All corporations want for Christmas is a $131 billion tax cut
In 2017, with Trump in the White House, Republicans in Congress passed a massive tax cut for corporations, reducing the basic corporate tax rate from 35% to 21%. From there, corporations have an assortment of deductions and credits to reduce their tax bill further. Between 2018 and 2020, the three tax years following the corporate tax rate cut, "39 profitable corporations in the S&P 500 or Fortune 500 paid no federal income tax." Corporations that paid nothing in federal income taxes over those three years include Duke Energy, FedEx, and T-Mobile.
In 2021, more of the nation's largest corporations, including AT&T, Charter Communications, and Dow Inc., are paying nothing in federal income taxes. Other highly profitable corporations are paying very low rates, including General Motors (0.2%), Ford (1%), Exxon Mobil (2.8%), Nike (5.9%), and Amazon (6.1%). While major corporations are paying these low rates, corporate profits are soaring to record highs.
To reduce the enormous cost of the 2017 tax cuts, the law made some technical changes to certain business tax deductions beginning in 2022. The most prominent change involved how businesses could deduct spending on research and development (R&D). Starting this year, businesses cannot deduct the full cost of R&D immediately. Instead, they must spread out the cost over five tax years, a process known as amortization. (A separate tax credit for R&D remains unchanged.)
This change in the R&D tax deductions was put in place by Republicans in Congress (no Democrats voted for the bill) and signed into law by Trump. The overall legislation was enthusiastically supported by corporate America.
But now, the same corporations that cheered the legislation are warning of "grave harm" if the change in how R&D spending goes into effect. A letter to Congressional leaders, signed by the CFOs of 178 companies, says that "the current playing field is tilted against the U.S., and every day this policy continues to be in place makes it harder for the U.S. to remain a global leader in innovation." Several signatories of the letter represent corporations that have paid no income taxes in recent years.
Giving these corporations what they want will cost the federal government $131.3 billion over 10 years. But there is little evidence that the R&D tax deduction meaningfully increases R&D spending or useful innovation. Rather, "[e]vidence suggests that a significant portion of increased R&D spending may be driven by reclassification of existing activity." A 2019 paper in the Journal of Accounting and Public Policy found "found that creative categorization of some corporate spending as qualified R&D expenses can be an effective tax avoidance technique for companies to use."
While corporations are arguing that the immediate deduction of R&D expenditures is necessary to incentivize R&D spending, they are also urging Congress to make the change retroactive. They want the federal government to refund $29.1 billion in estimated taxes corporations paid this year. Since this R&D spending has already occurred, it is not an incentive but a corporate giveaway.
“We’re hoping, again, [that] we’re going to get a tax law change here at the end of the year with tax extenders which, as you know, will give us a refund of the $1.5 billion that we’ve already paid,” Raytheon CEO Gregory Hayes said during an earnings call last month. Raytheon had $3.9 billion in profits in 2021. It is projecting higher sales and profits for 2022.
Last week, the U.S. Chamber of Commerce — which represents virtually every major corporation in the United States — listed its legislative priorities for the remainder of the year. The extension of immediate deduction of corporate R&D spending is prominently featured. The group claims that allowing amortization to take effect "would increase the cost of doing business for American companies at a time when they are suffering persistent, record-high inflation." But large American companies that benefit from favorable tax treatment of R&D spending are not "suffering" from inflation. Rather, they are enjoying record profitability.
Corporations versus kids
The American Rescue Act, passed in March 2021, expanded the child tax credit. It increased the amount of the deduction, made it fully refundable regardless of income, and provided it as a monthly benefit instead of forcing families to wait for a tax refund.
The expanded child tax credit kept 3.7 million children out of poverty. The monthly payments were spent "on basic household needs and children's essentials: the most common item is food." After two months of payments, "2 million fewer adults report[ed] that their children, specifically, did not have enough to eat." Overall, child poverty rates were cut in half to the lowest level on record.
The child tax credit has traditionally "enjoyed bipartisan support." But many Republicans in Congress turned against expanding the credit after Biden embraced it. The U.S. Chamber of Commerce specifically argued against extending the expanded child tax credit, saying it was concerned about "large amounts of transfer payments that are not connected to work." That argument won the day, plunging millions of kids back into poverty.
Earlier this month, a group of 58 progressive members of Congress wrote leadership and urged them not to extend full deduction of corporate R&D spending without also helping families. The signatories describe the change to how R&D spending is deducted as "one of the few provisions that helped level the playing field by increasing corporate taxes." They noted that Biden's original Build Back Better proposal included a 4-year delay of changes to R&D deductions. But that delay was "included as part of a comprehensive framework that provided major economic and tax-related support for working families while pursuing historic advances in the longstanding Democratic priority to make the wealthy and large corporations finally pay their fair share in taxes."
A separate letter by 51 centrist Democrats to Democratic leadership claims allowing the change to R&D expensing to go into effect "will hurt U.S. economic competitiveness [and] stifle the innovation that has powered our economy." But this group also urged leadership to pair any change to R&D expensing with an extension of "the enhanced [child tax credit] so American families and children have the resources and opportunities to flourish."