The new bipartisan tax deal is just the first of many battles that will ensue over the next year with the expiration of a number of the 2017 Trump tax cuts. Unfortunately, Democrats just can’t seem to help themselves. Instead of standing up and demanding what America really needs – a smart tax code that incentivizes the society they want – they have once again gone along to get along.
Last week, in the kind of rare show of bipartisanship that seems to only occur when it benefits rich Americans or corporations, by a vote of 357 to 70, House Republicans and Democrats voted to pass the Tax Relief for American Families and Workers Act of 2024. As we discussed last week, this $78 billion package will, among other things, expand the Child Tax Credit and extend a trio of major corporate tax breaks. The bill now moves to the Senate for approval. If Democrats want to salvage their chances of winning the upcoming elections, they need to read the political tea leaves in America, stop combining bad politics with bad policies, and make essential changes to their new tax package on behalf of working people.
We agree wholeheartedly with the 23 Democrats who voted against the bill arguing that it gives too little relief to poor families who need it most and entirely too much unmerited relief to ultra-profitable, tax-dodging corporations that don’t need it at all. Representative Lloyd Doggett (TX-37) put it best in the speech that he delivered on the House floor before casting his opposing vote: “This corporate tax windfall bill, thinly disguised as help for children, offers even more tax advantages to corporations that are paying today a mere 7.8% tax rate. A working mother of two earning the average wage pays a federal effective rate of 20%…Minimal help for children, maximum benefits for those who are failing to pay their fair share.”
Analyses of the bill have confirmed our view regarding its outrageously lopsided nature. According to one estimate, with the bill’s changes, for the 2023 tax year, the poorest 20% of households would see an average $60 increase in their after-tax income while the top 1% of earners would receive an average $9,500 boost. By another estimate, in 2025 when the bill’s provisions are fully in effect, foreign investors would actually be the biggest winners with a whopping $19.7 billion in total tax cuts, which is more than all of the benefits that US taxpayers would receive combined.
(The explainers of each of the provisions are lightly copied from last week’s Closer Look.)
Research and Development (R&D) Tax Deduction
The bill would extend a TCJA provision that allowed corporations to reduce their tax bills by deducting their research and development expenses from their earnings immediately in the year in which they were incurred. Since 2022, when the rule expired, companies have had to spread those expenses over a period of five years, which is a more realistic match for how those expenses and the income they generate are spread out. In theory, the “immediate expensing” rule was done with the aim of incentivizing companies to perform research and development in the US. However, Republicans insisted on making this benefit retroactive to cover the period between when the rule expired and now, which is based on the preposterous idea that companies need an incentive to spend money they’ve already spent.
MINIMUM DEMAND: Democrats should demand that this benefit not be retroactive and should ensure that it is not renewed in 2025.
Net Interest Tax Deduction
Before the TCJA, corporations generally were able to deduct the interest that they pay on loans on their taxes. The Trump tax bill enacted some changes, in three stages, to the deductibility of interest for large businesses (which they defined as gross revenue over $25 million adjusted for inflation post-2018). The first stage was a ceiling on interest deduction equal to 50% of earnings before interest, taxes, depreciation, and amortization (EBITDA). The second stage was a reduction of the interest deduction ceiling to 30% of EBITDA. The third stage, effective in 2022, was a reduction of the interest deduction ceiling to 30% of earnings before interest and taxes, i.e. after depreciation and amortization costs. These phases were designed as an accounting gimmick to lower the overall estimated “cost” of the TCJA, but the Republicans always planned on extending the more generous cut.
The new bill would retroactively delay the transition from the second to the third stage of the limitation on interest deductibility from 2022 to 2026. This would end up subsidizing some of the worst activities of private equity companies which have gained a bad reputation over the years for bankrupting employees of companies like Sears while lining their executives’ pockets.
MINIMUM DEMAND: Democrats should demand that the change not be retroactive. The provision should revert to the second stage beginning only from the date that the bill is enacted through 2025, and they should refuse to extend the second stage post-2025.
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 allowed companies to write off the entire cost of many assets in the year in which they were purchased, but this 100% bonus depreciation expired last year. This new bill would revive this provision through 2025 and, much like the other provisions, be retroactive from the time of its expiration. This provision is a favorite of companies like Amazon, Verizon, and General Motors, who pay single-digit effective corporate tax rates, and it’s also subsidized automation, creating a tax incentive to replace workers with machines.
MINIMUM DEMAND: Democrats should demand that this provision not be made retroactive, and be vocal that this short-term extension through 2025 is where the buck stops on bonus depreciation.
Closing
The title of the bipartisan tax package – Tax Relief for American Families and Workers Act of 2024 – is disingenuous at best and a lie at worst. It does give some relief to poor families with children, but it’s really only breadcrumbs, especially in comparison to the bread baskets – nay, truckloads of bread baskets – that the wealthy and corporations receive. It is beyond belief and insulting that the majority of House members apparently believed that poor children and struggling families could only be helped if big-box corporations were too.
According to the bill’s revenue score from the Joint Committee on Taxation, the relative benefits of the expanded CTC and corporate tax cuts are supposedly equalized by additional tax paid by corporations after the cuts expire at the end of 2025, but if Democrats do not demand changes in exchange for their votes now, the outlook for them to successfully resist further extensions in 2025 is bleak. These corporate taxes will now stack on top of the many personal tax cuts for the rich that are set to expire in 2025. Democrats are setting themselves up to fight a war on multiple fronts, and if they’re extended any further, these corporate tax cuts could become a $500 billion giveaway in exchange for $33.5 billion in CTC benefits.
The fight over the expiration of the Trump tax cuts is very obviously beginning now, and Senate Democrats need to step into the ring. These recommended changes are the bare minimum if Senate Democrats want to make it clear they’re not about to roll over in 2025 and let the Trump tax cuts be extended in perpetuity. Their entire reputation of being the party of and for working people depends on it.