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Corporate breaks at risk in U.S. plans to cut tax rates

U.S. Senate Finance Committee Chairman Max Baucus (D-MT) arrives to meet with a bipartisan group of lawmakers and Vice President Joe Biden,
U.S. Senate Finance Committee Chairman Max Baucus (D-MT) arrives to meet with a bipartisan group of lawmakers and Vice President Joe Biden,

By Kim Dixon

WASHINGTON (Reuters) - Billions of dollars in U.S. tax breaks prized by manufacturers, energy companies and other industries could be targeted for elimination when two powerful lawmakers are expected to introduce proposals to overhaul the United States' tax system.

The plans could be introduced as early as September and face tough odds in a Congress where disputes over nearly every tax and spending issue threaten a crisis.

Democratic Senator Max Baucus, chairman of the Senate Finance Committee and Republican Representative Dave Camp, head of the House Committee on Ways and Means, are crafting separate proposals to scrub the tax code of clutter and lower tax rates.

It is the most ambitious congressional effort in a generation, with Camp likely to move first.

The duo are considering trimming a slew of tax deductions and other breaks to offset the cost of cutting the top corporate and individual rates to as low as 25 percent, say aides and others. The corporate rate now tops out at 35 percent, while the highest individual rate is about 40 percent.

Baucus and Camp found the most common ground in potential corporate tax code revisions while working together on the congressional "supercommittee," a group of lawmakers who tried but failed to forge a debt deal in 2011.

"There were a lot of areas of agreement when they delved into the code," said a senior legislative aide involved in the supercommittee effort.

For example, both are open to tightening depreciation rules that govern how quickly companies can write off the cost of certain assets, and limiting a widely used manufacturing tax break known as the domestic activities deduction, said the aide, who worked for the panel.

Camp is the top tax-writer in the Republican-controlled House of Representatives and Baucus leads the tax-writing Finance Committee in the Senate, where Democrats hold power.

The tax code has not been completely cleaned up since 1986 when a politically divided Congress forged a deal with Republican President Ronald Reagan.

It will be a heavy lift, but one sure to cause heartburn for those in the corporate world now enjoying the breaks under fire.

Baucus and Camp aim to enact legislation by the end of 2014.

Party leaders worry that forcing members to vote on legislation with tough choices on popular tax breaks may be futile, given a belief among many that Democrats and Republicans will not in the end come together on perhaps the most contentious issue - added revenue.

Nearly every U.S. policy maker avows support for tax reform that would mean trimming some of the $1.3 trillion in annual "tax expenditures" to offset lower tax rates.

Most Democrats, keen to finance social programs, insist an increase in revenue should be part of any overhaul; Republicans want the bill to be "revenue neutral," meaning the new system would raise the same amount of revenue it does already.

CORPORATE TAX RULES

The two sides are much closer on how to deal with corporate tax rules than on personal tax rules, congressional aides say.

That is because for as much as corporations prize their breaks, individual American voters enjoy even bigger ones, such as the home mortgage interest deduction and the charitable write-off.

The biggest corporate expenditure is accelerated depreciation, which lets companies write off the cost of an asset more quickly than its useful economic life.

"It is pretty much impossible to design a corporate tax reform proposal which reduces the rate to the mid-20s without touching depreciation," said Marc Goldwein, a senior policy adviser with the Committee for a Responsible Federal Budget, a mainstream group supporting lower rates and trimming breaks.

Nixing these could yield $800 billion over a decade, according to the group. That alone could shave about five percentage points off the top corporate tax rate.

Touching it will be difficult because many Democrats worry about the impact on manufacturers.

Another potential target is the domestic production deduction - a write-off intended for manufacturing costs that critics say is often abused.

The tax break began as a 3 percent deduction from income derived from property manufactured, produced, grown or extracted in the United States and has since grown to 9 percent. A Congressional Research Service report said that one third of corporate activity may qualify for it.

A congressional report describes what staffers called the "Starbucks Footnote," which states that food processing qualifies, though not retail activities. Starbucks defends the break, saying it uses it for work done at its roasting plants.

Repeal could generate about $100 billion over a decade, according to the congressional Joint Committee on Taxation.

Another tax break facing bipartisan scrutiny is an accounting method known as "last-in, first-out accounting," a method of tracking inventory that President Barack Obama and some bipartisan tax reform groups have proposed scrapping.

"LIFO has to be repealed," to generate revenue for the revamp effort, a senior Republican staff member working on the tax overhaul said.

The method treats a company's most recently acquired goods as having been sold most recently, which minimizes the taxable profit of such goods. Businesses with inventories of goods with prices that tend to rise over time often use this method.

Energy companies are the biggest users of LIFO, according to the Committee for a Responsible Federal Budget.

"We have been all over the (Capitol) Hill for years, but does that mean we are not worried? No," said Jade West, a lobbyist for the LIFO coalition, which includes such trade groups as the American Petroleum Institute, representing the big U.S. oil giants.

Axing LIFO could generate $80 billion over 10 years, according to a Treasury Department estimate.

(Reporting by Kim Dixon; Editing by Howard Goller and Andrew Hay)

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