House Ways And Means Democrats Re-Tool Corporate Tax Cut Plan

WASHINGTON --House Ways and Means Committee Democrats and staff are retooling a proposal to overhaul the corporate tax code, with an eye toward introducing a new bill early next year.

The new legislation in the U.S. House of Representatives will be an updated version of a corporate tax code blueprint introduced by House Ways and Means Chairman Charles Rangel, D-N.Y., late last year, according to a Democratic House aide.

That bill would have cut the corporate rate from 35% to 30.5%. However, the new version will push that rate lower, people familiar with the effort told Dow Jones Newswires.

The previous Rangel proposal was "revenue-neutral" in that it paid for the corporate rate reduction by repealing certain existing tax benefits. It would have raised most of the $364 billion, 10-year cost of the rate cut by repealing a deduction for domestic manufacturing activities, limiting tax breaks for multinationals' overseas income and disallowing the last-in, first-out method of accounting.

Rangel told Dow Jones Newswires late last month he hopes to move forward with tax code reform at the same time as health-care reform, which will top President-elect Barack Obama's domestic agenda.

Rangel said he was aiming for a "dramatic" reduction in the corporate tax rate.

Congressional aides and lobbyists familiar with the matter cautioned that lawmakers and staff must still confer with Obama administration officials regarding the proposal. The administration's views could influence the content and the timing of introduction of a new bill.

President-elect Obama, at a press conference Friday, said he wanted to act quickly on his proposals to cut taxes for middle-class families. It is not clear how Rangel's plans for a corporate tax cut would fit into that effort.

Also unknown is what other revenue sources Rangel will look to for funding an additional cut in the corporate tax rate.

One possible area is the financial industry. Sen. Carl Levin, D-Mich., and Rep. Richard Neal, D-Mass., this year criticized financial products they said firms may be using to game the tax system.

Such products include exchange-traded notes, which allow investors to realize a gain from a stock sale while deferring taxes on the final sale for years. Levin held a hearing to blast banks that use "total return swaps" that help circumvent taxes on dividends by letting foreign investors loan their shares to a bank and receive a "dividend equivalent" payment.

When Rangel introduced his original bill in 2007, it was criticized by some business officials who said it did not deliver enough of a rate cut to justify the loss of tax benefits it proposed to take away.

Besides corporate tax changes, Rangel will likely also make changes to his bill that affect individual tax provisions, aides and lobbyists said.

For instance, his proposal from last October would repeal the alternative minimum tax, or AMT, and fund that through a 4% surtax on high-income taxpayers. Those proposals would likely have to be harmonized with Obama's own proposals.

Obama proposed indexing the AMT for inflation. He has proposed raising tax rates, including income and capital gains tax rates, on earnings above $200,000 for singles and $250,000 for couples. But he has not proposed a surtax overlay on the income tax like what Rangel put forward.

The bill could also be expanded to address expiring tax cuts such as estate and capital gains tax rules, according to the House aide.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com