What Will Be in the President’s Budget Package : Businesses Hope to Make Gains in Several Key Areas

WASHINGTON —  Business executives and investors are anxiously awaiting President Bush’s election-year budget proposal, hoping that it will be replete with tax breaks and other goodies designed to help boost the economy and get voters smiling again.

The budget, to be previewed Tuesday in the State of the Union address and unveiled Wednesday, will set the stage for a months-long political drama. The denouement comes with a White House signing of a document for which both parties will try to claim partial credit.

Typically, a Republican President’s budget would be greeted with disdain by a Democratic Congress. But with the backdrop of recession and a presidential election, there is a growing consensus that the 1993 budget will contain major tax provisions that will overall aid business and industry.

“Both parties are talking a lot about doing something for business,” says Rachelle Bernstein of the Washington office of Arthur Andersen & Co., a major accounting firm.

While the details are still being worked out, broad outlines of major policy initiatives have surfaced in Washington in recent days. Administration officials, business lobbyists and others say these business-related issues are likely to emerge from the Bush budget:

* A determined White House push for a capital gains tax cut. The President will argue forcefully that investment will be promoted and jobs created by trimming taxes on profits from the sale of stocks, bonds, real estate and other assets.

* A temporary speed-up in tax writeoffs for business equipment. The faster depreciation is aimed at spurring immediate purchases of new equipment and machinery.

* A boost for the beleaguered real estate industry, particularly the overbuilt commercial sector, in the form of a tax break for developers, brokers and builders. Those who spend more than half their time and get more than half their income from real estate would be allowed to take full deductions for their losses on real estate investments.

* In another real estate measure. the President will propose a tax credit--at least $2,000 and perhaps as much as $5,000--for first-time home buyers. It is hoped that this will spur housing demand and construction.

* The Administration will propose rules liberalizing Individual Retirement Accounts, encouraging more Americans to open tax-free accounts. This could help banks, which have suffered the loss of billions of dollars in deposits because of low interest rates, and other sellers of savings products.

* A 90-day freeze on the imposition of new federal regulations on business. The White House would use the time to review new rules ready to be imposed by the executive branch and discard those considered to be financially onerous for business in a difficult economic climate.

Of course, not all the budget proposals will be beneficial to business interests.

The defense industry, heavily represented in California, is resigned to the prospects of significant reductions. The President will offer a slimmed-down Pentagon spending plan, and the Democratic Congress will try to make even deeper cuts.

Competition will be intense for the use of the post-Cold War “peace dividend,” with the White House and Congress disputing whether the savings should be used to expand domestic spending or to reduce the budget deficit.

Then there is the complex health care issue. While business is concerned with the steady increase in health care benefit costs and growing numbers of uninsured workers, it is also concerned with many proposals to solve these problems.

The President is likely to propose limiting the deductibility of health benefits for some upper-income workers. Businesses have traditionally opposed any effort to tinker with benefits, regarding it as the “camel’s nose under the tent leading to greater government interference later,” says Ellen Goldstein, a spokeswoman for the Assn. of Private Pension and Welfare Plans, which represents firms with extensive benefit programs.

The proposal would be a disappointment for larger firms and some of their workers, but could easily be offset politically by the prospect of bigger tax breaks for small businesses and the self-employed to buy health insurance. The Administration also will propose measures to make it easier for small firms to band together to bargain for low-priced health insurance.

Some segments of the health-care industry expect to benefit from the Administration proposals, notably insurers hoping to sell policies to people and firms now lacking coverage. Health maintenance organizations, which provide medical services for groups at a monthly rate fixed in advance, also hope they could gain customers as the Administration tries to encourage cost-saving approaches to health care.

Despite these problem areas, the business community largely is upbeat about getting significant help from Washington this year. This is influenced by the dire state of the economy and the need of both parties to make friends and influence interests in an election year.

The President has talked over and over about the need for a capital gains tax cut, an article of Republican faith. Democrats always dismissed it as a sop to the rich. This time, however, many Democrats are listening to the appeals of worried business executives troubled about the economy. And they may craft their own version.

“There will obviously be a broad-based capital gains proposal” in the Bush budget, says Ed Hatcher, director of Congressional relations for the American Electronics Assn.

“We won’t oppose what they are doing--our efforts will be complementary,” says Hatcher, who is busy enrolling bipartisan support for a narrow measure to make tax-free half the profits for those who buy new issues of corporate stock and hold the shares for five years. The high-tech community, ranging from computer-makers to companies involved in developing gene therapies for cancer treatment, is aggressively promoting this idea on Capital Hill, where the campaign has enrolled liberals such as Rep. Robert Matsui (D-Sacramento) and conservatives such as Rep. Hank Brown (R-Colo).

For the first time, a capital gains tax cut appears to be generally supported by both Democrats and Republicans, says Benson Goldstein, manager of tax policy for the U.S. Chamber of Commerce. “They will argue how to define it, but in the end they will do something,” he says.

“The odds are extremely high there will definitely be a capital-gains tax cut,” agrees Mark Bloomfield, president of the American Council for Capital Formation, which traditionally represents big, heavy-industry firms interested in lower tax rates.

“The question is not if but when the capital gains initiative will become law,” he says.

The Democrats might try to trump the Administration by offering business a further fillip in the form of a special investment tax credit, promoted as an anti-recession tool, Bloomfield suggests.

But the White House fears this type of tax credit could be too costly, cutting deeply into revenues at a time of huge federal budget deficits, according to Administration officials. Instead, the President is likely to ask for a more modest incentive for business spending--an acceleration in the depreciation schedule used by corporations. This would allow companies to write off the cost of equipment over several years through federal tax deductions. The White House plan is expected to ask Congress to allow firms to take a bigger deduction in the first year, according to knowledgeable sources.

The proposals for a capital gains tax cut and faster writeoffs for equipment are broad-based life-lines to business, struggling with hard times. But the Administration also is developing special medicines for some grievously wounded industries.

“We’ve just got to do something for real estate,” a high-ranking Treasury official said recently.

Office vacancy rates are 20% or more in many major metropolitan areas, and federal regulators are selling into an already depressed market billions of dollars worth of properties from failed banks and savings and loan associations.

To help stabilize prices, the Administration wants to allow people active in the real estate business to take tax deductions for losses on their real estate investments, and apply the losses against other income to reduce their overall tax bill. The 1986 tax act sharply limited the deductions for these passive losses.

These new deductions, if approved by Congress, could raise the price of distressed real estate by as much as 5% to 7%, estimates Stephen Driesler, senior vice president for government affairs at the National Assn. of Realtors.

The tax savings would make properties more financially attractive. “It may mean the difference in whether a building sells at a profit or goes into foreclosure at a big loss,” he says.

Prospects are good for easy Congressional approval of the Bush Administration’s special real estate tax deduction. Jeffrey DeBoer, general counsel for the National Realty Committee, a group composed of builders, developers and other real estate interests, notes a bill providing the passive loss provision has already enlisted backing from more than 300 members of the House and more than 40 Senators.

Real estate’s second boost from the Administration will be a call for a tax credit for first-time home buyers, a sales promotion technique that hasn’t been used since 1975. A tax credit of $2,000 to $5,000 would boost sales and new home building.

The proposal comes after one of the industry’s worst years ever. Housing starts plunged last year to the lowest level since World War II. In addition, the home ownership rate has been declining among Americans aged 25 to 34, the period when most people traditionally buy their first home.

Realtors welcome the Administration plan, but they want to take it a step further. “The biggest single barrier is that people don’t have the cash for the down payment and the closing costs,” says Driesler of the realtors group.

The tax credit could be as much as a year away when the federal return is filed, Driesler noted. His group is trying to figure out a plan under which a person could get the money up front--perhaps from a bank or savings and loan by signing over the credit in return for cash now.

The Bush budget also is likely to have some help for financial institutions. Specifically, banks and S&Ls; support an Administration proposal to promote savings through new variations of the tax-free Individual Retirement Accounts.

“Bankers want a chance to catch up with some of the money” that is now flowing into tax-deferred savings bonds and annuities, according to Henry Ruempler, director of tax and accounting policy for the American Bankers Assn. conference.

Currently, funds can be deposited tax-free in an IRA, with the account holder paying taxes when the money is withdrawn. The Administration is considering a new plan to stimulate savings with a different type of IRA. There would be no deduction for the current deposit, but the earnings on the account would be tax-free at the time of withdrawal. This could appeal to comparatively affluent Americans with incomes too high to qualify under current IRA rules.

Another proposal generally supported by business is the expected three-month moratorium on new federal regulations. The Administration proposal is part of a broad effort to revive the economy by reducing the burden on federal regulation on business.

It is difficult to determine how much the moratorium could save business. The areas most likely to be affected are environmental protection, energy, transportation, exports, communications, biotechnology and finance.