Rep. Dave Camp, the chairman of the House Ways and Means Committee, will take the first step to make permanent certain business tax breaks on Tuesday, when his committee marks up legislation that would increase the deficit by $300 billion over the coming decade.
The provisions are among the “tax extenders,” the package of tax breaks that mostly benefit businesses and that Congress extends every couple of years. We have pointed out that even if Congress simply continues its practice of extending these tax breaks for another two years, it would signal that these corporate tax breaks will likely be with us forever — which the Congressional Budget Office projects would increase the deficit by $700 billion over the coming decade. Camp’s move to make certain of the tax extenders permanent would make that unfortunate outcome even more likely.
These bills should be rejected for several reasons.
1. It is plainly hypocritical for Congress to provide hundreds of billions in deficit-financed tax breaks for corporations while refusing to help the long-term unemployed, ostensibly because of the impact it would have on the federal budget.
2. One of the provisions Camp would make permanent is the research tax credit, which needs major reform before it can come close to carrying out its goal of encouraging businesses to conduct research.
3. Two other provisions Camp would make permanent are tax breaks that facilitate offshore tax avoidance by corporations —the “active finance exception” and “CFC look-through rule.”
Each of these three reasons to reject the legislation is discussed below.
1. Congressional Hypocrites Would Provide Deficit-Financed Tax Breaks for Businesses, Nothing for the Unemployed
It is plainly hypocritical for Congress to provide hundreds of billions of dollars in deficit-financed tax breaks for corporations while refusing to extend Emergency Unemployment Compensation (EUC) to the long-term unemployed, which expired in December, ostensibly because of the impact it would have on the federal budget. Since the 1950s, Congress has always continued such help until the long-term unemployment rate fell lower than it is today. As the Coalition on Human Needs explains
EUC has long been considered an emergency program that does not have to be paid for by other spending reductions or revenue increases. Five times under President George W. Bush, when the unemployment rate was above 6 percent, unemployment insurance was extended without paying for it and with the support of the majority of Republicans.
Now many lawmakers are establishing a new norm: All direct spending must be paid for, even if it’s temporary emergency legislation to help families of unemployed workers, but spending in the form of tax cuts for businesses does not have to be paid for. The bill approved by the Senate before the April recess to extend EUC includes provisions that offset the cost. (House Speaker John Boehner has nonetheless refused to bring the bill to a vote in the House.)
2. Congress Should Not Make Permanent the Research Credit before Reforming It
The most costly of the bills that will be marked up Tuesday would make permanent the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.
A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs reform is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.
Another aspect of the credit that needs reform is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly encourage research if the claimant did not even know about the credit until after the research was conducted.
As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.
3. Congress Would Make Permanent Two Tax Provisions that Facilitate Offshore Tax Avoidance
The general rule is that American corporations are allowed to “defer” (indefinitely delay) paying U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer paying U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.
Two of the provisions that would be made permanent on Tuesday poke holes in this general rule.
One of these provisions is the “active financing exception” but ought to be remembered as the “G.E. loophole.” In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to defer paying any U.S. taxes on offshore profits from financing loans.
G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes.
The other provision is the “look-through rule” for “controlled foreign corporations,” (for the offshore subsidiaries of American corporations). The look-through rule allows a U.S. multinational corporation to defer paying U.S. taxes on passive income, such as royalties, earned by an offshore subsidiary if that income is paid by another related subsidiary and can be traced to the active income of the paying subsidiary.
The closely watched Apple investigation by the Senate Permanent Subcommittee on Investigations a year ago resulted in a report — signed by the subcommittee’s chairman and ranking member, Carl Levin and John McCain — that listed the CFC look-through rule as one of the loopholes used by Apple to shift profits abroad and avoid U.S. taxes.