Construction industry organizations are finding fault with the Obama administration’s proposal to overhaul the corporate tax system, saying it does nothing to help many small businesses, which are prevalent in the design and construction industry.
The proposal, which administration officials released on Feb. 22, would trim the top corporate rate to 28% from 35% and make permanent tax credits for renewable energy and research.
In a call with reporters, Treasury Secretary Timothy Geithner said President Obama's plan would simplify the tax code and end dozens of tax incentives and subsidies, including breaks for oil and gas production.
Currently, the U.S. has one of the highest corporate tax rates among developed countries. That puts U.S. businesses at a competitive disadvantage, Geithner said.
Some critics say the administration's proposal does not offer assistance for small businesses, which often are structured as sole-proprietorships, partnerships or "S-corporations" and are taxed as individuals, rather than as corporations. Such non-corporate entities are common in architecture, engineering and construction.
Liam Donovan, Associated Builders and Contractors director of legislative affairs, says that because the Obama proposal would reduce the corporate rate but retain the current rate for small businesses at its current level, it would put those small firms at a disadvantage.
Moreover, the proposal eliminates many deductions that small businesses currently use, including 100% bonus depreciation for equipment purchases. "As an attempt at business tax reform, [the proposal] fails," Donovan says. By focusing on corporations— rather than on the “the vast majority” of U.S. businesses, which often are structured as S-corporations or similar entities—“the proposal doesn’t do much for the majority of the business landscape,” he says.
The administration's plan would effectively reduce the top rate for manufacturing companies even more, to 25%, by changing a current deduction. However, it remains unclear whether that would help construction firms because the president’s plan is short on details, Donovan adds.
David Mendes, American Subcontractors Association senior director of communications and education, says the devil is in the details, adding that ASA is taking a wait-and-see approach. It is now reviewing the proposal to determine whether there would be any benefits for its members. He notes the corporate rates for construction firms are currently higher than for any other group. “The question is not whether there should be a corporate tax rate cut, but how it should be done,” Mendes says.
Geithner acknowledged that the debate over how to reform the nation’s tax system could be "politically contentious." The president’s proposal is a “starting point,” and “a long-term growth strategy for the U.S. requires tax reform,” he added.
House Ways and Means Committee Chairman Dave Camp (R-Mich.) said, “I am pleased to see the administration’s proposal adopts many of the same principles of reform that House Republicans have championed, such as lowering rates by broadening the tax base and closing loopholes." However, Camp also said, “[There] are some policy differences that I look forward to discussing with the administration and my House and Senate counterparts."