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Uncertainty About Tax-Reform Irks Business : Some Projects Stalled, Others Accelerated as Firms Guess Outcome

March 09, 1986|JANE SEABERRY | The Washington Post

WASHINGTON — Almost two years ago, a Platteville, Wis., businessman began doing what he thought were all the right things to prepare for the opening of his second McDonald's restaurant.

"I sat down with our CPA, talked about our advantages and disadvantages of expanding," said the businessman. A crucial consideration was whether the investment would be worth it in terms of the tax advantages.

The accountant said go ahead, but the weatherman refused to cooperate. The 1985 opening had to be postponed because of extraordinarily wet weather and when the faSt-food store finally opened recently, the businessman was not overjoyed.

If his restaurant had opened before the new year, the owner would have been assured of lucrative tax breaks that are slated to be eliminated retroactively as of Jan. 1 in the tax-overhaul plan now under consideration in Congress.

"It's not fair. If you do anything on a tax bill, it has to have an effective date somewhere in the future so people can plan accordingly," the businessman complained. "I'm not trying to say a tax bill is good or bad. It has to have an effective date and not penalize people who made commitments in 1984 and 1985."

Businesses Scramble

Uncertainty over the tax-overhaul debate in Congress is causing consternation from coast to coast as businesses scramble to postpone, cancel or hurry up investments to beat the threatened elimination of tax breaks.

The tax-revision plan was intended to encourage businesses to buy equipment, expand plants and make other capital commitments based not on tax decisions, but on the economics of the investment itself. Instead, the uncertainty about the tax legislation is causing businesses to make investment decisions driven largely by their tax implications.

There are at least three schools of thought on the impact of tax revision on companies. One is that businesses will cancel or postpone plans because they are not sure how tax revision will affect them. Another is that businesses will hurry and make all of their investments this year in hope that the effective dates will be moved back when the bill is finally passed. And finally, there is the feeling that tax revision won't pass, so business will go on as usual.

"For the most part, there's skepticism" that any bill will pass, said Delos Smith, associate economist for the Conference Board, a private, nonprofit research organization supported by business. "Is there really going to be a bill? There's uncertainty about Gramm-Rudman and everything going on, especially in the financial community and that's a community that hates uncertainty. That makes them very, very nervous."

Uncertainty over tax revision was "one of the factors which entered into business-spending plans in 1986 showing no growth in real terms," said Robert Ortner, the Commerce Department's chief economist. "Uncertainty is never a favorable factor for investment. . . . "

Hurrying Decisions

"If anything, the high probability that there will be a tax-revision bill this year is causing business to hurry up their business decisions so they can get in under the wire," said Jerry Jasinowski, chief economist for the National Assn. of Manufacturers. "Business investment in '86 could be higher."

Firms ranging from small and large manufacturers to real-estate developers are particularly concerned about these provisions of the tax bill passed by the House and pending in the Senate:

- Elimination of the investment tax credit, which subsidizes up to 10% of the cost of new equipment and machinery.

- Changes in depreciation, which will make it less lucrative to purchase equipment and real estate.

- Restrictions on industrial revenue bonds, which prohibit their use for financing many projects with non-governmental uses.

- Limits on the deductibility of interest.

- Creation of a comprehensive alternative minimum tax on corporations.

Most of these provisions have effective dates that would wipe out the old tax breaks retroactive to Jan. 1. Because the effective dates could still be changed, many business people said they aren't sure when their investments might be affected by the new law--if there is one.

In the real estate industry, many developers are said to be holding off on decisions because of threats to the depreciation write-offs and interest deductions that draw billions of dollars each year into multifamily housing, low-income projects and other types of real estate transactions. In real estate, tax breaks usually make the difference between profit and loss on investments and sometimes are the only income investors derive from projects.

Just about all of the evidence about businesses changing plans is anecdotal since no major business group or the government has studied how businesses are reacting. Many large companies said they anticipate no changes resulting from tax revision because their investments are so vast and planned so far in advance that they cannot be stopped.

Increased Investment

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