Major Airlines Score a Break; So Do Networks, Pharmaceutical Companies and Bondholders

WASHINGTON â€”  Several major airlines are among the corporate winners in the tax and budget agreement reached by President Clinton and Republican congressional leaders. So are broadcasters such as Walt Disney Co.’s ABC network, corporate bondholders, pharmaceutical companies and Amtrak.

Wall Street firms also stand to benefit from a reduction of the capital gains tax rate, which should spur increased stock and bond sales, and a spurt in growth that may accompany the plan’s promise of a balanced federal budget by 2002.

“This is an important step,� said Micah Green, vice president at the Washington-based Public Securities Assn. “It represents a balanced budget that doesn’t impose any additional burdens on the capital markets.�

Other companies will be forced, however, to come up with funds for $90 billion in tax cuts. The tax plan places new limits on corporate life insurance policies, potentially important to mortgage giant Fannie Mae and others.

It also alters the way steel, automobile and other corporations deduct operating losses and imposes a set of taxes on U.S. airlines that tip the balance away from discount carriers such as Southwest Airlines Co. and toward UAL Corp.’s United Airlines and other major long-distance carriers.

The new air-ticket tax plan would reduce the current 10% ticket tax to 9% next year and then gradually lower it to 7.5%. It would also impose a $1 fee on passengers for each segment of their trip, with the fee gradually rising to $3.

The proposal has the support of the seven largest U.S. airlines--United Airlines, AMR Corp.’s American Airlines, Continental Airlines Inc., Delta Air Lines Inc., Northwest Airlines Corp., Trans World Airlines Inc. and US Airways Group Inc.

Short-haul carriers like Southwest will be hit particularly hard by the new passenger fee because they don’t offer nonstop service between many city pairs. Passengers who want to fly on Southwest from Houston to Los Angeles, for example, must fly from Houston to Phoenix and then from Phoenix to Los Angeles and would pay the new passenger fee four times on a round trip.

Southwest executives estimated the proposal could add $45 million to $50 million to the airline’s tax bill next year.

Overall airline taxes are projected to rise to $33 billion over the next five years, up from an estimate of $29 billion if existing taxes were left unchanged. Part of the increase will come from a doubling of the international departure tax to $12 and the introduction of a new $12 international arrival fee.

The budget accord would also give the nation’s 1,600 TV stations considerable breathing room on a schedule to turn over the airwave segment they now use for analog TV so the government can auction it.

The agreement would compel broadcasters to hand back their analog airwaves by 2006 only if 85% of households in the market have a digital television, subscribe to a video provider that carries digital signals, or have set-top converter boxes.

Corporate bondholders secured a victory under the bill when Republicans abandoned a House provision placing new limits on corporate investments in municipal bonds. The House proposal would have limited the tax break for companies holding $1 million or less of the tax-exempt bonds.

Pharmaceutical companies such as Merck & Co., Pfizer Inc., Bristol-Myers Squibb Inc. and American Home Products Inc. would benefit from the extension of a research-and-development tax credit through June 1998. The bill also permanently extends an “orphan drug� provision that provides a 50% tax credit for research into rare diseases.

Amtrak, the struggling intercity railway system, would be allowed to carry forward past years’ losses, providing about $2.3 billion over five years for capital improvement projects.

Credit card companies such as Citicorp, Banc One Inc., MBNA Inc., Morgan Stanley Dean Witter Discover Inc. and others would pay increased taxes under the bill. They would be forced to pay a new 7.5% tax on the blocks of frequent-flier miles they purchase from airlines to use as credit card promotions. It’s estimated to cost the industry $288 million over five years.

John Deere & Co. and U.S. auto makers would also lose an accounting provision that reduced their tax burden. The revision would go into effect beginning in 1998.

Venture capital investors and companies reliant on venture capital investments lost their attempt to receive a lower capital gains rate for investments in companies worth less than $100 million a year. That provision was removed from the final bill.

AirTouch Communications Inc. may also have lost its bid to secure tax-free status for its $5-billion purchase of U.S. Media Group’s U.S. wireless business, according to the House Ways and Means Committee.

San Francisco-based AirTouch on April 18 announced an agreement to buy the US West wireless business. That was a day after a bill was proposed in Congress that would eliminate so-called Morris Trust transactions, the kind AirTouch and US West proposed. Such transactions exempt companies from paying taxes on the sale or transfer of certain amounts of assets. Scrapping the tax benefit would raise the cost of the US West package.

Still, company executives say they will press negotiators to make a last-minute change that would allow the transaction to go forward.