Small business deal makers had to choose between political loyalty to the Administration and attractive offers from Democrats. They made a split decision.
Business lobbyists, who normally have no trouble keeping the Republican good guys straight from the Democratic bad guys when taking sides on tax legislation, were thrown off balance early this summer by the generosity of the business tax cuts proposed by Chairman Dan Rostenkowski and the Democratic majority on the House Ways and Means Committee.
John Fitch, vice-president for government relations of the National Association of Wholesaler-Distributors, was still on the President's team as the House Ways and Means Committee and the Administration-backed Senate Finance Committee were polishing their respective tax bills in mid-July, but Fitch was nervous. "Are Republicants going to dump [their business tax cut] some place down the road for the sake of Kemp-Roth?" he worried.
At the same time, Lewis Shattuck, executive vice-president of the Smaller Business Association of New England, and the leaders of most of the 14 other regional, state, and metropolitan business groups that make up Small Business United, a lobbying coalition, had already switched sides."We had testified in favor of the President's package," said Shattuck, "but we 'unendorsed' it when it became clear that the Democratic measure was more beneficial for small business.
Political loyalties, lobbying alliances, and economic self-interest pulled business groups in different directions during the summer-long tax debate. Publicly, the National Federation of Independent Business refused to break ranks with The Business Roundtable, the National Association of Manufacturers, and other members of the bigsmall coalition that had been pushing hardest for Reagan's 10-5-3 depreciation plan and 5-10-10 personal tax cut. At the same time, however, the NFIB was working to get a cash-accounting provision into either the President's or the Democrats' bill.
Privately, the U.S. Chamber of Commerce conceded the possibility of compromise between Democrats and the Administration, but its public stance remained stridently pro-Reagan. "Savvy" opponents of the President's program are trying to "woo small business" and fragment the business community, the Chamber said in one of its newspapers. "But," it went on, "none of the sweeteners Reagan foes have added to their tax-reduction bill is as favorable to small business as the President's overall proposal."
Comparing the two packages for their effects on small business was complicated by the lengthy phase-in schedules of each and by the fact that small businesses come in different forms. You could make a case for either bill by picking an example to yield just the result you wanted.
Established wholesalers, for example, whose principal capital assets are their warehouses, would fare better under the Reagan package. For commercial structures the President's proposal offered 15-year depreciation using the 200% declining balance method as against the Democrats' 150% declining balance formula. But the NAW's Fitch readily pointed out that the Democrats' first-year expensing would be better for firms who buy machinery and equipment.
The Chamber of Commerce argued that the President's personal tax cut proposal would help the 90% of all businesses that are not incorporated. SBANE's Shattuck, however, noted that the Democratic proposal held out more relief for small incorporated firms in the service industries where wages and salaries, not capital assets, are the main cost of doing business.
In fact, the Democrats had gone further than Reagan in addressing the tax issues affecting the greatest number of smaller companies. Where the President's tax bill simplified and accelerated depreciation schedules, the Democrats' bill proposed to eliminate depreciation schedules altogether for plant and equipment by letting business write off, or expense, the full cost of those assets in the year of purchase. Where the White House promised only to consider cutting corporate tax rates in a later tax bill, the Democrats' proposal included corporate rate reductions phased in over several years. Democrats also raised from $100,000 to $200,000 the income level at which the highest corporate rate would apply. Where Republicans proposed to permit firms to expense at first $5,000 and later $10,000 in capital acquisition costs during the phase-in of their 10-5-3 depreciation plan, Democrats offered immediate expensing of $25,000 annually in capital expenditures.
Ways and Means Committee Democrats were doing just what the Chamber of Commerce accused them of doing: wooing small business in an effort to fragment support for the Reagan program. "I hope you'll consider not just the specifics of the Ways and Means proposal, but the depth of their commitment to the private enterprise system," pleaded Chamber vice-president Hilton Davis to a breakfast gathering of corporate legislative affairs executives. Business should stick with the President because the Ways and Means Committee "can't deliver," argued White House special assistant Wayne Valis later that day in a telephone interview.
Economic concerns, such as which plan would best get America moving again, were clearly out of the picture at this point.
"It's a political hardball game now," observed Fitch, as Congress came down to its August 1 deadline for a decision, "to decide whether the Administration or the Democrats will win."