Manufacturers leery of losing breaks for tax rate cut

WASHINGTON Thu Jul 19, 2012 4:09pm EDT

WASHINGTON (Reuters) - Manufacturing executives told lawmakers on Thursday they are not ready to trade major tax breaks for a 10-point cut in the corporate tax rate to 25 percent, a key feature in the major Republican proposals for tax reform.

Democrats and Republicans say they want to simplify the tax code, which has not been overhauled since 1986. The blueprint for this feat involves trimming tax breaks to fund lower overall tax rates.

The top Republican tax-writer, Representative Dave Camp, asked officials from manufacturing companies if a 25 percent corporate tax rate "would be attractive enough" to keep them from seeking out lower tax rates in foreign countries.

A 25 percent rate would be welcome, but manufacturing businesses need to weigh the downside of losing tax breaks, the corporate officials said.

"The overriding concern is that rates have a tendency to creep back up," Susan Ford, vice president of tax at Corning Inc. (GLW.N), told a House of Representatives Ways and Means Committee hearing.

One goal the parties agree on is to revamp the system without adding to the budget deficit. Offsetting lower rates by trimming tax breaks could keep tax revenue collection the same in theory.

"It's an important part of moving comprehensive tax reform forward that it be revenue neutral, and so I am going to continue to stick with that," Camp told Reuters after the hearing.

But this zero-sum proposition creates winners and losers in the business community, sometimes within industries themselves as they fight to hold onto cherished tax breaks.

The U.S. statutory corporate tax rate is 35 percent, the highest among developed countries. But many companies are able to pay a lower effective tax rate with deductions and credits.

Manufacturing companies usually face higher effective tax rates than pharmaceutical or technology companies because assets like factories cannot be moved offshore to lower-tax locations. Intangible assets like patents can easily be sent to low-tax jurisdictions.

Tax deductions and credits tend to be more valuable to manufacturing companies because the bulk of their businesses are located in the United States. Killing the tax breaks would trigger tax increases for manufacturers even with lower rates, said Heather Boushey, a senior economist at the Center for American Progress.

"I don't think it's time quite yet to choose which ones stay and which ones go," said Diane Dossin, chief tax officer at Ford Motor Co (F.N).

Congress' Joint Committee on Taxation has estimated that cutting some of the major business breaks would allow the corporate rate to drop to 28 percent while keeping revenues neutral.

Republicans say this estimate does not take into account important deductions and other elements of the code.

Camp, in a corporate tax reform plan floated last year, did not specify what tax breaks would be cut to reduce taxes to 25 percent.

Mitt Romney, the presumptive Republican presidential nominee, has called for a 25 percent corporate tax rate but has been vague on the details.

(Editing by Leslie Adler)

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