House Committee Mulls Corporate Tax Reform

The House Ways and Means Committee heard from a panel of corporate finance executives during a hearing on how business tax reform can encourage job creation.

The hearing examined the potential benefits to companies and workers of lowering marginal tax rates, but several of the executives also found themselves on the firing line over recent reports about major corporations that paid little to no taxes (see 12 Major Corporations Pay Less than Zero in Taxes).

“The challenges created by the Tax Code for job creators of all sizes are many: high statutory rates, compliance and administrative burdens, the impact of temporary and expiring tax provisions, just to name a few,” said House Ways and Means Committee Chairman Dave Camp, R-Mich., in his opening statement. “Pile on top of that a dizzying array of credits, deductions and exemptions, and it is no wonder that the Tax Code is distorting economic behavior.”

He noted that corporations can face a combined federal and state statutory tax rate of 39.1 percent, well above the average of many other industrialized countries.

Rep. Sander Levin, R-Mich., the ranking Democratic member of the committee, said it was important to watch out for the trade-offs in any tax reform legislation.

“I think most of us agree that a lower corporate rate is desirable,” he said. “But the trade-offs involved in getting there truly matter. We have learned in our prior hearings that businesses seem generally to agree that tax reform should be revenue neutral. The inevitable consequence is a shifting of the burden of the current level of taxation, and there will be winners and losers. We must now examine the true impact on domestic companies if we were to repeal important tax benefits that encourage investment and jobs in the United States.”

Many of the corporate finance executives emphasized the need to cut tax rates. “We believe that a concerted effort to enact a corporate rate reduction to ensure that the U.S. remains competitive and an attractive place to do business in the global marketplace needs to be made now,” said James Zrust, vice president of tax at aircraft maker Boeing.

Corporate executives also said they were concerned about the increasing number of tax provisions that expire every year or two and need to be constantly extended.

“Because there is so much uncertainty with respect to the interpretation of certain tax provisions or whether certain expiring tax provisions will be extended for the time period for which the investment is planned, many alternative scenarios may need to be evaluated,” said James Misplon, vice president of tax at Sears Holdings Management Corporation, who testified on behalf of the National Retail Federation. “This is very frustrating when management is trying to make an investment decision. At times, these tax uncertainties could either delay an investment or cause the investment not to be made.”

Judy Brown, executive vice president and CFO of over-the-counter medicine producer Perrigo Company, said, “The United States need not have the lowest corporate tax rate in the world, but we should have a rate comparable to those of our trading partners.”

Some executives indicated they would be willing to sacrifice some tax credits and deductions in exchange for a lower statutory tax rate, although they did not specify which tax breaks they would be willing to give up.

“We as a country have been tinkering with credits and deductions that, while well-intentioned, have done little more than encourage complex tax planning,” said Walter Galvin, vice chairman of electronics manufacturer Emerson Electric Co. “Eliminating the bulk of deductions and credits in exchange for a lower corporate rate will keep U.S. companies competitive and create jobs."

Mark Stutman, tax practice leader at Grant Thornton LLP, urged the lawmakers to focus on effective business tax rates, and not just the statutory corporate tax rate, along with tax loopholes and expenditures. "Virtually every country with a statutory tax rate lower than the United States also burdens business activity with some form of a value-added tax," he pointed out. "The effective busines tax rate can only be measured by considering all of these factors, not just the statutory corporate tax rate."

Democrats on the committee pressed the executives to specify how much rates should be dropped and whether they would guarantee that they would not lay off workers in the U.S. in exchange for the lower rates. The witnesses declined to make any commitment.