Business swings into action for debate on Tax Reform, Part 3

Well before the Senate Finance Committee even began drafting a plan to overhaul the federal income tax system, Ken Simonson was planning how to change it. Two weeks ago, the American Trucking Associations, where Mr. Simonson is chief economist, got wind of the plan to be presented by chairman Bob Packwood (R) of Oregon.

The organization swung into action. It sent letters or called its 3,500 members, alerting them to the proposal's most damaging provisions. Members started lobbying senators on the Finance Committee. And as those 20 senators sat down to hammer out a tax plan, the trucking association had already built the nub of a coalition that may eventually include scores of companies, from tobacco to telecommunications to airline companies.

``It will be a test of wills,'' Simonson says.

Welcome to Tax Reform, Part 3.

First, the Reagan administration came out with a proposal to ``simplify'' the tax system and lower tax rates. The House followed up with its own bill last December.

Then on Wednesday, Senator Packwood presented the Senate Finance Committee with a carefully crafted plan for tax reform. To get it past the President, he knew it had to lower tax rates, maintain incentives for business investment, add no new taxes -- and be ``revenue neutral,'' that is, bring neither more nor less money into the Treasury.

To push it through committee, he had to give breaks to industries located in the committee members' home states, (which is why timber, mining, and oil-drilling companies saw their tax benefits preserved).

The House bill, the Packwood plan, and the administration proposal all shift the tax burden from individuals to business. Over the next five years, the House would have business pay some $140 billion more in taxes; the administration plan, closer to $100 billion, and the Packwood plan, somewhere between.

On the face of it, the Packwood plan seems kinder to business than does the House bill. It lowers maximum tax rates from 46 percent to 35 percent (vs. 36 percent in the House) and has a lower minimum rate (20 percent vs. 25 percent). It is also more generous when it comes to prized items like accelerated depreciation, capital gains treatment, research and development credits, and the phasing out of the investment tax credit.

But the Packwood plan is raising a storm of criticism from businesses that have supported tax reform. It has alienated some powerful industries, including banks, tobacco and alcohol companies, retailers, food marketing companies, and many importers of foreign goods.

And these lobbies have several sympathetic ears on the Finance Committee. Before a bill is hammered out -- and congressional aides say that will be by summer -- the Packwood plan may be a very different animal.

``Senator Packwood took great care for the [Finance Committee] senators' concerns, especially in the natural resource area,'' says Edward Hatcher, press secretary for George Mitchell (D) of Maine, who serves on the committee. ``But there are a whole slew of areas where members have objections.''

The Achilles heel, and the key to making the Packwood proposal ``revenue neutral,'' is its treatment of excise taxes and tariffs. Manufacturers would no longer be able to deduct excise taxes or tariffs from their pre-tax income. Packwood estimates that alone would raise about $62 billion.

Economists say that has the effect of raising excise taxes by 35 percent or more. Cigarettemaker R. J. Reynolds, among others, claims that any break it gets from lower tax rates will be wiped out by higher excise taxes. It is lobbying members, as is the trucking industry (trucks and truck parts are subject to excise taxes).

And legislators are concerned the provision would end up being essentially a tax increase on middle and low-income individuals. They say it could cause a jump in the prices of a whole array of goods, including airline tickets, gasoline, tobacco, liquor, telephone services, wagering, gasoline, and products moved by highway trucking, to name a few. And the tariff provision could translate into higher prices on clothing, since imported textiles and apparel have high tariffs.

``If those provisions are altered -- and it has a good chance of being mitigated if not thrown out -- where in the world will they get that money again?'' asks Thomas Ochsenschlager, a partner at the accounting firm Grant Thorton International. ``If they throw out the excise tax, the wheels fall off Packwood's cart.''

Less in the limelight, but of great concern, is the effect of the the Packwood proposal on the banks. Both the House bill and the Packwood plan would limit the way a bank deducts its loan loss reserves. However, the House bill does that only for the largest banks (it is mainly the small banks which have failed in the last year).

Banks are waging a grass-roots lobbying campaign. While the banks themselves may not have many sympathizers on the Finance Committee, the banks' customers do.

Bankers point out that ultimately, the Packwood plan could impact farmers, many of whom receive loans from smaller banks. It will make banks more conservative in their lending practices, says Kirk Willison, a spokesman at the American Bankers Association.

``Banks are not only going to be less likely to loan to particular places,'' he says, ``but they're going to be forced to foreclose on people sooner than they would like as well.''

David Wyss, a vice-president at Data Resources Inc., doubts that banks will be so extreme. But, he says, ``banks will probably not put as much into reserve, which could be dangerous if carried to excess.''

Now that the battle lines are drawn, the laborious process of compromise starts. After the Senate committee hammers out a bill and puts it to a vote by the full Senate, the House and Senate will have to mesh their two bills.

And Tax Reform, Part 4, will begin.