Talk of Ryan-Obama Tax Deal Roils Republican-Business Alliance

The potential deal raises fears that small businesses will be left out.

The “job creators” are fighting back on tax policy—against their Republican allies.

Small-business groups that have been among the Republicans’ loyal backers are warning their friends in Congress against cutting a deal with President Barack Obama on lowering corporate taxes.

The prospect of a fractured business community makes it even harder to see a path to major changes to the U.S. tax code this year.

 The hostility towards an effort spearheaded by top Republican leaders to reduce the corporate tax rate is particularly unusual because it comes from groups such as the National Federation of Independent Business, which tend to skew their political giving overwhelmingly toward Republican candidates and committees. Organizations now trying to stymie a potential deal between Obama and Representative Paul Ryan, a Republican who chairs the tax-writing Ways and Means Committee, gave the president’s party $1 for every $14 they gave Republican candidates.

They represent the building contractors, wholesalers and restaurant owners who are active in local Republican circles and often have the ear of their hometown representatives.

“The politics of this are fraught, I think, and that’s what we’ve been trying to convey,” said Liam Donovan, director of legislative and political affairs at Associated Builders and Contractors, which gave $1.6 million in contributions in the 2014 cycle, none to Democrats, according to the Center for Responsive Politics. “Given the option, this or nothing, nothing is better for our members.”

The simmering conflict spilled into the open in a series of testy letters last month between the groups and the top Republican tax writers, followed by private meetings.

Cutting rate

Leaders of small-business groups say they object to any deal that would help big companies by cutting the corporate tax rate without lowering the individual income tax rates that apply to millions of small businesses across the country.

That’s exactly the kind of deal that Ryan and Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, have been considering. They’re looking for a long-shot bipartisan agreement on lowering the corporate tax rate, curtailing targeted breaks and revamping how the U.S. taxes multinational companies. Small businesses and others outside the corporate income tax would receive help with targeted breaks but not a rate cut.

“We would prefer them to do it all together or not at all,” said Elizabeth Taylor, vice president for federal government relations at the International Franchise Association. “Or just small business. Do small business first if you’re going to do something first.”

Ryan has said he won’t leave small businesses behind in tax-law changes, and he hasn’t done anything yet to sever the decades-long link between small businesses and Republicans on tax policy. Still, he’s been testing it.

Limited time

Ryan has been coy and noncommittal about exactly how he would protect small businesses without cutting rates, and he doesn’t have much time to figure it out. Ryan has said he wants to make major progress within the next few months before presidential-campaign politics overwhelm Congress.

The rift between top Republicans and their usual allies in Washington’s world of small business trade groups stems from a disagreement on tactics, not policy. They all want to cut marginal tax rates for corporations and individuals.

The individual rates are what matter to small businesses and some large ones such as law firms and private equity firms, because the owners of S corporations and partnerships pay their business taxes on their individual tax returns. The companies are known as “pass-throughs,” because the income flows through them to the individual returns.

Bush tax cuts

When Republicans tried in late 2012 to extend all of George W. Bush’s tax cuts–with a top rate of 35 percent–they relied heavily on small business groups, which represent enterprises like restaurants and hardware stores that would be hurt by higher marginal rates.

Obama prevailed, and the top rate returned to 39.6 percent, a level that Democrats won’t give up.

Ryan’s taking a get-what-you-can-now approach. He sees Obama’s refusal to budge on individual rates as an opening for a two-stage approach to the biggest tax code changes in 30 years. The idea: Take the first bite now on business taxes and do the rest after Obama leaves office.

“He wants to do what’s achievable and we want to do what’s good for our members, and they’re not necessarily in line at this point,” Donovan said. “You can imagine the sort of united front of populists on both sides looking at a corporate rate cut financed by small businesses as something that would draw cries.”

Representative Vern Buchanan, a Florida Republican and a member of the Ways and Means Committee, said the current debate is a chance to have tax ideas vetted by interest groups and others.

Push for parity

“I’m going to continue to push to try to get some parity,” he said. “The thought is this year, maybe all we can get done is the corporate side. And in ’17 the dynamics might change and there might be a lot more opportunities.”

For the small business groups, no deal is better than the one Ryan and others are contemplating. The prospect of a top individual rate of 39.6 percent along with a corporate rate of 25 percent or 28 percent would give corporations an edge, they say. Corporate income does, however, face a second layer of taxation, on capital gains and dividends.

Administration officials have been talking about expanding cash accounting and businesses’ ability to write off capital expenses as ways to placate small businesses. Donovan said he didn’t think lawmakers would be able to find a solution– other than a rate cut–that would work.

No retribution?

“The imperative here is avoiding it being introduced, and that’s what we’re focused on right now,” Donovan said.

Ryan and Hatch wrote to business groups last month, asking for ideas and insisting that they have told Obama that pass-throughs and small businesses must be helped in any deal.

Some groups have responded by saying there are some solutions that would work for them, said a Ryan aide who spoke on condition of anonymity to discuss the private meetings.

Jeff Shoaf, senior executive director of government relations at the Associated General Contractors, said they haven’t planned what they would do if Ryan and Hatch manage to reach a deal with Obama.

“I don’t know exactly what Ryan and Hatch will come up with in the end,” he said. “I can’t see a mixture that starts with the sentence ’Hey, support us now because in a couple years we’ll get individual rate reduction for everybody else,’ being a good sales pitch.”

One thing that probably won’t change is a donation pattern from the groups that favors Republican lawmakers.

“We’re still going to be supporting the members that support our positions,” Taylor said. “Now, that could be reevaluated at any time. But for the most part, we’re not a single-issue organization.”

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