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Tax Reform Fight May Boost K Street’s Profits

President Barack Obama’s desire to streamline the cluttered tax code will spark a lobbying frenzy next year that could pit big business and other interests against each other as they clash over what deductions should be pruned or preserved.

Just as health care and financial regulatory reform were a boon to K Street in the past two years, a protracted effort to revamp the tax code could easily keep lobbyists fiscally flush in the 112th Congress.

“It will be the source of great focus, attention and effort on K Street,” said David Hoppe, president of Quinn Gillespie & Associates. Hoppe added that he has already been fielding questions from current and prospective clients about a tax overhaul.

While the president has said he wants to lower the rates and do away with many of the deductions, credits and loopholes,  he has not fleshed out how he intends to accomplish such a simplification. The Joint Committee on Taxation lists 18 pages of these deductions ranging from widely used provisions for home mortgages and charitable giving to more targeted incentives such as those for expensing the costs of raising dairy and breeding cattle to deduction for certain film and television production costs.

Roberton Williams, a senior fellow at the Tax Policy Center, said that even though some of the provisions may benefit only a small segment of the population, the tax advantages are substantial to those affected groups. If their tax deductions are threatened, those groups will turn to K Street for help, he said.

“There will be a lot of folks marching on the Hill,” he said. “But it won’t be citizens with pitchforks.”

Many business associations have endorsed the concept of tax simplification, but they are struggling to find consensus on the details.

“This is not going to be an easy debate,” said Martin Regalia, the senior vice president for economic and tax policy at the U.S. Chamber of Commerce. “If you were going to put everyone in a room and hash this out, you better send out for a lot of pizzas.”

Regalia said the chamber’s subcommittee on tax reform has been meeting more often since the president’s commission on deficit reduction came out in November with a recommendation to overhaul the tax code. But Regalia suggested it was unlikely that the chamber would issue its own proposals for a tax overhaul anytime soon. He said that within the business community, there will be “internecine discussions if not warfare” on how to proceed with tax reform.

Boon for Downtown Shops

The difficulty for broad-based trade groups in rallying behind a unified position on tax reform provides an opportunity for individual lobbying shops. That’s because contract firms can plead an individual company’s case on Capitol Hill,  free from the murky politics of an association.

“There will be a lot of business for contract lobbyists who represent individual businesses who want to protect their individual write-offs,” said Jade West, senior vice president for government relations for the National Association of Wholesaler-Distributors.

West said it would be unlikely that the business community will have one voice on tax reform.

“It would be out of line, presumptuous and inaccurate for someone to speak for the business community,” she said. “Nobody is lining up on one side or the other yet.”

Take, for example, the issue of research-and-development tax credits, whose extension is included in the tax bill under debate in Congress.

While high-tech and manufacturing operations have heavily lobbied for the tax incentives, West said, “my guys don’t care about the R&D credit.”

Dorothy Coleman, the vice president for tax and domestic economic policy at the National Association of Manufacturers, said the tax code should be restructured to provide lower corporate rates to help make U.S. companies more competitive internationally. But she said NAM members also want any overhaul to include the R&D tax credit.

Coleman acknowledged the difficulty in revamping the code.

“If it were easy to do, it would have been done a long time ago,” she said.

‘Getting Royally Hosed’

Ken Kies, a tax specialist and managing director of the Federal Policy Group, said that even if Congress approves a revenue-neutral tax reform plan, few interest groups will walk away satisfied.

“The losers are all convinced they are getting royally hosed, and the winners don’t step up and thank you because they are nervous,” he said.

The experience of the 1986 tax reform law has made many parties wary of such deals, Kies said. He added that while the 1986 law reduced rates and eliminated many deductions within seven years, many of the rates crept back up. Over time, lawmakers also added more deductions.

As a result, “people are going to be very reluctant to give up deductions for lower rates,” Kies said.

He also said it will be difficult for Obama to push tax reform when he is running for re-election because of the difficult choices to be made that will alienate various interest groups. He said that President Ronald Reagan didn’t seriously begin promoting the tax overhaul until the end of 1984, after he was re-elected.

Oddly, if Obama decides to take up tax simplification, he could find himself allied with tea party activists who were among his most vocal critics in the recent midterm elections. While tea party members emphasized their opposition to what they perceived as Obama’s big-government health care and stimulus plans during the campaign, many are proponents of tax reform.

“There’s nobody but lobbyists in Washington who would defend the current tax code,” said Max Pappas, vice president of public policy at tea-party-aligned FreedomWorks.

The leader of FreedomWorks, former House Majority Leader Dick Armey (R-Texas), has been a longtime proponent of the flat tax, which would eliminate deductions in the code.

If Obama proposes a revenue-neutral overhaul tax plan, he may find new friends in the tea party movement, Pappas said.

“I think there is some hope there if he is sincere about fundamental tax reform,” he said.

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