Obama May Put Deficit Test on Attempts to Reduce U.S. Corporate Tax Rate

By Ryan J. Donmoyer and Peter Cohn

President Barack Obama said at a meeting of his economic recovery advisory board that he’d be open to lowering the corporate tax rate if it could be financed by eliminating tax breaks. Photographer: Joshua Roberts/Bloomberg

President Barack Obama has suggested he’s open to supporting a corporate tax code overhaul. Now companies and Republican lawmakers are waiting to see if he shares their priority of lowering the top rate.

Obama told supporters he’ll focus on a theme of making the U.S. more competitive with economic rivals in his State of the Union address tonight. Procter & Gamble Co. Chairman Robert McDonald told a House committee last week that reducing the 35 percent marginal corporate rate and easing tax burdens on global profits would go a long way toward achieving that goal.

Businesses have pressed those points with Congress and Treasury Secretary Timothy Geithner in the past month. Senate Minority Leader Mitch McConnell, a Kentucky Republican, said he expects to hear some mention of tax proposals that Republicans have urged for years.

“I’m told he’s going to come out for lowering the corporate tax rate,” McConnell said on Fox News Sunday on Jan. 23. “We have the second-highest corporate tax rate in the world right now. It’s not competitive.”

Obama is unlikely to provide details of his tax proposals until February, some analysts say. The president is set to speak to the Chamber of Commerce on Feb. 7, a week before releasing a budget blueprint for the 2012 fiscal year that begins Oct. 1.

‘A Mention’

“He won’t talk a lot about it but he will give it a mention” in tonight’s speech, predicted former New York Representative Dan Maffei, a Democrat who now leads an initiative advocating a rewrite of the corporate tax code for Third Way, a Washington group with Democratic ties. “Presidents always put down markers that create expectations.”

Top officials of General Electric Co., Johnson & Johnson, Bank of America Corp., United Technologies Corp., Exxon Mobil Corp., Caterpillar Inc. and Microsoft Corp. met with Geithner this month to discuss corporate taxes. Some executives, such as Cisco Systems Inc.’s CEO John Chambers, are pushing for a special tax break to import their foreign profits.

Last October, Obama said at a meeting of his economic recovery advisory board that he’d be open to lowering the corporate tax rate if it could be financed by eliminating tax breaks. He further fueled expectations in December, directing his economic team to begin analyzing alternatives for a tax overhaul that would trim the budget deficit.

The administration faces a major challenge on a tax overhaul because the budget deficit, which totaled $1.3 trillion in the fiscal year that ended Sept. 30, limits their options.

Jason Furman, Obama’s deputy director of the National Economic Council, said in a speech at a conference at Georgetown University Law Center Jan. 21 that any moves to cut the corporate rate must not cause the deficit to increase.

Revenue Neutral

Obama has “repeatedly expressed interest in this and said he’s open to any ideas that promote economic growth without making our deficit problem worse,” Furman said, stressing several times that the effort must be “revenue neutral.”

The top 35 percent marginal U.S. corporate tax rate will soon be the highest in the developed world. The congressional Joint Committee on Taxation in 2007 estimated a proposal to reduce the rate to 30.5 percent would cost the government about $363.8 billion in foregone revenue over 10 years.

Congress and the White House likely would look to recover that revenue by eliminating deductions and credits available to some companies that allow them to pay an effective tax rate that’s well below 35 percent.

At a House Ways and Means Committee hearing Jan. 20, Procter & Gamble’s McDonald told lawmakers that a group of chief financial officers asked Geithner to take the revenue-neutral approach “off the table for now” and focus on lowering the corporate tax rate.

Fiscal Questions

“Let’s just agree that what we want to do is to do something that’s fiscally responsible,” said McDonald, who is also chairman of the fiscal policy initiative of the Business Roundtable, a Washington-based group representing corporations.

In recent weeks, the administration has debated internally whether rewriting the tax code is worth the political pain if the effort doesn’t raise revenue, according to a top administration official.

All the sides say it will take strong signals from Obama to determine whether talk of tax reform this year will produce legislation or will end up as another academic exercise.

“It will require leadership from the executive, which I am sure will be forthcoming,” said Michigan Representative Sander Levin, the top Democrat on the Ways and Means Committee.