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Studios and Stations Praise Tax Plan, But Worry of Losing Key Deduction

Studios and broadcast stations praised a Trump administration and GOP tax reform plan that would sharply lower the corporate tax rate — from 35% to 20% — as well as other incentives.

Yet that tax reform framework, released on Wednesday, is vague about just how the reduction in the rate will be paid for, other than to say that numerous deductions “will be repealed or restricted.” Chief of concern among major media companies is that a tax reform package would eliminate the immediate deduction of advertising costs.

Studios reap tax gains by being able to deduct their marketing spending, while broadcasters see the break as a way to boost ad buying. Whether that deduction survives will be left up to congressional committees, who will be tasked with hashing out which deductions are retained and which are dropped. That means that Capitol Hill in the coming months will be the scene of fierce lobbying, from all industry sectors.

Gordon Smith, the president of the National Association of Broadcasters, said that the organization supported the proposal, but that they “will continue to make the case that the tax reform goals of simplicity and economic growth will be undermined by any limitation to the full and immediate deductibility of business advertising costs.”

Still, media companies expressed support for the broad outlines of the proposal, even as Democrats bashed the plan as a giveaway to the rich.

“Meaningful tax reform, as reflected in this framework, will promote our nation’s global competitiveness and encourage more domestic production and jobs in American industries, including film and television,” said Charles Rivkin, the CEO of the MPAA, in a statement.

Most major media companies pay high effective tax rates, closer to the 35% statutory rate than other companies in other sectors. General Electric, for instance, went through years when it paid no federal corporate taxes, while Apple famously used Ireland’s low corporate tax rates to park its profits overseas. By contrast, the Walt Disney Co. paid an effective rate of 32.3% and Comcast 32.2% in the first quarter, according to Factset.

Twenty-First Century Fox said that they were “encouraged to see progress being made toward meaningful tax code reforms that would help grow the U.S. economy and boost the ability of American businesses, like ours, to invest here at home and compete in the global marketplace.” According to Factset, the company paid an effective rate of 29.6% in the first quarter.

The tax framework also calls for:

Capital expensing: Businesses will be able to immediately expense the cost of capital investments for at least five years. The plan does not specify whether these expenditures will include motion picture and TV production, but there is some expectation among studios that capital investments will be broadly defined to include it.

Tax “holiday” on overseas profits: The plan tries to end the “perverse incentive” companies have to keep foreign profits in other countries. The framework calls for allowing companies to “repatriate” those profits they have accumulated at a lower rate. Foreign earnings held in illiquid assets will be taxed at a lower rate than cash earnings, although the rates are not specified.

The plan also tries to prevent companies from shifting their profits to overseas tax havens, by establishing a tax at a reduced rate for those foreign profits of major companies.

Twenty-five percent rate for small businesses, family companies, and partnerships. The rate for smaller entities, like LLCs and partnerships, would be a maximum of 25%. Democrats have attacked this proposal, saying that it would allow high income earners to avoid a higher personal rate by shifting it to business income. Yet the tax proposal says that the congressional committees will adopt measures to prevent that from happening.

When it comes to individuals, the framework calls for consolidating the current seven tax brackets to three — 35%, 25%, and 12%. Those in the current 10% bracket will get a larger standard deduction and child tax credit.

At the other end of the scale, the highest income earners would see a reduction from the 39.6% rate, but the framework raises the possibility of establishing an additional top rate. It also does away with the estate tax, which it labels the “death tax.”

The plan preserves popular deductions for home mortgage interest and charitable contributions, but does away with many other individual deductions, and there is speculation that the plan ultimately will eliminate deductions for state and local income taxes.

Senate Minority Leader Chuck Schumer blasted the plan as “little more than an across-the-board tax cut for America’s millionaires and billionaires.” When it came to the corporate rate, he said that has proven to be unpopular, and predicted that Republicans would run into the same problems in pursuing this tax reform plan that they did with their attempts to repeal and replace Obamacare.

Kevin Brady (R-Texas), the chairman of the House Ways and Means Committee, said that the proposal would “bring more jobs, fairer taxes, and bigger paychecks.”

Now comes the hard part: The details, and how to pay for it.

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