. “President Obama has put the power of his office behind this goal and made it clear we can no longer tolerate having American businesses saddled with the second-highest tax rates in the world. Lower taxes will make U.S. businesses more competitive at home and abroad, and will help create the jobs out-of-work Americans are looking to fill.”

“The President’s proposal is a significant step forward, and we hope the Administration will work closely with those in Congress who have proposed going even further,” Shay said. “Tax reform is a once-in-a-generation opportunity and we need to get it right. Reform needs to address small businesses as well as corporations, and needs to be fair to all industries rather than favoring one over another.”

Among other provisions, Obama’s plan would eliminate the Last-In, First-Out accounting method, which the White House said allows businesses to “artificially” lower their tax liability. But LIFO has been used by some retailers for more than 70 years, and NRF has countered that it is an accounting tool rather than a tax provision. NRF believes it should not be changed unless tax rates are lowered significantly and appropriate alternatives for accounting for inventories are examined.

The tax plan received mixed reviews on Capitol Hill, where the House and Senate have been holding hearings since last year but the complexity and politics of the issue are expected to delay enactment of any legislation until after this year’s elections and into 2013.

“While this is a good step by the Administration, I will borrow from the President’s own words to Congress from just yesterday – don’t stop here. Keep going,” Camp said.

House Minority Whip Steny Hoyer, D-Md., said the plan would eliminate “loopholes that distort business decision making” while Ways and Means Committee Ranking Member Sander Levin, D-Mich., said it “put the focus of corporate tax reform where it needs to be: on promoting investment, job creation and especially manufacturing.”

But Senate Finance Committee Ranking Member Orrin Hatch, R-Utah, called the plan “a set of bullet points designed more for the campaign trail than an actual blueprint for fixing our tax code.”

NRF has led the retail industry’s push for corporate tax reform, and is a member of the RATE Coalition, a broad-based industry group dedicated to corporate tax reform that eliminates corporate tax expenditures in favor of a significantly lower rate. Retailers benefit from few of the tax provisions enjoyed by other industries, and consequently pay among the highest effective rates of any U.S. industry, often at or close to the full 35 percent statutory rate. NRF has argued before Congress that reform would make the tax code more economically efficient and make it easier for companies to make decisions based on business reasons rather than tax implications. Retailers would also likely see savings that could be passed along in lower prices, thereby increasing consumer demand and increasing jobs throughout the supply chain.

© 2012 National Retail Federation

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