November 8, 2023
November 8, 2023
As Congress approaches the November 17 deadline to keep the government open, pressure has mounted from corporate lobbyists to pass a package of business tax breaks before the end of the year. These tax breaks are far more costly than they appear, mainly benefit the well-off, and likely fail to achieve their stated policy goals. While Congress considers extending expired tax provisions, it should first and foremost focus on expanding the Child Tax Credit, a policy with a proven track record of helping families and children.
The 2017 Tax Cuts and Jobs Act—while overall a massive giveaway to the wealthy and corporations—included a few provisions to limit the cost of the legislation to around $1.5 trillion over a decade. Several favorable parts of the tax code for corporations and private equity were set to expire or phase out over the coming years. Congressional Republicans never truly intended for these provisions to expire and are now fighting to extend them. Making these provisions permanent would dramatically increase the cost of the 2017 tax law.
Meanwhile, Democratic lawmakers and anti-poverty groups have advocated for reinstating the Child Tax Credit expansion that was in effect in 2021. That expansion increased the credit amount, delivered the credit in monthly installments, and, most importantly, made the credit fully available to low-income children. As a result, child poverty was cut nearly in half that year. ITEP estimates that making the expansion permanent would help nearly 60 million children in low- and middle-income families next year.
Lawmakers Should Be Skeptical of Business Tax Breaks
Republican lawmakers have proposed enacting the business tax cuts (extending the tax rules that are more generous to corporations and other businesses) on a temporary basis to hide their true costs.
Some of these provisions allow businesses to claim tax deductions sooner than they otherwise would. This means that an official revenue estimate from the Congressional Budget Office will show that tax payments are delayed but most are eventually paid a few years later, keeping the costs relatively low. But these revenue estimates do not reflect reality. The lawmakers who want to enact these tax breaks through 2025 will push to extend them further or make them permanent. The cost of making these provisions permanent is far, far greater, and this is what lawmakers should pay attention to.
The Joint Committee on Taxation estimated that extending the research expensing, bonus depreciation, and net interest provisions through 2025 would cost $47 billion over the next decade. A more realistic estimate from the Committee for a Responsible Federal Budget shows that the true cost of these provisions would be more than half a trillion if continually extended or made permanent.
Proponents of the corporate tax breaks have argued that they are essential to economic growth, but it is not clear that the business tax breaks in question provide the broad public benefit that proponents claim. Lawmakers should question whether there are more productive uses for public funds. The provision for research expensing appears to subsidize private research for businesses making frozen foods and casino games—research unlikely to have a meaningful public spillover.
Read more about the individual business tax breaks below.
The Child Tax Credit is a More Responsible Use of Public Funds
Unlike the business tax provisions, the beneficiaries and effects of the expanded Child Tax Credit are clear. If Congress reinstates the credit at 2021 levels, three-quarters of the benefit will go to children and families making less than $86,000. According to Census data, families receiving the CTC in 2021 mostly spent the credit on necessities like food, rent, and utilities. And despite concerns from skeptics, the expanded CTC did not have any discernible effect on parents’ decisions to enter or leave the workforce.
If Congressional Republicans do not agree to a full reinstatement of the CTC at 2021 levels, lawmakers can still act to make the credit available for the children and families who will most benefit. Ninety-nine percent of children in the lowest income families will receive a reduced credit or no credit at all next year due to income limits on the current credit. This includes children raised by grandparents, parents with disabilities, or parents working as full-time caregivers.
Congress can eliminate or modify the rules on refundability—or the amount that a family can receive beyond their income tax liability—without increasing the maximum credit amount. All families pay taxes, whether they be payroll taxes, property taxes, or sales taxes. But the federal personal income tax is designed to be a progressive tax which partly offsets the other more regressive taxes that people pay. After factoring in deductions and credits, many low-income families owe very little or nothing in federal income taxes. An income tax credit is only useful to these families if it is refundable, meaning it can be received as a tax refund exceeding the federal income tax they owe.
ITEP previously estimated that eliminating refundability limits represents only about 20 percent of the cost of a full 2021 level CTC expansion.
Congressional Democrats have stated that they do not want to enact business tax breaks unless an expansion of the CTC is included in the same legislation. It might be difficult for lawmakers to understand what type of CTC expansion is comparable in terms of cost to the business tax cuts. As explained above, the temporary costs of the business tax breaks are minuscule compared to the costs if made permanent, which is the real intention of proponents. No one should be deceived into believing that the official CBO estimate of temporarily enacting the business tax cuts reflects their true costs.
More Details on Business Tax Breaks
This tax break is supposedly an incentive for corporations to conduct research that benefits society, but lawmakers have not asked what it has accomplished.
- 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.
- 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 four years.
- Read more about research expensing here.
This tax break 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 raises several problems.
- Accelerated depreciation has let many large corporations (Verizon, Amazon, Walt Disney, Con Edison, General Motors, Dish Network, 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.
- Read more about bonus depreciation here.
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 last 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 businesses 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.
- Read more about the looser limit on interest deductions here.