Corporate Taxes on Table in Cliff Talks - Wall Street Journal

By DAMIAN PALETTA, JANET HOOK and CAROL E. LEE

The White House has told Republicans it would include an overhaul of the corporate-tax code as part of any deal to reduce the deficit, people familiar with the talks said, a move to court business groups as budget negotiations intensify.

Corporate taxes hadn't until now been part of budget talks aimed at averting spending cuts and tax increases set for January. Much of the focus has instead been on the expiring individual income-tax rates.

The offer from the White House came amid a fresh round of proposals from both sides, as President Barack Obama and House Speaker John Boehner exchanged counteroffers to address the so-called fiscal cliff. Big gaps remain between Democratic and Republican negotiators, and while talks are continuing, there is no guarantee a deal will be struck, with or without a corporate-tax revamp.

The White House's corporate-tax suggestion wasn't specific, according to officials familiar with the offer, other than committing to overhaul the corporate tax code in 2013. White House officials, in making the suggestion, cited a corporate-tax plan the administration unveiled in February but said they weren't wedded to any specifics.

Left unclear is the crucial question of how any revamp would affect companies' overall tax burden. That is one reason why Republicans considered it a tactical offer only, and not one that might help seal a deal.

As part of its budget proposal, the White House also slightly lowered its target for new tax revenue to $1.4 trillion, down from Mr. Obama's initial offer of $1.6 trillion, officials said. It retained items from an earlier offer that had irked Republicans, included new stimulus spending and an increase in the U.S.'s borrowing limit.

House Democratic Leader Nancy Pelosi responded to House Speaker John Boehner in a floor speech, saying that she was glad Mr. Boehner brought the fiscal-cliff debate before the full House and reiterated Democratic demands that any spending cuts in the deal "not hurt the middle class.''

Mr. Boehner, an Ohio Republican, responded Tuesday with a proposal that wasn't "dramatically" different from the one he made to the White House last week, according to an official familiar with the talks, who declined to elaborate.

The flurry of activity showed the talks were moving along, albeit haltingly. Messrs. Boehner and Obama discussed the negotiations by phone Tuesday evening. The White House in recent days also has been talking with Democratic leaders about the types of spending cuts that might accompany any deal, to calm increasing queasiness in the party over the direction of the talks.

In a brief update on the House floor earlier Tuesday, Mr. Boehner asked, "Where are the president's spending cuts?" He added: "We are still waiting for the White House to identify what specific cuts the president is willing to make." He accused the White House of "slow-walking" the talks. Republicans viewed the White House's latest offer as not that different from its first—heavy on new taxes and light on ideas to trim spending.

Political reaction to the corporate-tax idea split along party lines. A senior Democratic aide described the addition as a smart way of making concessions without having to touch entitlement programs.

Republicans said they didn't consider the move a concession at all, given their assumption that the corporate tax code would be tackled at some point. "It's a red herring," said Boehner spokesman Michael Steel. He said keeping individual rates low was a more immediate priority because of its impact on small businesses, many of which aren't structured as corporations, and whose owners pay taxes through the individual tax system.

The White House earlier this year proposed lowering the corporate rate to 28% from 35%, and even lower for manufacturing companies. Lower rates would be combined with eliminating some tax deductions in the White House plan, with the net effect being that the tax burden on companies would remain about the same. But it would be a simpler and clearer system, which many CEOs have sought.

Many Republicans have offered similar proposals, though their proposals call for lowering the corporate rate to 25%. Neither plan gained any traction.

An overhaul of the corporate-tax code came up repeatedly during Mr. Obama's recent meetings to discuss the fiscal cliff with chief executives at the White House. Some CEOs signaled a willingness to accept higher individual tax rates to bring in more revenue, but they said the corporate code needed to be redrawn because it hurt U.S. competitiveness. By agreeing to include an overhaul of the corporate-tax code as part of these discussions, the White House could be trying to further attract business groups to its deficit-reduction plan.

Democrats and Republicans involved in the cliff talks are trying to design a two-phase timetable. If a deal is reached, it would lock in some changes to taxes and spending rules by the end of 2012 and then require a number of more significant changes next year to entitlement programs and the tax code. The White House's corporate-tax plan would fit into the second phase, giving lawmakers, White House officials and business groups time to work through the details.

The White House's February proposal to redesign the corporate tax code received a lukewarm reception from business groups. Many were supportive of the proposal to lower rates but worried about which industries might get hurt by an accompanying elimination of tax breaks. Many large businesses were also unhappy the White House didn't back a proposal to shield profits from foreign affiliates from U.S. taxation.

Still, business groups saw that early proposal as a starting point, and hoped it would lead to a comprehensive deal, a point several echoed on Tuesday during a conference call organized by the Business Roundtable trade group.

"Start at wiping out all of the deductions, figuring out where that tax rate is—whether it's 25%, 22%, 15%, whatever it is," said Douglas Oberhelman, the chief executive of construction-equipment maker Caterpillar Inc. "I think all of us are on that wavelength today to begin the process."

Corporate income taxes make up about 10% of revenue collected by the government. In the fiscal year ended Sept. 30, the government received $2.449 trillion in revenue, with $242 billion of that coming from corporate income taxes.

Big differences remain between the two sides, and in public the Republicans and Democrats continued to hammer at each others' ideas.

The administration's new proposal made no major concessions on entitlements such as Medicare, which it is withholding until Republicans give up ground on tax rates. Republicans likewise want first to see more details on spending cuts.

The Business Roundtable for the first time Tuesday backed the possibility of higher tax rates as part of a broader package of changes to reduce the deficit. The group previously called for extending all the Bush-era tax rates.

John Engler, president of the Business Roundtable, an influential trade group that represents large corporations, said he thought a proposal to overhaul the corporate tax code would be well-received by Democrats and Republicans, but wouldn't be enough to replace Republican demands for spending cuts. Still, he said it would help expand the scope of the package, which could ultimately draw more backers.

Falling Over the Fiscal Cliff

See some scenarios for how different groups of people may be affected by the tax changes that will take place if the fiscal cliff isn't resolved by the Jan. 1., 2013, deadline.

A small but growing number of Republicans have argued that the party should give up on blocking any rate increase on higher-income Americans and instead shift focus to securing spending cuts as part of the deal.

Some Democrats regard Republicans' eventual concession on taxes as a foregone conclusion, and they have begun to talk among themselves about which concessions on entitlement programs they might be asked to make.

The three leading proposals floated by Republicans include increasing the eligibility age for Medicare, requiring wealthier people to pay more for Medicare and changing the formula for calculating Consumer Price Index adjustments to slow the growth of Social Security benefits.

Many Democrats are especially concerned about looming Medicare cuts if they include a GOP proposal to raise the eligibility age. "If people are working in coal mines in West Virginia, it's really inhumane to talk about raising the eligibility age," said House Assistant Democratic Leader Jim Clyburn of South Carolina, who is close to Mr. Obama. "For those of us in air-conditioned offices to talk about raising the age, that's fine for us to say."

AP

House Speaker John Boehner, shown walking to the House floor Tuesday, said the White House plan would exacerbate the U.S.'s problems.

Many Democrats acknowledge that any deficit-reduction package will include proposals they don't like. "There's no way to do this without both sides giving up something," said Senate Budget Chairman Kent Conrad (D., N.D.).

Administration officials have been engaged in conversations with Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi to bring them along as Mr. Obama negotiates with Mr. Boehner. Those conversations have picked up in recent days as the White House takes soundings from Democratic leaders on what might be possible for the party to stomach in a final deal.

Republicans are frustrated that they haven't secured larger spending-cut commitments from Mr. Obama in exchange for what they see as a major and early concession from Mr. Boehner on tax revenue, said people familiar with the talks.

In his speech Tuesday, Mr. Boehner argued that Mr. Obama's proposed tax increase barely scratches the surface of the deficit problem.

"Even if we did exactly what the president wants, we would see red as far as the eye can see," Mr. Boehner told the House. Aides said Mr. Boehner decided to make the speech because he believed recent reports of tentative progress in his talks with Mr. Obama played down differences that remain on spending.

The White House rejected Mr. Boehner's complaint that Mr. Obama hadn't put forward detailed spending cuts.

"What we haven't seen from Republicans to this day is a single specific proposal on revenue," White House spokesman Jay Carney said. "And in fact, we've seen less specificity from Republicans on spending cuts than the president himself has proposed."

—Jared A. Favole contributed to this article.

Write to Damian Paletta at damian.paletta@wsj.com, Janet Hook at janet.hook@wsj.com and Carol E. Lee at carol.lee@wsj.com

A version of this article appeared December 12, 2012, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Corporate Taxes on Table in Cliff Talks.

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