Just Taxes Blog by ITEP

Opponents of Inflation Reduction Act Call for Continued Tax Avoidance by Large Manufacturers

Opponents of Inflation Reduction Act Call for Continued Tax Avoidance by Large Manufacturers

August 2, 2022

Steve Wamhoff
Steve Wamhoff
Director of Federal Tax Policy

The biggest revenue-raising provision in the Inflation Reduction Act, the 15 percent minimum tax for corporations that have more than a billion dollars in profits, is under attack from members of Congress who argue that manufacturing companies should not be required to pay any minimum amount of tax. Sen. Mike Crapo, the top Republican on the Senate Finance Committee and an opponent of the bill, released a statement over the weekend arguing that the provision would “overwhelmingly hit American manufacturers and supply chains.”

Sen. Crapo is wrong. The legislation will help manufacturing in the United States. What’s more, there is no reason that companies in any sector should be allowed to avoid taxes.

1. The IRA subsidizes manufacturing in the U.S. more than it taxes it.

Sen. Crapo’s statement relies on an analysis from Congress’s official revenue estimators at the Joint Committee on Taxation (JCT). It shows that of the $313 billion that will be raised over a decade by the corporate minimum tax, about half that amount ($156 billion) would be paid by corporations that describe themselves as mainly manufacturers.

Crapo does not mention that the bill would also spend $369 billion on energy and climate provisions that would increase manufacturing of electric cars, batteries, solar panels and other products in the United States. Combined with the recently passed CHIPS legislation that provides $79 billion in subsidies for the production of semiconductors, the IRA continues a streak of pro-manufacturing policies.

2. The manufacturing classification used in the analysis Sen. Crapo relies on is very broad and includes corporations that are more known for avoiding taxes in the United States rather than creating jobs here.

As Jean Ross of the Center for American Progress explained over the weekend, the manufacturing category includes oil refiners receiving windfall profits right now, as well as tech companies like Apple and pharma companies, which both shift intellectual property into offshore tax havens and produce most of their physical products abroad.

A newly released analysis from JCT further explains that about half of the revenue raised from “manufacturing” companies will come from those producing textiles, apparel, leather, pharmaceuticals and computers and electronics. These are the industries that already produce most of their physical products abroad rather than here in the U.S.

3. The corporate minimum tax would be particularly effective in cracking down on corporations that shift profits, and even real manufacturing operations and jobs, offshore.

For example, the pharma giant Amgen has for several years reported to investors that 70 percent or more of its sales are in the U.S. but claims that only about a third or less of its profits are generated in the U.S. Amgen claims that a disproportionate share of its profits are generated by its drug manufacturing subsidiary in Puerto Rico, which is treated as a foreign jurisdiction for tax purposes, and as a result it has reported a 12.5 percent tax rate over the past decade.

The IRS is suing Amgen but could very well lose the case because the tax laws regarding U.S. corporations and their offshore subsidiaries are so vague and difficult to enforce.

4. Accelerated depreciation, a frequently discussed tax break that is supposed to encourage manufacturing and which would be limited for the largest corporations under this proposal, is a costly giveaway.

Permanent rules in the tax code allow for accelerated depreciation – deducting the cost of investments in equipment faster than it wears out – and a series of temporary provisions over the past decade has allowed for even more acceleration. These tax breaks mainly reward corporations for making investments they would have made anyway, with or without a tax break, as a 2018 ITEP report explains.

The ITEP report relies on research from Lily Batchelder, now the top tax policy official at the Treasury Department. She found that while corporations certainly claim any and all tax breaks available to them, depreciation breaks do not actually influence the companies’ investment decision-making because they don’t show up in the financial accounting used to inform shareholders and potential investors about the profitability of specific publicly traded companies.

5. The logical conclusion of Sen. Crapo’s argument is that corporations simply should not be required to pay any minimum amount of tax and Congress should allow corporate tax avoidance to continue.

The principle behind the corporate minimum tax is very simple. All corporations rely on public investments that are financed by taxes, including the educational system that creates a productive workforce, the transportation network that allows shipment of products, the court system that enforces property rights, and many others. Corporations that are profitable should pay some minimum amount of taxes to help finance those public investments.

But this is not always happening today. During the first three years that the 2017 tax law was in effect, 39 large corporations reported profits to their shareholders each year but paid no federal corporate income taxes during that time. An additional 73 consistently profitable corporations paid an effective tax rate that was 10 percent or less during that period. Sen. Crapo’s logic would bar any legislation that would prevent this from happening.

6. The related argument that financial accounting is different from tax accounting does nothing but restate the fact that companies do not pay much in taxes relative to the profits they report to investors.

The corporate minimum tax would be based on corporate profits under the financial accounting rules, meaning the affected companies would pay at least 15 percent of the profits they report to shareholders and potential investors. This often includes profits that are not reported to the IRS under the current tax rules.

Opponents make technical arguments that the financial accounting rules differ from the tax accounting rules and then claim that there is good reason for these differences. But these arguments basically boil down to the idea that some companies simply should not pay much in taxes relative to the profits they report to investors.

Perhaps Congress believed that in the past, which is why lawmakers kept enacting more tax breaks that made tax accounting more generous than financial accounting. But if Congress enacts the corporate minimum tax, that means that lawmakers have rightfully come to their senses.