A Brake on Corporate Tax Breaks

Congress begins to rethink some of last year's largesse

A little more than six months ago, Congress granted U.S. business major tax cuts that were designed to spur investment in job-creating factories and to increase industrial productivity. That legislative largesse enabled some highly profitable companies to reduce tax bills greatly. Now, with Congress trying to find ways to slash the gargantuan federal budget deficits, Senate Finance Committee Chairman Robert Dole and other congressional leaders want to rescind some of their generosity.

Corporate accountants have long been worked hard to find ways to trim their companies' tax bite. Of the, 2.4 million corporations that filed returns in 1978, fully 64% were able to avoid all federal income taxes, either because they had no earnings or because they creatively made use of investment tax credits or other IRS technicalities. The maximum tax rate for companies is 46%.

Changes that Congress passed as part of last year's general tax cut gave companies several new breaks. The provisions, including liberalized depreciation rules and increased investment tax credits, will save companies an estimated $10.5 billion in taxes this year. The most controversial change in the law permits companies with little or no earnings to sell tax credits and depreciation benefits to profitable firms. This measure alone is expected to cost the Treasury $40.7 billion by the end of 1987.

The complicated leasing deal starts with an ailing company that has an investment tax credit and depreciation deductions that are useless to it because it is paying few if any taxes. The corporation sells some equipment plus the tax breaks that come with it to a firm that can use the breaks to reduce the amount it pays to the Government. Then the first company leases back the equipment. The agreement benefits both sides: the profitable company gets a valuable tax break while the firm losing money earns some cash and still has its machinery on lease. In one of the largest of these transactions last year, Ford Motor Co. sold some $1 billion worth of new machinery and tools to International Business Machines. A tax credit of between $100 million and $200 million came along with the property. Ford leased the equipment back from IBM, so it still uses the machinery even though it no longer owns it.

Last month Senator Dole denounced these deals and said that the provision would be removed from the tax law or substantially limited. A well-organized lobby, though, has mounted a campaign to keep the leasing tax break. One organization fighting for it is the New York State Metropolitan Transportation Authority. Last year the MTA sold 598 buses and ten commuter rail cars for more than $15 million to Metromedia. The MTA now leases the buses and cars from the communications conglomerate.

Proponents of the leasing measure argue that the deals discourage mergers that might be made only to acquire tax credits. Says Martin Feldstein, president of the National Bureau of Economic Research and a member of TIME'S Board of Economists: "Halting such mergers was actually an important rationale for congressional support of the leasing law. If you now cut the leasing provisions, companies will find that there are strong tax reasons, rather than good economic reasons, for merging."

Congress may consider other measures to tax corporations more heavily and thus lower the budget deficit. These include putting a tax minimum on corporate earnings and limiting additional depreciation benefits.

Dole's threats, meanwhile, have already placed a cloud over leasing transactions. Laments Glenn Mackles, a leasing specialist with the accounting firm Touche Ross & Co.: "People are taking three steps back and waiting for the smoke to clear. The situation will continue until Congress gets its act together." Although the Senate Finance Committee and the House Ways and Means Committee, which write federal tax law, are only now beginning to study the issue, some reversal of last year's legislative openhandedness seems inevitable.

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