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Insight: In heartland, Obama's move against jet loophole hits turbulence

U.S. President Barack Obama waves to reporters as he departs for travel to Israel from the White House in Washington, March 19, 2013. REUTER
U.S. President Barack Obama waves to reporters as he departs for travel to Israel from the White House in Washington, March 19, 2013. REUTER

By Andy Sullivan

WICHITA, Kansas (Reuters) - First came the recession, throwing thousands out of work. Then came the drought, choking crops and draining reservoirs. Then came the president, arguing that the private-plane buyers who fuel this city's economy benefit from an unfair tax break.

President Barack Obama's proposal to reduce that tax break has won wide support among Democrats who see it as an example of how the U.S. tax code is too generous to the wealthy.

But what looks like a loophole in Washington appears much different in this prairie city of 400,000, where leaders of all political stripes worry that Obama's rhetoric is already undermining an industry that accounts for 1 in 10 jobs in the region.

"I'm certainly disappointed that he would do something of this nature," said Wichita Mayor Carl Brewer, a Democrat who displays Obama's portrait on his office wall. "As long as you're doing something to threaten my aviation industry ... I'll continue to speak out against it."

Brewer's vow could serve as an early warning for Obama and lawmakers in Congress as they try to streamline the U.S. tax code in order to lower rates or narrow trillion-dollar deficits.

The idea of eliminating perks in the nation's tax laws may sound appealing in the abstract. But many changes - particularly to provisions that have helped to create jobs - are likely to spur bipartisan blowback from places like Wichita that are still struggling to emerge from the country's deepest recession in 80 years.

In Wichita, a city that bills itself as the "Air Capital of the World," business and labor leaders are questioning why a president who bailed out Detroit's auto industry seems less concerned about the impact his words might have on another manufacturing industry that employs 1.2 million people and exported $4.8 billion worth of aircraft last year.

"It's so frustrating," said Republican Representative Mike Pompeo, who represents the region in Congress. "All the aviation manufacturers want is for him to stop talking down their industry. Don't write them a check, don't give them a tax credit, don't hand them a subsidy. Stop bashing them."

The International Association of Machinists, a labor union with close ties to Obama's Democrats, has warned that Obama's push to raise taxes on private-plane buyers could undermine his efforts to boost the economy.

Obama's allies say that it is only fair to ask affluent private-plane buyers to pay a bit more in taxes at a time when social programs that help the poor are facing sharp cutbacks.

"These things don't exist in a vacuum, and you have to balance the benefits with the costs," said Michael Linden, director of tax and budget policy at the Center for American Progress, a liberal think tank. "Why should (jet tax breaks) be prioritized over, say, nutrition assistance to low-income families and pregnant women?"

A HOME-GROWN INDUSTRY

Aviation has been a central part of Wichita's economy since the first commercially built aircraft in the United States were produced here in the 1920s.

Home-grown companies such as Cessna, Beechcraft and Learjet spurred development of the private-aircraft market after World War II. Alongside large-plane makers such as Boeing, they anchor a local network of more than 200 machine shops and other parts suppliers.

Wichita now has the highest concentration of aerospace manufacturing jobs in the United States, according to Wichita State University economics professor Jeremy Hill.

Those jobs pay well: The industry's average annual wage of $74,000 is nearly twice the regional average.

The city produces nearly half of all private aircraft worldwide. According to the nonpartisan Brookings Institution, exports account for nearly 20 percent of Wichita's gross metropolitan product, making it the most export-intensive city in the United States. Brewer and other civic leaders hope to boost exports further in coming years as China loosens its airspace restrictions and allows the country's newly minted billionaires to fly in style.

Private-aircraft sales have always risen and fallen along with the economy, but the 2008 recession proved especially severe.

Sales fell by 29 percent from 2008 to 2011, and the lower end of the market was hit especially hard as small-business buyers were unable to get bank loans, said aviation analyst Richard Aboulafia.

In Wichita, Hawker Beechcraft filed for bankruptcy and Textron Inc unit Cessna laid off 12,000 workers, two-thirds of its local workforce. The unemployment rate climbed to 10.6 percent in July 2009 from 3.5 percent in October 2007.

A SYMBOL OF EXCESS

Meanwhile, Wichita's main product was taking on unwelcome political baggage.

After auto executives were widely criticized for flying their corporate planes to Washington to ask for a bailout in 2008, the business jet came to symbolize corporate excess.

As the recession hammered Washington's balance sheet, Republicans pressed for deep spending cuts to narrow budget deficits that amounted to more than $1 trillion annually. Democrats countered with a proposal to raise revenue by eliminating some of the subsidies and breaks in the tax code that collectively deprive the government of more than $1 trillion in tax revenue each year.

One item on their list: reducing the tax benefits given to those who buy planes for business uses.

Obama has framed the choice in the starkest possible terms.

"Are Republicans in Congress really willing to let these cuts fall on our kids' schools and mental healthcare just to protect tax loopholes for corporate jet owners?" he asked in a radio address on February 23.

Such rhetoric initially caught industry officials by surprise.

"The first time we heard 'corporate jet loophole' we couldn't figure out what they were talking about," said Ed Bolen, who heads the National Business Aviation Association.

The U.S. tax code treats private aircraft as it does bulldozers, computers and other business equipment: Companies that buy them are allowed to deduct the cost from their tax bill over five years. The deduction applies only to planes used for business purposes.

The depreciation schedule has been in place for decades. It is supposed to reflect how long a product will be useful to a business. But private planes and factory machinery can be used for decades, while computers and mobile phones can become obsolete before the five-year depreciation period expires.

Obama and his Democrats say the depreciation schedule for corporate jets should be stretched out to seven years, to treat private-aircraft purchases like commercial airliner purchases.

That would effectively raise the cost of buying a private plane because customers would be able to deduct just 14.29 percent of the price from their tax bill in the year of purchase, rather than the 20 percent that current law allows.

The change would generate an additional $300 million in tax revenue each year, about as much as the U.S. government spends in 45 minutes.

Republicans are eyeing an overhaul of the tax code as well to try to lower corporate and personal income tax rates. That could lead to a longer depreciation period for business-plane buyers, but industry officials and advocates said they wouldn't necessarily object as long as their sector were not singled out.

"They're perfectly prepared to be part of a solution for corporate tax reform," said Pompeo, who ran an aerospace parts supplier before his election to the U.S. House of Representatives in 2010.

WOULDN'T HELP, BUT MIGHT NOT HURT

Analysts say the business-plane industry probably wouldn't see much change if Congress stretched the five-year depreciation schedule to seven years, because taxes are only one factor that businesses consider in buying planes. The change also wouldn't apply to the 60 percent of sales that are made abroad.

"It can help, but it certainly doesn't make or break the industry," said aviation consultant Brian Foley.

Others say that Obama already has hurt the industry even though his tax proposal hasn't advanced in Congress.

As he strolls through the repair bays and passenger lounges at Yingling Aviation, a truck stop of sorts for private planes next to Wichita's Mid-Continent Airport, owner Lynn Nichols says Obama's rhetoric has led some of his customers to park their jets to avoid stigma.

Decisions like that translate into less maintenance work for Yingling, fewer plane sales for manufacturers and lower sales at area grocery stores, he said.

"I think Obama's been able to demonstrate to everybody he's a pretty good politician, but I just wish he'd be more mindful of the hurt that he creates," Nichols said.

While Obama has argued that business-plane buyers should pay more taxes, he has backed other tax breaks that could help the industry.

He has extended a temporary recession-fighting measure four times that would allow businesses to write off 50 percent of the cost of new capital purchases in the first year - a much more dramatic break than would otherwise be granted under the tax code. Plane manufacturers say they see an uptick in sales toward the end of every year as customers decide that the enhanced tax break provides enough incentive to make a purchase.

Obama also has proposed additional tax breaks for domestic manufacturers, though that measure has not become law.

The president's overall message is "a bit schizophrenic, isn't it?" said Brad Thress, Cessna's senior vice president of business jets.

Obama allies say the tax breaks favored by the president make more sense because they seek to boost economic activity as a whole.

The five-year depreciation schedule, by contrast, amounts to a special break for private-plane buyers who can afford to pay a bit more to help reduce the deficit, they say.

"If you can afford to buy a private jet, you can afford to depreciate it over seven years," Linden said. "Show me any mom-and-pop hardware store that owns a corporate jet, and I have a bridge to sell you in Brooklyn."

Chuck Pierson doesn't run a hardware store. But the Wichita dentist says it would be much harder to keep up with new developments in his field without his propeller-driven Cessna 421, which he has flown to out-of-the-way places like Bozeman, Montana, to examine new equipment and learn how to train his staff on new techniques.

Pierson said tax benefits were a factor when he was deciding whether to upgrade from a smaller aircraft in 2011. Aircraft purchases shouldn't be treated differently from the other equipment he and his partners have bought to improve their practice, which employs 30 people.

"They might think that it's a luxury, that we like to go around on Saturday afternoons and buzz fields or something, but it's a vehicle just like any other type of transportation for us," he said.

(Editing by David Lindsey and Tim Dobbyn)

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