Obama Splits Republican Alliance With CEOs Favoring Tax Increase

Thursday, 20 Dec 2012 08:37 AM

 

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Even as President Barack Obama was being attacked in campaign commercials funded in part by America’s business elite, he was making plans to enlist corporate chiefs to help in his first post-election battle.

Within 36 hours of the Nov. 6 vote, White House aides returned from victory celebrations in Chicago and began calling business leaders urging them to press for a budget compromise, including Obama’s demand for higher tax rates on the wealthy.

Some 50 chief executive officers have since met with the president or his advisers, White House aides say, with many CEOs spurred by their own desire to rein in the deficit and remove the uncertainty looming over the economy. Among the visitors: Lloyd Blankfein of Goldman Sachs Group Inc., Robert Iger of Walt Disney Co. and Randall Stephenson of AT&T Inc.

The resulting support among executives for Obama’s tax stance has split the Republican business alliance, driving a wedge between CEOs urging compromise and the nation’s most prominent small-business group resisting.

The administration has “sicced big business on us,” said Representative Pete Sessions, a Texas Republican. Sessions, who will soon become chairman of the House Rules Committee, said pleas from owners and executives of smaller privately held companies to hold firm against tax increases have “completely outweighed” corporate lobbying.

Still, Republican House Speaker John Boehner has retreated in talks, offering a plan to raise tax rates on income over $1 million, rather than the $400,000 threshold Obama proposed in his latest bid. The House may vote Thursday on the measure.

Touching Nerve

Adding to the pressure, Obama administration CEO allies such as David Cote of Honeywell Inc., Jim McNerney Jr. of Boeing Co. and Robert Wolf of 32 Advisors LLC have recruited fellow executives to join in discussions with the White House and lobby Republicans in Congress, said people familiar with discussions.

One sign that the business leaders’ efforts have touched a nerve is a Dec. 14 letter by Representative Dave Camp, the Republican chairman of the House Ways and Means Committee, and Orrin Hatch, the top-ranking Republican on the Senate Finance Committee. They warned that any increase in tax rates would impede future efforts to overhaul corporate income taxes.

“The president’s latest gambit is clearly meant to divide the business community on the issue of tax reform,” they wrote to the Business Roundtable, a CEO group, and the National Federation of Independent Business, the largest small-business trade association.

Different Stakes

The small-business federation has maintained its opposition to a tax-rate increase, urging members to lobby congressional representatives against the Obama demand.

“We’ve made clear the impact that raising the top tax rates would have on flow-through businesses and job creation,” said Chris Whitcomb, tax counsel for the group.

Companies structured as S corporations, partnerships or sole proprietorships typically don’t pay the corporate tax of up to 35 percent. Instead, the small-business owners report profits on their individual tax returns.

A 2011 Treasury Department analysis found that between 29 percent and 32 percent of small-business income is subject to the top two tax rates. Of the taxpayers subject to the top two rates, 25 percent are small businesses and employers. Not all the businesses that pay taxes through their owners’ individual returns are small. They include partners in global law and accounting firms, oil pipeline companies and hedge funds.

CEO Support

Congress and the White House are seeking to head off more than $600 billion in tax increases and spending cuts scheduled to begin in January if no deal is reached. Obama has demanded a tax-rate increase on higher-earning Americans before he will agree to spending cuts to address long-term fiscal imbalances.

Chief executives from about 170 large companies signed a Dec. 11 letter urging a deal, saying it should include more revenue — including tax increases — and spending cuts. The Business Roundtable, which organized the letter, previously had favored extending tax cuts passed under President George W. Bush for all income levels.

The same day, CEOs of 18 builders including Doug Yearley of Toll Brothers Inc., the largest U.S. luxury home builder, released a letter also calling for a compromise agreement with higher taxes and spending cuts.

Business Roundtable President John Engler and U.S. Chamber of Commerce CEO Tom Donohue joined other industry group leaders Wednesday at the White House for a meeting with top administration officials.

Hardest Hit

Obama’s ability to bring around top executives on tax rates is striking, considering the clashes the president had with the business community during his fights over the overhaul of the healthcare industry and financial-market regulations.

Many of the CEOs would be among the hardest hit by higher tax rates because of their salaries. Cote’s total compensation last year was $37.8 million. McNerney’s was $23 million, according to data compiled by Bloomberg.

Some executives stressed that any willingness to accept higher rates was strictly tied to spending cuts, and they’ve brought that message to the White House.

Barry Sternlicht, chairman and CEO of Starwood Capital Group LLC, said he was invited by Marc Lasry of Avenue Capital to participate in a meeting with Valerie Jarrett, a senior Obama adviser who is spearheading the outreach, and a few advisers. Sternlicht said he decided it was worth attending to see if he could make a difference.

He said he advised the administration at the meeting that he opposed raising tax rates unless they “get serious about spending cuts, led by tackling entitlements” and unless new revenue “be earmarked to education reform and job creation and specifically to bolstering community colleges.”

‘Special Credibility’

While the White House is also enlisting traditional Democratic supporters such as mayors and unions to back its efforts, corporate CEOs are key to making the case for the economic benefits of a compromise, said Joel Johnson, a former adviser to President Bill Clinton.

CEOs “have special credibility with members of Congress,” said Johnson, now managing director of the Glover Park Group, a Washington-based strategic communications firm.

The White House has an eye on that selling power. Administration officials have made a point of asking chief executives to provide backing for any agreement forged with Boehner, arguing that a show of support will help tamp down opposition in Congress from more ideological members of both parties, said a person familiar with discussions.

Offering Encouragement

Arne Sorenson, CEO of Marriott International Inc. and a supporter of Republican Mitt Romney in the presidential campaign, said he has made phone calls to “folks on both sides” since attending a White House meeting to urge a compromise that includes both tax increases and spending cuts.

“We’re here to provide some encouragement to leaders from both parties so they understand there’s more support from the business community to do what’s uncomfortable,” Sorenson said.

The CEOs have been more forceful voices for compromise than the last time a partisan deadlock threatened economic disruption, when a standoff over raising the legal debt limit in 2011 brought the U.S. to the brink of default.

A former administration official involved in the debt talks said the 2010 Republican midterm election victory and uncertainty over Obama’s re-election prospects weakened the White House in getting business support then. Obama now has a fresh four-year election mandate.

‘Investment Pause’

The Obama team and corporate executives also learned lessons from the gridlock. In the aftermath of the debt-limit talks, the Conference Board’s Consumer Confidence index’s August 2011 reading plunged 14 points, its largest one-month drop since the near-collapse of financial markets in 2008. The index didn’t return to its July level until the end of the year.

The current standoff may again be weighing on consumers. The Thomson Reuters/University of Michigan consumer sentiment index showed its biggest drop in December in more than a year.

General Electric Co. CEO Jeffrey Immelt, who signed the Business Roundtable letter, told investors on Dec. 17 that uncertainty over the budget has contributed to an investment “pause” that is depressing fourth-quarter revenue for the Fairfield, Connecticut-based conglomerate.

Business leaders “have been more engaged” than in the debt-limit talks and administration outreach has been “much more intense,” said Obama adviser Jarrett.

Reaching Out

In addition to the White House meetings, the administration is maintaining contact with business leaders through conference calls several times a week, an administration official said. Treasury Secretary Timothy F. Geithner and National Economic Council Director Gene Sperling have been calling individual CEOs since the election, officials said.

Boeing’s McNerney and Honeywell’s Cote, whose defense- contracting firms would be especially hard hit by the automatic spending cuts, met this week with Jarrett and Sperling.

“The White House is trying to, and frankly doing a good job of, marketing their position,” Blankfein, Goldman Sachs’s CEO and chairman, said at a Dec. 12 conference in New York, according to the New York Times Dealbook. “They’re trying to recruit, and I say this in a positive way, trying to recruit people to their view.”

Several years have also passed since Obama fought with corporate America over healthcare and financial regulations.

“We’re in a different time now,” Jarrett said. “So I think there is an alignment of interests.”

© Copyright 2014 Bloomberg News. All rights reserved.

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