ShareThisNevada Republican Sen. John Ensign is pushing legislation to help businesses weather the recession.
Ensign is trying to add a corporate tax suspension to the economic recovery package making its way through Congress. Senate Democratic leader Harry Reid has signaled an interest in the concept.
Ensign's legislation reflects Republican interest in increasing the tax component in the American Recovery and Reinvestment Act, the $800 billion package of tax cuts and public spending designed to rescue the economy. Tax cuts now account for less than half the package.
Economists agree that the government needs to approve a vast stimulus program to stem the economy's downward slide. But they disagree over the form of the program. Should the money be pumped into public works projects, creating new jobs, or spent giving tax breaks to help corporations?
The Ensign bill would allow companies that renegotiate their debt avoid taxes on the forgiven amount. For example, if a company persuaded a lender to reduce the company's debt from $100 million to $85 million, the $15 million in savings normally would be taxed as if it were income.
Ensign's bill would eliminate those taxes for two years.
"This temporary tax relief would provide businesses with the incentives they need to grow, hire employees and remain solvent," Ensign wrote in a posting last week at Forbes.com. "We know too many companies have too much debt, and our economy is immobilized until this problem is resolved."
Experts say a suspension of the tax would ripple across the economy -- getting toxic assets off company balance sheets and thawing the frozen credit markets of lenders.
"This has a cascading impact," said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which is backing the bill. "It tries to provide a little more cash to companies to get them straightened out."
The business community points to the similar tax break Congress approved last summer for homeowners who renegotiate their mortgages as an example.
But critics doubt that money companies save with the tax break would necessarily flow back into the economy in the form of job creation or retention.
Many economists prefer direct government spending on public works projects to build roads, schools or renewable energy programs, as well as the more individualized tax breaks offered in the package. The main tax break in the recovery bill would give working individuals a $500 credit and $1,000 for couples.
John Irons at the liberal Economic Policy Institute said money put directly into people's hands is more stimulating than corporate tax cuts because it will be spent "on everything from rent to the local McDonald's. That's going to get into the economy right away."
Struggling companies, he said, "need customers, they don't need tax breaks on their nonexistent profits."
Consumer advocacy groups argue that similar tax holidays are not being extended to individuals struggling under mountains of debt. When consumers negotiate down their debt with their credit card companies, they must pay taxes on the difference.
"For consumers who are choking on credit card debt, there is not a similar option," said Travis Plunkett, legislative director at Consumer Federation of America.
Ensign expects that congressional analysts will determine that it would cost the Treasury at least several billion dollars in lost tax revenue.
But he believes those numbers are skewed: Most companies will not renegotiate their debt without the tax break so Uncle Sam is not collecting taxes anyway, he said.
Ensign presented the bill several weeks ago to White House Chief of Staff Rahm Emanuel during a meeting on the Hill, and he may try to have it included during this week's Senate Finance Committee hearing on the recovery package.
Senate Democrats inserted a more modest version of his proposal in the draft recovery bill released Friday. It would maintain the tax, but allow companies to spread out the payment over four years. It costs $511 million.
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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