The “job creators” are fighting back on tax policy—against theirRepublican allies.

Small-business groups that have been among the Republicans'loyal backers are warning their friends in Congress against cuttinga deal with President Barack Obama on lowering corporate taxes.

The prospect of a fractured business community makes iteven harder to see a path to major changes to the U.S. tax codethis year.

The hostility towards an effort spearheaded by top Republicanleaders to reduce the corporate tax rate is particularly unusualbecause it comes from groups such as the NationalFederation of Independent Business, which tend to skew theirpolitical giving overwhelmingly toward Republican candidates andcommittees. Organizations now trying to stymie a potential dealbetween Obama and Representative Paul Ryan, a Republican who chairsthe tax-writing Ways and Means Committee, gave the president'sparty $1 for every $14 they gave Republican candidates.

They represent the building contractors, wholesalers andrestaurant owners who are active in local Republican circles andoften have the ear of their hometown representatives.

“The politics of this are fraught, I think, and that's whatwe've been trying to convey,” said Liam Donovan, director oflegislative and political affairs at Associated Builders andContractors, which gave $1.6 million in contributions in the 2014cycle, none to Democrats, according to the Center for ResponsivePolitics. “Given the option, this or nothing, nothing is better forour members.”

The simmering conflict spilled into the open in a series oftesty letters last month between the groups and the top Republicantax writers, followed by private meetings.

Leaders of small-business groups say they object to any dealthat would help big companies by cutting the corporate tax ratewithout lowering the individual income tax rates that apply tomillions of small businesses across the country.

That's exactly the kind of deal that Ryan and Senate FinanceCommittee Chairman Orrin Hatch, a Utah Republican, have beenconsidering. They're looking for a long-shot bipartisan agreementon lowering the corporate tax rate, curtailing targeted breaks andrevamping how the U.S. taxes multinational companies. Smallbusinesses and others outside the corporate income tax wouldreceive help with targeted breaks but not a rate cut.

“We would prefer them to do it all together or not at all,” saidElizabeth Taylor, vice president for federal government relationsat the International Franchise Association. “Or just smallbusiness. Do small business first if you're going to do somethingfirst.”

Ryan has said he won't leave small businesses behind in tax-lawchanges, and he hasn't done anything yet to sever the decades-longlink between small businesses and Republicans on tax policy. Still,he's been testing it.

Limited time

Ryan has been coy and noncommittal about exactly how he wouldprotect small businesses without cutting rates, and he doesn't havemuch time to figure it out. Ryan has said he wants to make majorprogress within the next few months before presidential-campaignpolitics overwhelm Congress.

The rift between top Republicans and their usual allies inWashington's world of small business trade groups stems from adisagreement on tactics, not policy. They all want to cut marginaltax rates for corporations and individuals.

The individual rates are what matter to small businesses andsome large ones such as law firms and private equity firms, becausethe owners of S corporations and partnerships pay their businesstaxes on their individual tax returns. The companies are known as“pass-throughs,” because the income flows through them to theindividual returns.

When Republicans tried in late 2012 to extend all of George W.Bush's tax cuts–with a top rate of 35 percent–they relied heavilyon small business groups, which represent enterprises likerestaurants and hardware stores that would be hurt by highermarginal rates.

Obama prevailed, and the top rate returned to 39.6 percent, alevel that Democrats won't give up.

Ryan's taking a get-what-you-can-now approach. He sees Obama'srefusal to budge on individual rates as an opening for a two-stageapproach to the biggest tax code changes in 30 years. The idea:Take the first bite now on business taxes and do the rest afterObama leaves office.

“He wants to do what's achievable and we want to do what's goodfor our members, and they're not necessarily in line at thispoint,” Donovan said. “You can imagine the sort of united front ofpopulists on both sides looking at a corporate rate cut financed bysmall businesses as something that would draw cries.”

Representative Vern Buchanan, a Florida Republican and a memberof the Ways and Means Committee, said the current debate is achance to have tax ideas vetted by interest groups and others.

Push for parity

“I'm going to continue to push to try to get some parity,” hesaid. “The thought is this year, maybe all we can get done is thecorporate side. And in '17 the dynamics might change and theremight be a lot more opportunities.”

For the small business groups, no deal is better than the oneRyan and others are contemplating. The prospect of a top individualrate of 39.6 percent along with a corporate rate of 25 percent or28 percent would give corporations an edge, they say. Corporateincome does, however, face a second layer of taxation, on capitalgains and dividends.

Administration officials have been talking about expanding cashaccounting and businesses' ability to write off capital expenses asways to placate small businesses. Donovan said he didn't thinklawmakers would be able to find a solution–other than a ratecut–that would work.

“The imperative here is avoiding it being introduced, and that'swhat we're focused on right now,” Donovan said.

Ryan and Hatch wrote to business groups last month, asking forideas and insisting that they have told Obama that pass-throughsand small businesses must be helped in any deal.

Some groups have responded by saying there are some solutionsthat would work for them, said a Ryan aide who spoke on conditionof anonymity to discuss the private meetings.

Jeff Shoaf, senior executive director of government relations atthe Associated General Contractors, said they haven't planned whatthey would do if Ryan and Hatch manage to reach a deal withObama.

“I don't know exactly what Ryan and Hatch will come up with inthe end,” he said. “I can't see a mixture that starts with thesentence 'Hey, support us now because in a couple years we'll getindividual rate reduction for everybody else,' being a good salespitch.”

One thing that probably won't change is a donation pattern fromthe groups that favors Republican lawmakers.

“We're still going to be supporting the members that support ourpositions,” Taylor said. “Now, that could be reevaluated at anytime. But for the most part, we're not a single-issueorganization.”

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