The Treasury Department is expected to propose slashing tax breaks heavily used by defense contractors, big construction firms and real estate investors as part of its effort to ensure that President Reagan's tax revision plan does not increase the federal budget deficit, government sources said Friday.
Last month, after the congressional Joint Tax Committee estimated that the White House tax proposal would reduce revenue by $25 billion over the next five years, Treasury Secretary James A. Baker III agreed to provide Congress with a list of tax changes to make the plan "revenue-neutral," raising just as much in revenues as the current tax code.
Going to Panel Next Week
The list, which was promised for Sept. 1, is expected to go to the House Ways and Means Committee next week, after the White House determines which provisions will be included.
Among the changes that Treasury officials have proposed to Baker, government sources said, are measures to restrict the use of the completed-contract method of accounting, used primarily by defense contractors and big construction firms, and to eliminate the installment sales method that is followed by many real estate firms.
The two proposals are expected to raise a large part of the $25 billion needed to eliminate any deficit in the White House package, which generally would reduce overall individual and corporate tax rates by slashing dozens of specific tax preferences.
Although details of the possible changes have not been made public, analysts suggested that the Treasury proposals are likely to have only a limited impact on the defense industry as long as eliminating the completed-contract provision is not made retroactive.
Not a Major Threat
"I don't view this as a major threat to the industry, unless they try to take away previous tax benefits," said Christopher Demisch, an aerospace industry analyst for First Boston Corp., a New York investment firm. "Many defense contractors have accumulated huge tax deferrals," but the use of future tax deferrals was narrowed in the 1982 tax bill.
The completed-contract method allows defense contractors, such as Los Angeles-based Northrop Corp. and Lockheed Corp. of Burbank, and big construction firms, such as Irvine-based Fluor Corp., to put off taxes on income from partial payments until after a project is completed.
Last year, for example, Northrop deferred $162.5 million in taxes using the completed-contract method, and Lockheed accumulated $256.9 million in tax deferrals from the same provision.
Northrop was not required to pay federal income taxes last year, and Lockheed paid $17.9 million, according to company annual reports.
The installment sales accounting method allows investors to postpone taxes on their profits by receiving payments in installments rather than all at once. The provision is used extensively in real estate transactions.
Another option under consideration by the Treasury, according to a report Friday in the Wall Street Journal that first disclosed some of the proposed changes, is to expand the Administration's proposal to "recapture" depreciation benefits given to corporations in previous years. But many congressional tax writers are opposed to the idea of taxing previous benefits, and they are more likely to reduce the impact of the recapture proposal than to increase it.
Some defense industry executives expressed fears that Congress might focus its attention on them because of reports from the labor-backed Citizens for Tax Justice showing that many leading defense firms have paid little or no federal income taxes over the last several years. They worry that construction firms will be permitted to retain the completed-contract tax benefit but that defense contractors will be forced to give it up.