The Senate Finance Committee`s sweeping new tax bill is winning praise from many businessmen, who applaud its lower tax rates and the prospect that consumers may have more to spend.
But several major industries fear they would be hit with substantially bigger tax bills. These include such capital-intensive businesses as steel and utilities.
Meanwhile, the real estate industry has issued dire warnings about potential rent increases as a result of a sharp drop in construction activity if the bill becomes law. Some venture capitalists say funding for new companies would suffer.
As tax experts scramble to sort out the effects of the bill, there is little disagreement that the plan would benefit those industries now paying the highest rates, such as service companies and retailers. Many retail stocks have surged in the last few days also because of the bill`s bullish implications for consumption, said John Landschulz, an analyst with Mesirow & Co. in Chicago.
”I think, in total, this is a good bill for tax reform,” Roger D. Smith, chairman of General Motors Corp., said at a meeting of the prestigious Business Council in Hot Springs, Va.
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On the other hand, ”A lot of people in the Midwest Rust Belt will be hurt, especially capital-intensive companies who make a lot of use of investment tax credits and accelerated depreciation of equipment and facilities,” said John D. Mabie, president of the venture capital firm Mid-Continent Capital Inc.
”It`s our understanding that the legislation would negatively affect the investment of capital in U.S. manufacturing industries, including steel,”
said Frank W. Luerssen, chairman of Inland Steel Industries Inc. ”It will therefore have an unfavorable impact on U.S. competitiveness as well as on the economy.”
The bill is ”a multiple assault on capital formation that contains all the wrong remedies for what ails this country,” said Robert A. Judelson, first vice chairman of Skokie-based Balcor Co., one of the nation`s largest real estate syndication and investment companies.
Still, experts say the final tax law may look much different than the Senate bill. ”It`s not law yet, and, in my opinion, it`s a long way from it,” said Thomas Bloch, president of tax operations for H&R Block Inc.
To that end, many corporate lobbyists will be working overtime to push amendments on the Senate floor. Particularly visible will be the National Association of Realtors, which will have 7,000 real estate brokers in Washington for the next few days for a midyear conference.
Much uncertainty remains about the provisions of the bill and its impact on different businesses. ”This is a bill which, when it is written, will be the size of a telephone directory,” said Stephan Small, director of congressional relations for the Securities Industry Association. ”It`s going to take us longer than 72 hours to figure out on balance whether it`s good or bad.”
The basic provisions include a reduction in the top corporate tax rate to 33 percent from 46 percent and a drop in the maximum individual tax rate to 27 percent from 50 percent. However, the bill would eliminate many business tax breaks, including the investment tax credit, and impose a minimum tax of 20 percent.
New depreciation schedules would treat investments in machinery and equipment more favorably, but there would be longer depreciation periods for real estate.
Capital gains would no longer be granted special treatment, except for gains on the sale of a principal residence. Now gains on other assets held for more than six months are taxed at a top rate of 20 percent, compared with the 50 percent rate on ordinary income; under the Senate panel`s bill, such gains would be taxed at the 27 percent rate applicable to other income.
The bill is expected to raise business taxes by $100 billion over five years, compared with an increase of $140 billion under a plan passed earlier by the House.
Conflicting effects of the bill`s various provisions have led to considerable uncertainty about its overall impact. The securities industry, for example, has traditionally been a staunch defender of lower capital-gains rates to encourage investment.
Although the industry will probably still press for some kind of favored capital gains treatment, ”Certainly the reduction in (the top ordinary income) rate to 27 percent goes a long way toward easing the pain” of eliminating the capital gains break, said Steven Campbell, manager of taxes and administration at William Blair & Co. in Chicago.
And restrictions on other tax shelters could boost sales of municipal bonds. ”If the bill passes in its present form, municipal bonds may be the only legitimate shelter left,” said John Sebastian, vice president at Clayton Brown & Co., a Chicago-based municipal bond firm.
The mutual fund industry has mounted a strong lobbying campaign to defeat the bill`s provisions on individual retirement accounts. Under the plan, contributions to IRAs by workers covered by company pension plans would no longer be deductible, although taxes would continue to be deferred on interest earned.
”We feel, basically, that you`ll see the IRA program die out, if it goes through like this,” said a spokeswoman for the Investment Company Institute, a trade group for the mutual fund industry.
But banks are ”generally feeling very good about the bill,” said a spokesman for the American Bankers Association. Sources said many bankers don`t want to rock the boat, because the bill retains important deductions for loan loss reserves and for interest paid to finance municipal bond investments.
The real estate industry would be hurt by the extended depreciation schedules and the loss of favorable tax treatment for sheltered partnerships. ”This is a tax meltdown as far as housing is concerned,” Kent W. Colton, a National Association of Home Builders executive vice president, said in a statement last week.
A spokesman for the builders said construction of rental housing could drop as much as 350,000 units, or more than 50 percent, the first year after such a plan is enacted. He said average apartment rents could rise 20 percent more over a five-year period than they otherwise would have.
Electric utility bills might rise over time, because utilities building nuclear power plants wouldn`t be able to depreciate them as quickly, said Lowell Klosky, a director of Edison Electric Institute, an industry trade group.
The industry might also face higher borrowing costs when building coal-fired power plants, because the Senate bill would wipe out the tax exemption making pollution-control bonds an attractive investment, he said.
Tax preparers might see their business dwindle if new legislation significantly simplifies the tax system. However, H&R Block`s Bloch isn`t worried.
”My personal feeling is that this plan does not substantially simplify our tax system, and it wouldn`t have a major impact on the demand for tax-preparation help,” Bloch said.
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”This will make our pocketbooks fatter, which is not right,” said Herbert P. Lamee, regional tax director for Ernst & Whinney. The very issue of change, not necessarily simplicity or complexity, is what makes people seek tax help,” he said.