By Kristina Cooke and Kim Dixon
NEW YORK/WASHINGTON (Reuters) – A push to overhaul the U.S. corporate tax code will take a back seat to negotiations on the deficit and debt ceiling over the next two months, Treasury Secretary Timothy Geithner said on Tuesday.
Geithner said the Obama administration hopes to take up the issue of tax simplification before the presidential election in 2012 but he signaled the issue is on hold for now.
"I think realistically this fiscal debate we're having is going to dominate our preoccupation for the next couple of months," Geithner said in response to a question after remarks to the Harvard Club in New York.
He added that the Treasury Department has been working to figure out a more "sensible" design for the tax code.
A revamp of the multi-layered corporate tax system is a key priority for U.S. businesses, which have complained that the current structure hurts their ability to compete globally.
President Barack Obama raised hopes earlier this year that he would take up the cause. He has called the current code "burdensome" and promised in his State of the Union address to work with Democrats and Republicans to simplify it.
Geithner said in early April the administration was working on a broad proposal that could trim the corporate tax rate from the current 35 percent to somewhere in the high 20 percent range in exchange for ridding the code of many special breaks.
Expectations had been building that the Treasury Department would release the plan as early as this month and Geithner had been telling lawmakers its release was imminent, according to a Democratic congressional aide.
But the aide said the Treasury secretary recently moved away from that stance. "It is very easy to talk about tax reform at a 30,000 feet level but once you get to specifics it becomes more difficult," the aide said.
Corporate tax reform has long been a priority for Republicans and some in the White House viewed it as an issue that could help entice Republicans toward a broader deal on deficit reduction.
But Republicans have said lately a tax-code overhaul is too complex to tackle as part of a deal on spending cuts they are demanding in exchange for voting to raise the federal government's $14.3 trillion debt ceiling, which the government hit on Monday.
The Obama administration is eager to get a deal to lift the debt ceiling and has warned of the risk of a default if an agreement is not reached by August 2.
Geithner and other officials say that if uncertainty over the debt ceiling drags on for too long, it could cause turmoil in financial markets and hurt the economy.
Discussing tax reform at the event in New York, Geithner said the administration would like "to take a run at doing this ahead of the election. That means we've got to start but we also need to get this fiscal stuff on a better trajectory."
Senate Republican leader Mitch McConnell told CNN on Sunday that tax reform was "very, very complicated" and would not be part of the current debt and deficit talks.
A major sticking point in any corporate tax revamp plan is how to treat business income earned through the individual side of the tax code.
The White House has floated the idea of requiring that certain large businesses file through the corporate side of the code, a proposal that has drawn howls of protest from many businesses that file under the individual tax code.
Publicly traded partnerships, law firms, hedge funds and private equity funds are among those that may be affected by such a change.
Further complicating efforts is the departure of Treasury Assistant Secretary for tax policy Michael Mundaca.
(Additional reporting by Glenn Somerville and Alister Bull; editing by Caren Bohan and Todd Eastham)
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