Guide to a Potential Year-End Tax Bill in Congress
December 14, 2022
Steve Wamhoff
Federal Policy Director
December 14, 2022
Any tax legislation enacted before this Congress ends should prioritize policies that have a proven track record of helping workers and children rather than policies that cut taxes for corporations or for individuals who are already well-off. It is not clear right now whether lawmakers will do that – or whether they will enact any tax legislation at all before the year ends.
Here are the key tax issues that lawmakers are discussing, with links to more detailed explanations from ITEP of each issue.
1. Extending Corporate Tax Cuts vs. Lifting Children Out of Poverty
Many lawmakers want to extend certain corporate tax breaks before the year ends, which is misguided for several reasons.
▶ Corporate lobbyists who pushed for the Trump tax law in 2017 and the Congressional Republicans who drafted that legislation are now actively working to repeal the law’s cost-containing provisions, which they previously claimed would hold down the price of their tax cuts.
▶ They are pushing to delay or repeal these cost-containing provisions and extend the much more generous corporate tax provisions that were in effect previously, which would effectively increase the cost of the Trump tax cuts by hundreds of billions of dollars.
▶ Even worse, many lawmakers seek to extend these corporate tax breaks without extending one tax provision proven to help families and children – the recent expansion of the Child Tax Credit.
2. Problems with Specific Corporate Tax Cut “Extenders”
Three corporate tax cut “extenders” are receiving the most attention in Congress right now and each raises additional concerns.
Research expensing – This tax break is supposedly an incentive for corporations to conduct research that benefits society, but lawmakers have not asked what it has accomplished.
▶ Many of the companies lobbying for this tax break have paid very little in taxes. Netflix, for example, has paid federal corporate income taxes equal to less than 1 percent of its reported profits over the past four years.
▶ Some activities subsidized by this tax break do not meet any definition of “research” that most people would understand. Companies urging Congress to extend this tax break range from a brewery and a company that develops frozen and packaged foods to a sausage business and a company that develops electronic games for casinos. Lawmakers should ask what “research” this tax break supports before blindly extending it.
Bonus depreciation – This policy allows companies to deduct the cost of equipment the year they purchase it, rather than deducting the cost over several years until the equipment wears out. This extreme version of accelerated depreciation, which allows businesses to deduct the costs of equipment more quickly than it wears out, raises several problems.
▶ Accelerated depreciation has helped many large corporations (Verizon, FedEx, Walt Disney, General Motors, Bank of America Amazon and others) largely avoid taxes, particularly during the last several years when this bonus depreciation provision has been in effect.
▶ Bonus depreciation is supposed to encourage investment, but research shows that corporate leaders pay little attention to depreciation tax breaks when making investment decisions, even though their tax departments naturally exploit them to the greatest extent possible.
Looser limit on deductions for interest payments – This proposal would overturn a stricter limit on deductions that businesses take for interest payments they make on their debt and would extend the more lenient rule that was in effect until this year.
▶ Without strict limits, the tax deduction for interest payments results in the tax code favoring corporations that borrow money over corporations that raise funds from investors by selling shares.
▶ This provides an unwarranted subsidy to private equity firms that buy corporations and load them up with debt, which often results in the companies spiraling into bankruptcy.
▶ In recent years this practice has led to the collapse of Toys “R” Us, Payless and other well-established companies.
3. Bipartisan Retirement Tax Legislation Would Mainly Benefit the Well-Off
The EARN Act and SECURE Act 2.0, two bipartisan retirement bills working their way through Congress, would provide modest assistance for those who really need help to save but far greater benefits to comfortable individuals who are already guaranteed a secure retirement. Many observers believe these bills are the most likely tax legislation to be enacted before year’s end.
▶ Both bills would allow people to hold their savings in tax-sheltered accounts longer, with no requirement to start taking money out until age 75 (compared to age 72 under current law). The tax breaks that come with these accounts were meant to help people save for a secure retirement, but anyone who does not need to tap into their retirement savings before they are 75 years old is likely quite well off and will have a comfortable retirement regardless of what tax breaks are available.
▶ Similarly, both bills allow people in their early 60s to make larger “catch-up” contributions to their tax-sheltered retirement accounts, $10,000 compared to the current maximum of $6,500. People who have $10,000 of surplus income to place into retirement savings accounts are, by definition, well off and would likely retire comfortably even without such tax breaks.
▶ This legislation would not address one of the most pressing problems with tax breaks for retirement savings – the ability of extremely wealthy individuals to avoid or evade the statutory limits and place massive fortunes in tax-sheltered retirement savings accounts, like Peter Thiel’s $5 billion Roth IRA.
4. What Congress Should Include in Year-End Tax Legislation: An Expansion of the Child Tax Credit
The expansion of the Child Tax Credit that Congress enacted for 2021 lifted 2.1 million children out of poverty but expired at the end of that year. Many Democrats propose to extend that expansion, while some Republicans led by Sen. Mitt Romney offer a competing proposal to expand the credit.
▶ The Congressional Democrats’ approach would help more families and children while Sen. Romney’s approach would leave a quarter of children worse off and would help half as many low-income children.
▶ Neither of these proposals is likely to be enacted in their entirety but Congress could take some elements of either proposal and include them in year-end tax legislation.
▶ The biggest problem with the current CTC is the limits on the refundable portion of the credit, which prevent nearly all children among the poorest fifth of Americans from accessing the full credit. The Congressional Democrats’ approach would provide the full credit to all these children while Romney’s approach would continue to deny the full credit to more than 40 percent of these low-income children.