Taxes: Ready to Rumble How Obama will target business, and how business will fight back

If you thought the fight over health care was tough, wait until the White House tries to raise corporate taxes.

The budget deficit, bloated by the costs of President Barack Obama's stimulus plan and the sharp fall in tax receipts due to the recession, will hit $1.4 trillion in fiscal 2010, for the second year running—more than twice what it was in 2008. If Obama sticks to his pledge to keep the Bush tax cuts for families earning less than $250,000 a year, the move will add a projected $230 billion a year on average to the deficit over the next decade.

That leaves only one viable source for the hundreds of billions in extra tax revenue needed to sponge up all that red ink. With his Jan. 14 proposal to raise up to $117 billion through a levy on the nation's largest financial institutions, Obama took a stab at increasing corporate taxes. It won't be the last. "The pressure to raise more from the business sector will only intensify," says Anne N. Mathias, a tax policy analyst for the Washington Research Group. Few expect the Democrats to push hard for a big corporate tax hike before midterm elections, and the prospects for boosting any taxes just got a lot harder with the Democrats' stunning loss in Massachusetts. Yet Mathias and others believe the risks of a squeeze on companies will rise sharply by yearend, when Congress and the President will have to extend the Bush tax cuts for the middle class before they expire.

Corporate lobbyists are girding for a battle, especially over the lucrative tax breaks that U.S. multinationals get on their foreign earnings. Thanks to a massive pushback last year—some of it coming personally from CEOs such as IBM's (IBM) Samuel J. Palmisano, Caterpillar's (CAT) James W. Owens, and Cisco's (CSCO) John T. Chambers—the Administration backed down from its proposals to raise some $160 billion by hoisting taxes on U.S. companies' overseas profits. The multinationals were able to convince many in Congress, including prominent Democratic legislators like Senate Finance chair Max Baucus, that the proposed hike in taxes on overseas operations would make it harder to compete in global markets, since foreign rivals generally pay lower rates.

The next hints of how Obama plans to press his tax agenda will appear in February, when the White House releases the 2011 budget. "We expect them to bring all [of last year's] proposals back" with only minor changes, says Ralph Hellman, head of government relations at the Information Technology Industry Council, a trade group. "They might even add a few other things to hit us up further."

The most disputed of those tax hikes would sharply limit companies' ability to defer taxes on income earned abroad until those profits are repatriated to the U.S. Another would reduce multinationals' power to lower U.S. taxes through favorable accounting of their foreign tax credits. A third proposal would end a complex maneuver that lets multinationals shift profits from high-tax countries to tax havens: It's been dubbed "check-the-box" because companies can effectively make some foreign subsidiaries disappear for U.S. tax purposes by checking a box on their tax filings.

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