GOP AIDES REVISE BILL TO HELP BIG FIRMS

GOP Aides Revise Bill To Help Big Firms
Lobbyists See Opening For Special Favors

By Jonathan Weisman
Washington Post Staff Writer
Saturday, March 1, 2003; Page E01

Even before Congress begins debating President Bush's tax cut plan, Republican tax-writing aides have inserted a generous new provision for major corporations and their shareholders that some fear could open the legislation to a tidal wave of loopholes.

The provision would be of tremendous benefit to such blue-chip giants as International Business Machines Corp., Ford Motor Co. and General Electric Co., which otherwise would have had the value of billions of dollars in tax credits radically reduced by the president's plan to end the "double taxation" of dividends.

Tax writers were expected to simply translate Bush's tax plan into legislative language for introduction on Thursday, but they wrote the potentially significant change after Treasury Department officials concluded that it was needed, said Pamela F. Olson, assistant Treasury secretary for tax policy.

Bush proposed to make dividends on fully taxed corporate income tax-free to shareholders. Under the draft legislation, businesses could continue to deduct past payments of the corporate alternative minimum tax from their current tax burdens, but the use of those credits would not reduce the amount of money they could offer shareholders as tax-free dividends. Olson said the Bush proposal had already stipulated that refunds from corporate income taxes paid before 2001 would not count against tax-free dividends, so the AMT change would merely keep the treatment of past tax payments consistent.

The cost to the Treasury may be minimal -- $2 billion a year or less -- said Robert S. McIntyre, director of Citizens for Tax Justice, a liberal tax watchdog group. But, he said, it could open the floodgates to lobbyists already seeking to protect their favorite tax credits from the impact of the president's plan.

"This is sort of the camel's nose in the tent," said William G. Gale, an economist at the Brookings Institution.

"They just blew the barn door off this bill," a Republican tax lobbyist said.

The centerpiece of Bush's "economic growth package" -- which would cost the Treasury $637 billion through 2012 -- is the $335 billion dividend proposal. Under the plan, corporations would record fully taxed income in a special account, out of which they could offer their shareholders dividends that would not be taxed as income.

Any tax credits that a company used to reduce its income taxes would also reduce the amount of tax-free dividends available to shareholders. If shareholders pressure companies to maximize the amount of tax-free dividends, some businesses and advocacy groups fear that companies would avoid activities that now are encouraged through tax credits, such as investing in the inner city, hiring welfare recipients, refurbishing historical buildings, building low-income housing or engaging in research and development.

But the Bush administration has argued that corporate income should be taxed only once. If a company were allowed to take a tax credit for $1,000, then pass on that $1,000 to shareholders as a tax-exempt dividend, that profit would never be taxed.

Republican tax aides say the new corporate alternative minimum tax loophole does not violate that philosophy but simply makes sure that companies get credit for past taxes paid.

McIntyre said the proposal is unfair because it would in effect make the Bush dividend tax cut retroactive. Because companies are allowed to carry AMT credits indefinitely, shareholders could benefit from taxes paid as far back as 1987, when the corporate AMT went into effect.

For some companies' shareholders, the provision would be a windfall. A 2001 Congressional Research Service report said companies held more than $26 billion in AMT credits.

By the end of 2000, 16 companies had accumulated AMT credits worth more than $100 million, and most of them are generous dividend payers, according to Citizens for Tax Justice. IBM had collected $1.4 billion in AMT credits, Ford $1 billion, General Motors Corp. $833 million and GE $671 million. If the dividend proposal passes as drafted, all that money could be deducted from future tax liabilities without diminishing those companies' stock of tax-free dividends.

The provision also would make it more difficult to resist lobbyists seeking to protect other tax credits. Housing advocates met with Treasury officials this week seeking to preserve the value of the low-income housing credit, which encourages developers to build affordable apartments. The advocates hope to persuade the administration and Congress to stipulate that the use of low-income housing credits would not diminish a company's pool of tax-free dividends.

But according to meeting participants, Treasury officials told the advocates that such an exception would open the legislation to exemptions for virtually every tax credit in the tax code. That would significantly increase the cost of the dividend proposal and ensure that billons of dollars in corporate profits would never be taxed.

Olson said the AMT decision should have no effect on the prospects for those other credits.

"These guys paid those taxes in earlier years. They're just essentially getting refunds on taxes paid," she said. "It doesn't seem to me that this has any bearing on other credits at all."