Congress is facing an important deadline this week. By this Friday, December 16th, lawmakers must adopt a new spending bill to fund the federal government for the 2023 fiscal year, or they will face the prospect of a government shutdown.
Both Republicans and Democrats are eager to get this done. They might not care equally about the need to prevent the economic fallout that would inevitably ensue with a shutdown (as we’ve seen with many shutdowns in the past), but they both see this spending bill as an opportunity to accomplish some of their other goals. At the top of the list for both parties are tax extensions, which we want to highlight for you in this week’s Closer Look.
For their part, Democrats want to revive a fraction of the American Rescue Plan’s expansion of the Child Tax Credit (CTC). The expansion gave parents a tax credit of up to $3,600 per child and lifted no fewer than 2.1 million children out of poverty in 2021. Congress unfortunately let this expanded version of the CTC expire at the end of last year, but now Democrats want to use the legislative opportunity at hand to re-expand the CTC (although probably not to the same extent) and give a much-needed financial boost to working families.
On the other hand, Republicans (and some of their corporate-minded Democratic allies) have a different tax priority in mind for this spending bill. Instead of giving a helping hand to working families, they want to help their corporate donors by extending three substantial corporate tax breaks enacted under Donald Trump and Paul Ryan’s 2017 Tax Cuts and Jobs Act (TCJA) that either expired in 2022 or are set to expire in 2023. As the fight over these extenders rages on Capitol Hill, you might be hearing about these different policies without much explanation, so here’s a rundown of all three:
Research and Experimentation (R&E) Tax Deduction
With this deduction, the TCJA allowed corporations to reduce their tax bill by deducting their research and development expenses from their earnings immediately in the year in which they were incurred. This immediate write-off rule expired in 2022, so starting this year, companies now have to spread out their R&E deduction over a period of five years instead of just one, which ultimately will make for higher corporate tax bills.
Some of the world’s biggest corporations – including household names like Amazon, Ford, Intel, and Microsoft – are lobbying like crazy to reinstate the full, immediate write-off for R&E costs. If they get their way and Republicans honor their request to make this tax break permanent, it would result in $155 billion in additional tax breaks for major corporations over the next decade.
Net Interest Tax Deduction
When calculating their tax bills, corporations are able to deduct the interest that they pay on loans. For many corporations with significant amounts of loans, this can be a very large amount of money.
The TCJA limited this deduction to 30% of adjusted taxable income, originally defined as taxable income before interest, taxes, depreciation, and amortization are subtracted. In 2022, however, this broad definition of adjusted taxable income “expired.” Starting this year, companies can still deduct up to 30% of their adjusted taxable income, but what counts as adjusted taxable income has changed. Depreciation and amortization are now included in those calculations, meaning that the amount of adjusted taxable income ends up being smaller. And since the Net Interest Tax Deduction is capped at 30% of adjusted taxable income, a smaller amount there means a lower amount that can be deducted and a larger tax bill for corporations.
This seems like a minor technical change, but if Congress reinstates the Net Interest Tax Deduction, it would result in over $200 billion in new corporate tax cuts over the next decade.
100% Bonus Depreciation
Corporations have long benefited from something called accelerated depreciation: the ability to deduct the cost of business assets (like trucks, machines, etc.) faster than those assets wear out. The TCJA supercharged this tax break by allowing companies to write off the entire cost of many assets in the year in which they were purchased, similar to the R&E deduction. Corporations still have the ability to make use of this special tax break, but it is scheduled to start gradually expiring in 2023.
It’s hard to overstate how impactful this is on corporate profits. Thanks to the time value of money, being able to deduct the full cost of an asset immediately rather than spread out over many years gives corporations a massive financial benefit. Between 2018 and 2021, 23 of the nation’s biggest corporations – including the likes of Google, Bank of America, and Walt Disney – avoided a combined $50 billion in taxes because of 100% bonus depreciation. If corporations get their way and Republicans extend this egregious tax break, it would result in no less than $250 billion in new corporate tax cuts over the next decade.
If your eyes glazed over while reading about the definition of adjusted taxable income, we don’t blame you – this is dense stuff. But it’s important. We can’t let the complexities of the corporate tax code deter us from talking about it, particularly when corporations and their allies in Congress are depending on the masses not understanding just how badly they’re being swindled.
These are not minor tweaks; they are massive tax cuts that will amount to over $600 billion over the next decade. And corporations do not need any tax breaks, much less ones of this magnitude. They are doing better than ever profit-wise because of their successful price-gouging campaigns, and can therefore more than afford to start finally paying their rightful share in taxes. They will raise a stink about needing special breaks to make investments to grow their businesses and the economy, but don’t be fooled: research has shown time and again that corporations would make investments in their businesses even in the absence of these sorts of tax breaks.
Some Democrats may be trying to broker a quid pro quo deal that moves these corporate tax extenders through in exchange for Republicans agreeing to renew the expanded CTC. But while the CTC is certainly worth fighting for, the final act of Democrats while in full control of Congress should not be to pass $600 billion in tax cuts for corporations. Democrats should let these tax breaks expire for good.