Obama Eyes Corporate Tax Reform

Sources familiar with meetings between Treasury Secretary Timothy Geithner and leaders from business, labor, and academia say the Obama administration is actively interested in a corporate tax overhaul and that the president will nod to the issue in his State of the Union address on Tuesday.

But administration officials caution that they won't push for broad reform unless business groups agree to support a revenue-neutral approach--a tax reform, not a tax reduction.

Obama is spending the weekend annotating and rewriting, administration officials said, but he also intends to clear his mind by watching the NFL playoffs.

"We need to test the true appetite of business for reform that simplifies the system and lowers rates without making the deficit worse," a senior administration official told National Journal on Friday.

Officials say the idea of a broad overhaul of corporate taxes--an issue at the top of the big-business agenda--has merit as a matter of policy and fits well with the president's new focus on bolstering competitiveness.

At a White House meeting in December with corporate executives, venture capitalist John Doerr and General Electric CEO Jeffrey Immelt argued that creating investment in the United States would require an overhaul that lowers rates and reduces complexity. Business groups especially chafe at U.S. laws to tax income earned overseas--a policy that no other developed countries embrace.

At that meeting, administration officials pledged to explore the issue and Geithner has hosted at least two meetings at the Treasury Department to solicit ideas from business executives, labor officials and experts from think tanks and universities.

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On Friday, President Obama named Immelt to head a presidential advisory board on jobs and competitiveness, a move that puts a champion of corporate tax reform near the center of White House policymaking.

Knowledgeable sources predicted that Obama will mention corporate tax reform in his State of the Union address, in part because the idea fits well into his narrative about competitiveness. In addition to winning points with business, officials say, a successful reform package could offer an inexpensive way to improve investment and economic growth.

Many economists say that the corporate tax code is a mess and overdue for a clean-up.  The code riddled with inefficiencies, creating perverse incentives for companies to invest overseas and waste money on elaborate tax-reduction strategies.  Business supporters say a overhaul could eliminate the misguided incentives, lower tax rates, and attract more capital to the U.S. Some liberal critics also support reform, saying the current system is so tangled that it doesn't even do a good job of raising revenue.

The issue could offer a rare opportunity for collaboration with Republicans in Congress. But while there is considerable consensus about the appeal of reform, the administration doesn't want the effort to widen the deficit.  Some officials said they are worried that bringing any tax reform proposal would end up more as tax cuts than tax reform.

"That was a big point of debate and pushback," explains a source familiar with a meeting between Geithner and a number of corporate CFOs on January 14. "A number of the CFOs said, 'If you want to achieve objective No. 1, which is developing a competitive system, there shouldn't be a heavy emphasis on doing so in a deficit neutral and deficit reducing fashion.'"

White House officials say the annual cost of "tax expenditures" --special tax breaks--is already $1.1 trillion. That's more than the government actually collects in personal and business taxes under the current code. "It's more holes than cheese," one White House official said last week. Given the challenge of taming the government's trillion-dollar budget deficit, Obama's team isn't willing to make the problem even worse while Republicans clamor for deep spending cuts.

Rather, the administration seems to prefer a strategy akin to its approach to health care reform: By convincing concerned private interests to buy into the White House approach, or at least not oppose it publicly, officials hope the political lift will be easier. During the health care fight, insurers gained millions of new customers while agreeing to restrictions on their behavior. Now, the administration is offering support for a variety of corporate tax reforms in exchange for backing on fiscal responsibility.

Everyone National Journal spoke to cautioned that specifics were not yet under discussion; rather, officials are reaching out to assess the climate in Washington in advance of what could be a two-year or even three-year legislative battle. Any reform effort would mean eliminating scores of tax provisions that benefit specific industries and companies, which would deploy armies of lobbyists to defend their breaks.

Administration officials don't expect a final decision on whether to seriously pursue corporate tax reform for several months.  Most observers believe reform can be accomplished separately from a comprehensive tax reform effort -- while postponing a reform of individual taxes until at least the next round of the battle over extending the Bush tax cuts.