Investors and corporate executives have had an entertaining show the last eight years--both on Wall Street and on Pennsylvania Avenue. The United States racked up unprecedented economic growth, as a volatile stock market weathered crisis after crisis and still managed to stay stratospheric, and as broad-based prosperity revived once-forlorn downtowns from New England to the Sunbelt. Meanwhile, the Clinton- Gore Administration has endured the loss of Congress to the Republicans in 1994 and somehow managed to work with its bitter partisan enemies to balance the budget, reform welfare, cut the capital-gains tax, and expand free trade--all while fighting like caged tigers over the President's impeachment.
With a few notable exceptions, the vast majority of companies have fared rather well through the capital chaos, making the possibility of change wrought by this fall's election campaign a matter of some importance and risk for CFOs.
There have been elections in which major-party candidates' attitudes toward issues of fundamental importance to corporations, such as trade or monetary policy, helped set the agenda. This campaign will not be one of them. In 2000, issues likely to grab the most headlines--Social Security reform, for example- -have more to do with personal finance than corporate finance.
Nonetheless, significant business issues, from Internet taxation to tort reform, will come into play as Al Gore vies with George W. Bush to become the nation's 43rd President. To a degree, the candidates' platforms are built on ideological beams that traditionally separate Democrats from Republicans. "There's a basic big-picture difference in that Vice President Gore looks toward much more government involvement, whereas Bush looks much more toward private-sector initiatives and the market," says Glenn Hubbard, a Bush campaign adviser and an economics professor at Columbia University's Graduate School of Business.
But to the Vice President's backers in the world of corporate finance, the support for government involvement is a positive, not a negative. "Gore understands the business and technology environment very well, and like a smart senior manager he recognizes that education is key," says Jonathan Foster, CFO and COO of Toysrus.com, and a Gore supporter.
Yet Bush and Gore, two essentially centrist, Ivy Leagueeducated baby boomers, do substantially agree on such potentially divisive issues as free trade and Internet taxation. And what differences there are may even dissolve a bit further as the campaign gets under way and both parties diligently tack toward the center. Still, understanding those differences that are likely to remain as the major issues for business--even if the differences lie in emphasis or in the fine print--certainly helps bring the two candidates into sharper focus.
Online commerce has positively exploded since the 1996 Presidential election, with sales leaping from a few billion dollars then to an estimated $444.5 billion now, according to Forrester Research Inc. This remarkable growth has not escaped the attention of government officials at all levels, from small-town mayors to big-state governors. As a result, the question of whether to tax electronic commerce--and how to do it if the answer is yes--is certain to be a burning political issue.
Gore, who may forever regret his claim to have invented the Internet, and Bush, whose Austin office is surrounded by high-technology start- ups, have both taken great pains to align themselves with the forces forging the New Economy. "While he may not have invented the Internet, Gore has certainly been a player in all of these issues," says Ken Wasch, a Gore supporter who is president of the Software and Information Industry Association. "Bush has no record" there, Wasch says, "and he is dancing to the tune of advisers who are trying to guess at what will play."
The Internet Tax Freedom Act, passed by Congress in 1998, created a three-year moratorium on both Internet access taxes and multiple taxes on E-commerce. Both candidates support extending the freeze, for an additional five years in Bush's case and two years for Gore. "I also support a permanent ban on all Internet access taxes," Bush said last May.
But such rhetoric "just scrapes the surface of the whole debate, and they haven't said much beyond that," notes Mark Nebergall, president of the Software Finance and Tax Executives Council.
While no politician wants to be portrayed as favoring Internet taxes, mall owners, big-box retailers, and state and local governments have been lobbying for such taxation, at least as a way of giving them a share of online sales. Regardless of who is elected President, it is likely there will be some form of levy on transactions conducted over the Internet in the future. "That's the area that worries a lot of people," says Frank R. Goldstein, a partner in the Washington, D.C., office of law firm Brown & Wood LLP. "The Democrats have historically been a taxation party," he notes. "The question is, who's going to have the least-heavy hand when it comes to dealing with these entrepreneurial companies?"
New Tax Breaks
Rather than proposing sweeping governmental actions, both candidates seem to prefer manipulating the federal tax code as their way of encouraging companies to achieve desirable social goals. "I think it's very fair to say that Bush's notion of compassionate conservatism would include using the tax code for social engineering," says Jerry Howard, senior staff vice president for federal government affairs at the National Association of Home Builders.
In an effort to encourage the private sector to construct more affordable housing, Bush last April proposed a $1.7 billion, five-year tax break. Aimed at stimulating development in urban areas where land costs are high, the "renewing the dream" incentive would provide building companies with a tax credit of up to 50 percent of the project costs of building new houses for low-income buyers.
For his part, Gore has proposed a training tax credit for U.S.-based companies that provide employees with remedial education and training in English as a second language. "The [conventional] notion is that training workers at a basic level is the responsibility of our school system, and we shouldn't be burdening our companies with that," says Rob Atkinson, a Gore supporter who is director of the technology and New Economy project at the centrist Progressive Policy Institute.
On more-traditional issues, both candidates support making the revered Research & Development Tax Credit permanent. The measure, first introduced in the 1980s and renewed by the last Congress for five years, gives companies a 20 percent credit against federal taxes for any incremental increase in their R&D spending. And, of course, if there ever was a way to simplify the tax code, either candidate would embrace it--at least in theory.
Corporate Tax Rates
So far, the two candidates have been relatively mum about corporate tax rates in general. "Despite what everybody would like to think, tax is a second-tier issue," says Clint Stretch, director of tax policy at Deloitte & Touche LLP in Washington, D.C. "It's not health care. It's not Social Security."
Bush has pledged to veto any increase in corporate tax rates. "I would expect the governor, if he were elected, to immediately sit down with both parties to talk about corporate tax reform," says Bush adviser Hubbard. "He's got a strong interest in international tax issues and in tax- simplification issues."
And Gore hasn't made an issue of corporation taxation--yet. "I don't presume that he would want to raise corporate rates, but he hasn't said he would hold the line," says Bill Diefenderfer, deputy director of the White House Office of Management and Budget during President George Bush's Administration and currently CFO of E-Numerate Solutions Inc., an E-commerce infrastructure company in Tysons Corner, Virginia.
Even in an era of surpluses, the tax code will remain politicized. Over the past four years, politicians from Bill Clinton to John McCain have made hay over shuttering tax shelters and loopholes that allegedly benefit corporations. "There's a lot of smoke, and nobody has seen the flames," says The Brookings Institution's Henry Aaron.
Some recent data may add fuel to the fire. While corporate profits have boomed, the corporate income taxes the Treasury Department collected barely rose from $213.3 billion in fiscal 1998 to $216.3 billion last year. And since 1997, corporate tax receipts have risen only about 6 percent, although personal income tax receipts soared 21 percent.
Treasury Secretary Lawrence Summers has made a public issue of tax-shelter abuse. And despite the swinging pendulum of the past decade, the Democratic party surely remains less accommodating to Corporate America than the Republicans. But, says Hubbard, "I think there's certainly strong interest from both candidates in disciplining abusive corporate tax shelters."
Last fall, the issue of cash-balance pensions moved with astonishing speed into the political arena from the spot it previously occupied down in the depths of actuarial policy. Angered at IBM Corp.'s plans to transform its traditional defined benefits plan into a cash balance pension plan, activist employees quickly enlisted senators and representatives of both parties to their cause.
Gore quickly jumped into the fray last November, seeking to shore up labor support. For example, he supports legislation that would force companies switching to cash balance plans essentially to guarantee the value of the benefits under the old plans, and that would allow older employees with 15 years of service to stay in existing plans. And Gore suggested that the Equal Employment Opportunity Commission be called in to investigate whether cash balance pension plans discriminate against older employees. For his part, Bush has been largely silent on cash balance pensions. "I think it's an issue that's one rung down for this stage of the debate, and I'm not aware of the governor having made any comments," notes Hubbard.
Gore has also made other pension-related proposals. "He does understand the high degree of complexity in pension law and the need to make things easier," says James Delaplane, vice president, retirement policy, at the Washington, D.C.-based Association of Private Pension and Welfare Plans. For example, Gore would provide tax credits to small employers to start up pension programs, and waive the Internal Revenue Service fees associated with gaining approval letters.
As a political issue, pensions lay dormant for much of the spring. But they may rise again in the fall. In recent months, employee groups have begun to argue that corporate pension plans, swollen by the booming stock market, are padding companies' bottom lines. And unions at General Electric Co. argue that GE should use its massive pension surplus to boost pension payouts. "The potential is there for it to become a political issue, but I think it's better for the soundness of pension policy that it not become part of the campaign," Delaplane says.
The 1990s were a golden age for mergers and acquisitions, of course, with 11,005 transactions worth $1.59 trillion consummated in the United States last year alone, according to Thomson Financial Securities Data. But the decade has also been a boom time for antitrust lawyers. And aggressive enforcement of Justice Department actions against Microsoft Corp., MCI WorldCom Inc., and others has altered corporate strategy significantly.
Seeing the issue as a minefield, both candidates have trod carefully. Gore, mute about the Microsoft case, is generally believed to have interventionist instincts that Bush lacks. "Gore has been supportive of the government's efforts to pursue the tobacco and gun industries legally," says Diana Furchtgott-Roth, resident fellow at the American Enterprise Institute. While Bush has hardly been outspoken on Microsoft, says Brown & Wood's Goldstein, "I think there's a signal coming out of the Bush camp that what's happened here is kind of an example of government overreaching."
Some analysts suggest that a Bush victory would sharply change the posture toward antitrust generally and Microsoft in particular. But by the time the next President takes office in early 2001, says Brookings's Aaron, "the government's decision [will be] how hard to push the appeal, or whether to accept settlement." While Bush could hardly drop the case, he could order his newly installed attorney general to lighten up on other companies.
Most analysts warn, though, against putting a partisan spin on the Microsoft case. "Antitrust enforcement is not the province of Democrats," says Wasch of the (anti-Microsoft) Software and Information Industry Association. "Robert Bork, Judge Thomas Penfield Jackson, Rep. Henry Hyde (R Ill.), and Republican state attorneys general all support this action against Microsoft."
One area where the old Democrat-Republican divide remains stark is tort reform--an issue that routinely showed up as among the top three issues in an informal survey conducted by CFO magazine. "There is a very clear difference [between the parties], if you look at what they have actually said and done," says Sherman Joyce, president of the Washington, D.C.-based American Tort Reform Association.
Civil-justice reform was one of Bush's four key issues when he ran for Texas governor in 1994. And he managed to push punitive-damage caps, joint-liability reform, and a Y2K- liability bill, along with other such items, through the Democratic Texas legislature. "Bush has done it in Texas, and he is for national reform," says E-Numerate's Diefenderfer.
While the Clinton Administration has taken some strides in tort reform--including last year's federal Y2K-liability bill--Gore opposed federal product-liability reform when he was in the Senate. "The perception certainly is that the Vice President isn't a big advocate, and is likely to side with the trial lawyers," says Joyce.
The issue has lost some of its partisan tinge, however. When the congressional Y2K bill pitted trial lawyers against the high-tech industry, Gore and Clinton sided with industry. Meanwhile, some trial lawyers have been trying to curry favor among congressional Republicans.
Regardless, expect Bush to press his plans for further reform. In February, Bush unveiled a federal tort reform proposal. Among other measures, it calls for federal courts to impose three-year bars on lawyers who are found to have filed three frivolous lawsuits, and it encourages the relocation of large class-action lawsuits from state to federal courts.
It is both tempting and dangerous to read too much into the platforms of Presidential candidates, of course. After all, President Clinton ran in 1992 on pledges of middle-class tax cuts and expanded health insurance coverage. Neither materialized. President Bush rode to victory in 1988 vowing to hold the line on taxes and to keep the prosperity going. Whether or not taxpayers read his lips, they watched him take only a few recessionary years to sign a tax hike. And as Brookings's Aaron puts it: "The history of candidates modifying positions on less-than-central promises is very lengthy."
Either way, Campaign 2000 is shaping up as a spirited, if not particularly divisive, election. "I think what you're observing is consensus politics around the big issues in the two parties," says Stretch of Deloitte & Touche. The failed Clinton health-care initiative of 1993 and the sputtering Republican Revolution of '94 seem to have made both parties wary of far-reaching, visionary legislative proposals.
Control of both the White House and the Hill by the same party, whether Democratic or Republican, could increase the certainty and quicken the pace of any changes a President Bush or a President Gore might seek, of course. But were both the Presidency and Congress to change hands this fall--putting Bush in the White House and the Democrats in charge of Congress--many observers predict more evolution than revolution when it comes to issues affecting CFOs. "The most likely case is that for the next eight years we'll have gridlock more often than not," says Kevin Hassett, co-author of Dow 36,000 and economic adviser to John McCain's campaign. And Washington gridlock--at least as practiced the last six years--has been pretty good for business.
1. TORT REFORM
BUSH: Has pushed punitive-damage caps
GORE: Has opposed many reforms, though he and product-liability reforms. sided with industry on a Y2K measure.
2. RESEARCH & DEVELOPMENT TAX CREDIT
BUSH: Supports extension.
3. PENSION REFORM
BUSH: No announced position on conversion to cash balance plans.
GORE: Supports employee protections in conversions.
4. (TIE) INTERNET TAXATION
BUSH: Supports 5-year extension of ban.
GORE: Supports 2-year extension.
5. (TIE) TAX CREDIT FOR DEVELOPING URBAN AREAS
BUSH: Supports 5-year plan.
GORE: No announced position.
6. ANTITRUST POLICY
BUSH: No announced position.
GORE: No announced position.
7. REMEDIAL-EDUCATION TAX CREDIT
BUSH: No announced position.
GORE:Has proposed a credit.
8. ELIMINATING ABUSIVE CORPORATE TAX SHELTERS
BUSH:No announced position.
GORE:Stands by current Administration's crackdown.
Who's On Second
Finance executives were also asked to "nominate" the best and worst vice presidential candidates the two major parties could field.