How Obama Wants to Pay for Business Tax Cuts

Chris Good Sep 8 2010, 3:06 PM ET

President Obama is pushing for two business tax cuts in a major economic address in Cleveland today, and he's employing what's become a popular method to pay for them: closing overseas tax loopholes.

Or, as Obama's critics would identify it, a tax hike on multinational businesses.

Specifically, Obama wants to hit the oil and gas industry to offset these tax cuts and make them deficit neutral, which Congress must do under its self-imposed spending rules known as "pay-go."

Besides pushing for a Democratic bill to cut small-business taxes, Obama called for a permanent extension of the research-and-development tax credit and a 100 percent exemption for capital investments.

Asked how these cuts would be paid for, and administration official said last night that the administration is working with Congress to hammer out the offsets, but that "we'd like to see some loopholes closed for oil and gas companies as one possible option."

Here's how Obama pitched his pay-for in the speech today:

One of the keys to job creation is to encourage companies to invest more in the United States. But for years, our tax code has actually given billions of dollars in tax breaks that encourage companies to create jobs and profits in other countries.

I want to change that. Instead of tax loopholes that incentivize investment in overseas jobs, I'm proposing a more generous, permanent extension of the tax credit that goes to companies for all the research and innovation they do right here in America.

"Closing overseas tax loopholes" was actually a campaign talking point in 2008, and it's a popular pitch to middle- and working-class Americans, one that strikes chords with skepticism of outsourcing and free-trade deals. Democrats have consistently demonized oil companies for years, and their criticism was heightened in the aftermath of BP's oil spill in the Gulf of Mexico. Nobody likes "overseas tax loopholes"--and I'm guessing "multinational corporations" don't poll too well these days, either--and Democrats are betting this election year that nobody likes oil companies either.

Politically, here's how this will likely play out:

As congressional Democrats work out the specifics of the offsets and as bills for these proposals emerge, Republicans and big business groups will resist, accusing Obama of robbing one business sector to benefit another and score political points in the process. Resentful that Obama is proposing this after they've called for the R&D credit to be permanently extended for years (except without the proposed string attached), Republicans and business groups will point out that Obama has hidden a tax hike in his pitch for tax cuts.

A dispute over this will fall into a storyline we've seen time and again in this Congress: Democrats propose something, and Republicans don't like how it's paid for. This happened with unemployment insurance (Republicans wanted it paid for; Democrats wanted to ignore pay-go rules and count the spending as an "emergency" measure) and state aid (Democrats wanted to use unspent stimulus money; Republicans, even as they had criticized Democrats for not spending the stimulus money fast enough, wanted Democrats to hold to their spending schedule and, in an ideal world, do away with stimulus spending altogether).

Republicans will oppose these measures after Obama blasted them for political obstructionism in the same breath in which he proposed them. He'll criticize them again for opposing business tax cuts just for the sake of thwarting him.

But that's just a guess.