May 6, 2022
May 6, 2022
On Wednesday night, the vast majority of Senate Democrats joined their Republican colleagues in approving a non-binding measure to include a new corporate tax break related to research in legislation that contains no offsetting corporate tax increases. Congressional Democrats have spent months discussing reforms that would reduce corporate tax avoidance and increase corporate tax revenue, but the vote Wednesday night suggests an incredible reversal, allowing for legislation that cuts, rather than increases, corporate tax revenue.
The corporate tax break related to research is not new. It was included in the Build Back Better Act (BBBA) passed by the House back in November. But that legislation contains many corporate tax increases so that the net effect would be to reduce corporate tax avoidance and increase overall corporate tax revenue substantially. The vote on Wednesday night suggests the possibility that Senate Democrats would reverse course by passing legislation that has the net effect of cutting corporate taxes.
ITEP and Americans for Tax Fairness (ATF) recently wrote a letter asking members of Congress to oppose the tax cut unless it is part of a bill like BBBA that increases corporate tax revenue overall.
The vote Wednesday, which passed 90 to 5 in the Senate, was on a non-binding “motion to instruct” the conferees who are working out the differences between the versions of a “competitiveness” bill passed by the House and Senate. The United States Innovation and Competition Act (USICA), which passed the Senate, and the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength (COMPETES) Act, which passed the House, are both supposed to ensure that American corporations producing semi-conductors and other technology can compete with those based abroad, particularly in China.
The tax cut would allow companies to deduct research expenses in the year they incur them rather than writing those costs off over five years, as required under current law starting in 2022.
In fact, the requirement that companies write these costs off over five years rather than deduct them immediately was enacted as part of the Tax Cuts and Jobs Act, which was passed by a Republican Congress in 2017 without a single Democratic vote and signed into law by then-President Donald Trump. This requirement was supposed to raise some revenue to partly pay for the tax cuts that Republicans wanted to enact, to keep TCJA’s overall cost to an amount they had previously agreed upon, $1.5 trillion over a decade.
The research tax provision itself has a smaller revenue impact, but it could still be quite significant. The version of this tax cut in the House-passed BBBA would be provided for four years. (In other words, the House’s BBBA would delay for four years the TCJA provision that slows down deductions for research expenses.) Congress’s official revenue-estimator, the Joint Committee on Taxation, estimated that this would cost $125 billion during those four years.
It is true that the Treasury would, in theory, recoup much of that revenue in later years. Much of the revenue effect would result from companies taking deductions earlier than they can under current law, meaning less revenue collected for the first four years but more revenue collected in later years compared to current law. But anyone paying attention understands that corporations lobbying for this tax break would not rest if Congress provides it for a limited number of years. The companies would lobby for another extension of the tax break and for Congress to make it permanent, meaning the ultimate cost will be much greater.
Proponents claim that allowing companies to immediately write off full research expenses would encourage more research. But it seems more likely to reward companies for research activities they would have engaged in regardless of what tax policy is in effect. Even in the unlikely event that companies make such decisions based on tax policy, there is little reason for concern given that another tax break, the research and development tax credit, is available and is a permanent part of the tax code.
Neither party seems to take their own positions on corporate taxes very seriously. Senate Republicans included a “revenue-raising” provision that would spread out deductions for research expenses in the Tax Cuts and Jobs Act and now have voted to reverse it. Many Senate Democrats campaigned against TCJA as an unjustified tax cut for the wealthy and corporations but now most of them seem to contemplate passing even more corporate tax cuts.
The only members who voted against the “motion to instruct” conferees to add this tax break were four Democrats, Bernie Sanders, Cory Booker, Ed Markey and Elizabeth Warren, and one Republican, Mike Lee. Hopefully their view will prevail when the final version of the legislation is written.