Scramble for Pork: Everyone Wants Their Tax Credits.
washingtonpost.com
Tax Credits Lose Appeal In Bush Plan
Special-Interest Groups Lobby for Exemptions
By Jonathan Weisman
Washington Post Staff Writer
Wednesday, February 26, 2003; Page E01
President Bush's plan to slash taxes on corporate dividends will be introduced as a House bill this week, and special-interest groups are swarming Capitol Hill to argue that their favorite tax credits should be exempt from the proposal.
Yesterday, housing advocates released a report by Ernst & Young LLP that concluded Bush's plan would result in a 35 percent reduction in the nation's supply of low-income housing -- affecting more than 80,000 potential occupants -- while increasing rent on units that are built. The report, commissioned by the National Council of State Housing Agencies, is being used by advocates and builders of low-income housing as evidence to support an exemption.
Developers, home builders and housing investors receive tax credits for low-income housing. Only with the credits can developers turn a profit on such risky investments , housing advocates say.
Under Bush's proposal, shareholders would receive tax-free dividends only on corporate profits that are fully taxed. Companies would have to choose between taking the tax credits and forgoing them to give tax-free dividends to their shareholders.
Low-income housing is only the beginning. Bond traders and local governments are seeking an exemption for tax-free municipal bonds. Energy companies want special status for alternative-energy credits and oil-exploration tax breaks. Other businesses seek exemptions for tax credits that offset such things as research-and-development spending, the hiring of welfare recipients, and the cost of modifying staircases for the disabled.
The groups are getting sympathy from lawmakers from both parties who helped draft the tax credits in the first place.
"We don't have a lot of tax credits at the federal level, and the few that are remaining are important," said Rep. Nancy L. Johnson (R-Conn.), a member of the House Ways and Means Committee. "I know the administration feels that if we make room for these credits, we eliminate the benefit of eliminating the double taxation of dividends. But the burden of proof is right now on the administration."
If Johnson's attitude is widespread, it could mean serious trouble for the $335 billion centerpiece of the White House economic plan, which Ways and Means Committee Chairman Bill Thomas (R-Calif.) plans to introduce. The Treasury Department estimates that Bush's overall proposal would cost $637 billion in 2003 through 2012.
Protecting tax credits would increase the cost of the dividend proposal by as much as 50 percent, according to a Ways and Means staff aide, and undermine the philosophical argument for it. Bush has said dividends from fully taxed corporate profits should be tax-free because income should be taxed only once. But every dollar of profit that can be claimed by a company as a tax credit and paid out as a tax-free dividend is a dollar that has never been taxed.
"This comes down to the fundamental question of whether you're trying to end the double taxation of dividends or make a pass-through system" that preserves the advantage of tax credits for shareholders, said Pamela F. Olson, the assistant Treasury secretary for tax policy. "We chose to end the double taxation of dividends."
Mindful of the White House's reputation for hardball tactics, special-interest groups preface their exemption pitches with expressions of support for the Bush plan. Gerald M. Howard, chief executive of the National Association of Home Builders, responded to the Ernst & Young report with a carefully worded statement that called for more research into the potential impact on low-income housing starts. "We look forward to working with the Bush Administration and Congress in helping to refine this complex plan so that the housing sector can continue to lead the economy forward," Howard said.
But behind the scenes, the groups are lining up allies, and the housing advocates have received the most public support from members of Congress. Even before the Ernst & Young report was complete, Johnson and Rep. Charles B. Rangel (N.Y.), the Ways and Means Committee's ranking Democrat, expressed concern about the plan's impact on low-income housing. Johnson said the alarm is widespread in the committee.
"We don't believe they will let this happen to low-income housing," said Barbara J. Thompson, executive director of the National Council of State Housing Agencies. "Others will make their case, but we can't imagine a stronger case than ours."
Ernst & Young suggested in its report that low-income housing credits be treated as taxes paid, allowing shareholders to get tax-free dividends from profits enhanced by the credits.
That argument could be made by advocates of any tax credit. John R. Vogt, chief lobbyist for the Bond Market Association, said his organization, teaming with state and local governments, has approached the administration and Congress about an exemption for interest that corporations are paid on their municipal bond holdings.
Randall Swisher, executive director of the American Wind Energy Association, said his group has spoken with Treasury and congressional allies about protecting the tax credit that energy companies receive for wind-energy development.
"The dividend proposal sort of clouds things," Swisher said. "It adds an element of uncertainty, and we'd love to see it clarified so the wind credit is not diminished by the proposal."
Tax credits are "a way of preferencing resources into areas that do not otherwise attract capital," Johnson said.
"I'm going to need a lot of convincing" before voting to diminish the value of such preferences, she said. "So far I haven't gotten that information."
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