Republicans and Democrats have been engaging in some horse trading on tax policy lately, but the deal, in its current form, provides corporations – already flush with cash – a massive tax break while working families will see only a modest extension of the Child Tax Credit.
Two weeks ago, Senate Finance Committee Chairman Ron Wyden (D-OR) and House Ways and Means Committee Chairman Jason Smith (R-MO) announced that they had reached a deal on a bipartisan tax package, The Tax Relief for American Families and Workers Act of 2024. House Speaker Johnson has vowed to bring the bill to the House floor for a vote today under a suspension of rules, despite various concerns and protestations from his fellow Republicans.
The bill would usher in several changes, but what’s attracting the most attention is a “trade” that has been in the works for a while between Democrats and Republicans regarding the Child Tax Credit (CTC) and a trio of corporate tax cuts. For this week’s Closer Look, we want to highlight these two core aspects of the bill and explain how corporations are the clear winners of the trade.
Child Tax Credit (CTC)
Let’s start with the CTC. In 2021 during the height of the COVID pandemic, the American Rescue Plan expanded the CTC for families in need. Incredibly, the expansion managed to cut child poverty in half as it lifted no fewer than 3.7 million children out of poverty in 2021 alone. While the current formula for calculating poverty is woefully inadequate, it’s indisputable that the provision had an overwhelmingly positive impact on the well-being of millions of children. When the credit elapsed in 2022, child poverty predictably rebounded back to pre-COVID levels. Ever since then, Democrats have been determined to bring back an expanded version of the CTC to give much-needed relief to working families with children.
The new deal expands the CTC for three years. Most of the changes involve the “refundability” aspect of the credit. Under current law, the CTC is $2,000, and only $1,700 of it is refundable. This means that, for families whose tax bills are lower than the $2,000 CTC, they can only get a maximum tax refund of $1,700 from the credit. The proposal would change this by gradually making the credit fully refundable by 2025, but only for those earning above $2,500. The new CTC would also help families with multiple children by phasing in the refundable portion of the credit for each child separately and creating a “lookback rule” which will allow families to use earnings from the previous year to receive the credit. All told, the Joint Committee on Taxation estimates that this new CTC would cost $33.5 billion.
It is important to note that the new CTC does not go as far as the 2021 CTC expansion. Among other things, the 2021 CTC increased the credit amount to $3,000 (or $3,600 for children under the age of 6), distributed refunds as monthly checks instead of one lump-sum payment via tax returns, and also did not have work requirements. That said, although the new CTC is smaller in scale, it would still lift 400,000 children above the federal poverty line in its first year, which is undeniably a good thing.
Three Corporate Tax Cuts
Meanwhile, Republicans got their wish in this new package to renew three corporate tax cuts enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) which have expired. The Joint Committee on Taxation estimates that these three cuts – relating to research and development expensing, interest deductibility, and bonus depreciation – and one smaller one will cost the government $186 billion, in fiscal years 2024 and 2025, making them nearly five times as expensive as Democrats’ amended CTC.
Below are brief explainers of each of the corporate tax cuts. (You might recognize this from our Closer Look in December of 2022.)
Research and Experimentation (R&E) Tax 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 companies now have to spread out their R&E deduction over a period of five years instead of just one, which ultimately makes for higher corporate tax bills.
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.” 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 has become smaller and corporations’ tax bills have become higher.
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. This is a particular favorite among corporations, as it has allowed household names like Amazon, Verizon, and General Motors to pay single-digit effective corporate tax rates.
Closing
We’d like to close by sharing the thoughts of our President, Erica Payne, on Republicans and Democrats’ new deal, which were recently featured in Roll Call. She said, “Enhancing the Child Tax Credit (CTC) is an undeniable good in this new deal… At the same time, I’m disgusted by those who saw the obvious need to extend those benefits as an opportunity to extract tax cuts for corporations, who clearly didn’t need them as they pulled in record profits and artificially pumped up inflation. There was no need for horse trading on the CTC.”
Like Erica said, there was no need for horse trading on the CTC in the first place. This deal is a grab bag of unnecessary tax breaks to corporations and offers only a meager benefit for struggling families. Our children deserve better, and Democrats should fight for a better deal.