Analysis: Corporate split slows U.S. tax cut plan

U.S. President Barack Obama signs into law a bill at the Eisenhower Executive Office Building in Washington, December 17, 2010.

WASHINGTON (Reuters) - You might think President Barack Obama's talk of cutting the U.S. corporate tax rate would have the entire business world cooing, but instead the idea could lead to a wrenching split in corporate America.

The reason: Obama wants to fund a rate cut by closing tax loopholes and slashing deductions enjoyed by America's biggest companies.

Opposition from corporate giants who could lose cherished tax breaks, along with the political risk of tackling tax issues in the runup to the 2012 presidential election, will likely push off reform for several years.

"The whole idea of corporate tax reform is going to split the business community in half," said Neal Weber, a consultant for health, retail and other companies at RSM McGladrey. "You're talking about lowering the rate, but some are already paying a low rate."

Companies such as DuPont Co and Hewlett-Packard Co have artfully employed deductions, credits and other breaks to cut their effective tax rates below 20 percent and more, according to Thomson Reuters research, which calculated rates paid using cash taxes divided by pretax income over the last five years available.

That is far beneath the statutory 35 percent corporate rate. (For a summary of tax rates across companies, see: r.reuters.com/xyf87r )

The unlucky ones do not enjoy as many tax preferences and pay closer to the top rate, including oil behemoth Exxon Mobil Corp and retailers such as Home Depot and The Gap.

The debate is at an early stage and no firm plan has emerged. An overhaul of this sort -- where well-funded interests will be fighting for their billions in tax breaks -- could well take years.

"I don't have many clients that are dying for fundamental tax reform," said Jeff Trinca, a lobbyist whose clients include big multinationals such as FedEx Corp.

MF Global investor analysts said odds are less than 50 percent of passage this year, given the competing demands.

The White House insists that a rate cut should not add to a projected fiscal-year 2011 U.S. government budget deficit of $1.5 trillion, setting up inevitable winners and losers.

While Obama courts corporate America, including tapping General Electric Co Chief Executive Jeffrey Immelt to head a jobs council, he also looks to curb corporate tax breaks.

GE paid an average rate of 14 percent over the past five years, according to Thomson Reuters.

Although the top 35 percent rate is among the highest in the industrialized world, Obama and others note that after deductions and credits, U.S.-based companies on average pay closer to the mid-20 percent average in other major nations.

WIDE GAPS ACROSS, WITHIN INDUSTRIES

Driving a business split are wide gaps in taxes paid across industries and even among rivals.

Big retailers and health care service companies tend to pay closer to the top rate, spurring more enthusiasm for change in those sectors. These companies have little intellectual property such as patents to transfer overseas to shelter profit.

The world's biggest retailer, Wal-Mart Stores Inc, paid an average tax rate of 33 percent over the past decade, according to Thomson Reuters research.

Retailers such as Sears Holding Corp would "absolutely" benefit from a cut in the corporate rate, said National Retail Federation tax counsel Michelle Bernstein.

Even so, Bernstein, who worked on tax reform legislation in the 1980s, said: "It is not the kind of thing you can do in a matter of months, even a year."

Major healthcare and technology companies are among those with big intellectual assets, letting them keep profits abroad.

Companies incorporated in low-tax countries, from Ireland to Cayman Islands, will also suffer if loopholes are cut.

Big oil companies pay among the highest tax rates across all industries, but they are weary because despite high rates, the industry is a popular target of politicians.

Exxon and Chevron Corp both paid close to an average 40 percent rate over the past five years, according to Thomson Reuters.

Obama in his first two budgets sought to cut tens of billions of dollars in tax breaks for the oil, gas and coal companies, and he appears ready to revive those proposals.

"We are obviously excited to engage in the conversation of corporate reform, but we just don't want to be singled out on anything," said Brian Johnson, a tax expert at the American Petroleum Institute.

INNOVATION, FOREIGN PROFITS

Obama in his State of the Union speech last month pitched more investment in innovation like green energy, calling for a "Sputnik moment."

Big companies will likely use this line to preserve favored tax breaks, like a research and development credit that costs the government $6 billion a year.

"In fact Obama keeps calling for the R&D tax credit to be made permanent," said Anne Mathias, an investor analyst at MF Global. "The idea behind cutting some of the offshore breaks is to spur U.S. investment."

Less popular tax provisions will be first on the block.

Obama's past budgets sought to limit companies' ability to defer taxes on income earned abroad.

Eyes move next to Obama's fiscal 2012 budget proposal, scheduled for release February 14.

Republicans, for their part, have defended some of the breaks Obama blasts, and they have fundamental disagreements about the need to fully fund a rate cut.

Obama has not yet set out a path for reform, as Ronald Reagan did when he set a deadline for his administration to deliver a tax overhaul plan in the 1980s.

It took several years for the historic 1986 bipartisan tax overhaul bill to be signed.

"If he stays at that level of message (in the budget) then it won't happen," lobbyist Trinca said.

U.S. Rep. Dave Camp, Republican chairman of the House tax-writing committee, is keen to revamp the tax code, though he has not proposed a timeline for legislation.

"I'm under no illusion that the task before us will be easy," he said recently.

(Reporting by Kim Dixon, editing by Matthew Lewis)