Why Dems could go for more business tax breaks

SPLITTING THE TAB: As debt ceiling drama engulfs Capitol Hill, the last thing on anyone’s minds is a hefty tax spending bill, but that doesn’t mean businesses have stopped knocking on lawmakers’ doors to complain about changes to research and development rules that were enacted by the Tax Cuts and Jobs Act.

The rules — which took effect last year and require businesses to deduct R&D expenses over five years instead of all at once like they used to — are creating tax bills for small research firms the likes of which they really haven’t seen before.

In many cases, businesses report that they’ve had to lay off employees and take out lines of credit to rustle up the money to pay the IRS without the immediate writeoff.

But proponents of restoring immediate R&D deductions, like Sen. Todd Young (R-Ind.), are still encountering the same old problem that they did last year: Democrats say they won’t go for any business breaks without a restoration of the expanded child tax credit for families that expired at the end of 2021.

How could the two sides break the impasse as business pressure mounts on lawmakers and millions of children reportedly slip back into poverty?

Well, as our Brian Faler reports this morning, it could have much to do with reckoning the costs of the two items: the Biden administration’s version of the expanded CTC would cost $259 billion in 2024 alone, ten times more than reversing the R&D restrictions.

To achieve cost parity, Democrats could be incentivized to throw more business breaks into a compromise package.

BUT FIRST: We should note that President Joe Biden is set to meet with Speaker Kevin McCarthy this week to talk over the debt ceiling, and there’s a component of all this that should alarm those who think the $80 billion windfall for the IRS was a good thing for tax administration and enforcement, as tax historian Joseph Thorndike writes in Tax Notes.

If Biden is forced to reckon with what House Republicans want as expressed in McCarthy’s Limit, Save, Grow Act, think about which provisions would be more palatable for Democrats to accept: a repeal of green tax credits that make significant headway in avoiding a climate apocalypse and function as a large tax cut for business or “additional funding for America’s most unloved federal agency,” as Thorndike puts it.

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BACK TO A TAX PACKAGE: At the end of the day there are several things one could do to make what Democrats want and Republicans want more equal in terms of their costs.

Besides R&D, Republicans want to reverse limitations put in place by the TCJA on deductions for business interest expenses and extend bonus depreciation, which allows businesses to deduct the purchase price of eligible assets up to 100 percent immediately.

Throwing those in would add roughly $50 billion per year to the business breaks tab, Brian found.

On the other side of things, Democrats could make tweaks to their expanded Child Tax Credit to make the family relief less expensive.

The American Rescue Plan of 2021 both increased the maximum amounts available to CTC recipients and made the credit fully refundable, so that families making little-to-no income could take advantage of the credit, but Republicans and West Virginia Democratic Sen. Joe Manchin have generally not been fans of the idea — especially for parents who don’t work at all.

Some sort of compromise that could scale down the cost could keep the minimum income threshold for the current CTC in place — people have to make $2,500 or more to begin to be eligible for the credit — but accelerate the phase-in for the full credit.

Lawmakers could also increase the refundable portion of the credit, which is currently $1,600, but not make the entire credit refundable.

THE OECD STORM COMING: The CTC-R&D sage isn’t the only thing that lawmakers are going to need to do some catch-up homework on once (or if) the debt ceiling issue is resolved.

Specifically, there’s a coming storm as the EU and other countries around the world begin to roll out a minimum tax spearheaded by the OECD in Paris to make all companies making €750 million or more pay a 15 percent minimum tax.

As described by a May 1 letter by the National Foreign Trade Council to the OECD’s Centre for Tax Policy and Administration, R&D, housing and energy credits, among other tax incentives in the U.S., aren’t currently recognized under the global minimum tax — which could pose a major problem for some American companies, making them subject to the tax when they otherwise wouldn’t be.

While full implementation of the global minimum tax seems a way off, the OECD rules could, if unchanged, roll back a lot of policies that use taxes as leverage , such as those green credits in the Inflation Reduction Act that are aimed at significantly reducing the nation’s carbon emissions.

Smelling the coffee: That all begs the question of how alert lawmakers are to OECD developments and to what extent they’re coordinating at all with Treasury on negotiations taking place in Paris.

As a reminder, a few months ago Treasury asserted that the green credits under the IRA are protected by guidance issued by the OECD’s plan, but tax experts don’t seem to agree.

Here’s another interesting point: the United Kingdom appears to have done a much better job than the U.S. at protecting its incentives, such as the Brits’ version of an R&D credit.

“The United Kingdom has done a masterful job of negotiating terms of the deal that best benefit its taxpayers and its tax regime,” said Mindy Herzfeld of University of Florida in a recent Tax Notes article.

MINNESOTA MAKES BIG MOVES: Minnesota’s state legislature is moving rapidly to embrace a very different way of taxing companies that do business in the state — specifically, by requiring multinationals with a tax filing requirement in Minnesota to report the combined income of all their domestic and foreign subsidiaries for the purpose of paying the state’s corporate income tax.

The requirement would be a substantial departure from how businesses are currently taxed in every state in the U.S., which considers the proportion of sales that occur in state compared to the nation-wide sales of a company, but doesn’t look beyond the “water’s edge.”

Liberal tax policymakers and advocates in the Minnesota legislature say the tax would help stop companies from hiding their profits in tax havens, while conservative onlookers argue that the move raises concerns of overly complex compliance burdens and double taxation.

“One economic danger is that the tax will be an example to other states, creating a stack of state levies that claim a significant share of international business income,” the Wall Street Journal’s editorial board wrote in an op-ed last week.

Around the World

Reuters: “Australian Treasurer urges parliament to back petroleum tax changes”

FT: “PwC launches review over Australian tax law leaks”

Guardian: “Tax firm run by SNP’s auditors accused of potentially running avoidance scheme”

Around the Nation

LA Times: “L.A.'s luxury real estate market freezes, putting ‘mansion tax’ funds in limbo”

Kansas City Star: “Seeking Hollywood investment, Missouri legislature passes film production tax credit”

AP: “Maryland judges question jurisdiction of digital ad tax case”.

Also Worth Your Time

Reuters: “US senators urge Biden to negotiate tax agreement with Taiwan”

Bloomberg: “Finland’s Missing Millions Show Traders Are Still Exploiting Tax”

Did you know?

The average age when you stop feeling young, according to a study described in the Wall Street Journal, is now 43.