CHN: Action on Tax Policy Possible in Lame Duck; Administration Moves to Reduce Corporate Tax Avoidance
Action on Tax Extenders: During the lame duck session in November and December, Congress may work to extend dozens of temporary tax cuts known as “extenders” that have expired or are scheduled to expire. Business and energy tax breaks comprise approximately 90 percent of the tax extenders, with the remaining going to individuals. On April 3, the Senate Finance Committee passed by a voice vote a retroactive two-year package of tax extenders for 2014 and 2015 that expired at the beginning of this year, costing $85 billion. Rather than a short-term extension, the Republican-led House has passed several bills making permanent some of their high-priority tax extenders. House action began on April 29 when the House Ways and Means Committee passed with almost straight party line votes a permanent extension of six corporate tax cuts at a cost of $310 billion over 10 years. The Committee proceeded to pass legislation to make permanent a total of 14 tax breaks. The full House has passed permanent extensions of individual extenders, including the two pro-business tax cuts with the highest 10-year costs – bonus depreciation and the research and development credit, costing $287 billion and $156 billion respectively. For more information on these cuts, see CHN’s June 17 Human Needs Report.
The cost of making permanent all of the tax extenders is more than $700 billion over 10 years. Congress has no appetite for offsetting the cost of renewing these tax cuts by increasing other revenues or cutting spending. This is in stark contrast to the insistence by Republicans that the much less expensive extension of unemployment benefits would have to be paid for. Unable to come to agreement on offsets, Congress has allowed that program to expire. A new report based on Department of Labor statistics shows that over 3.6 million people have lost benefits due to the program expiring.
Action during the lame duck on tax extenders will likely depend on the outcome of the elections. Both parties could agree to pass the Senate $85 billion two-year extension. Senate Finance Committee Chairman Senator Ron Wyden (D-OR) and House Ways and Means Chairman Dave Camp (R-MI) are also said to be considering a one-year $47 billion extension. If the Republicans win the Senate, they may want to wait until early next year to make permanent at least some of the 55 tax extenders. They would need to act quickly to retroactively reinstate the cuts for tax year 2014 so they would be reflected in taxes filed by the April 15 deadline.
Citizens for Tax Justice has been in the forefront of calling for greater scrutiny on the merits of the tax extenders. In a report released in May , they outline why they believe that many of these tax cuts do not benefit the economy and are poor policy, or should be funded through direct spending, not the tax code.
Corporative Tax Inversions: On September 22, the U.S. Department of the Treasury (DOT) and the IRS announced initial steps to reduce the tax benefits from corporate inversions. A so-called “inversion” results when a larger U.S. corporation merges with a foreign company in a country with lower marginal corporate tax rates and other favorable policies, and on paper calls itself a foreign company for tax purposes. At the same time, the corporation continues in reality to be headquartered in the United States maintaining its management and workers here.
Treasury Secretary Jack Lew and some members of Congress have become alarmed at the growing frequency of inversions. Heightened attention focused on the issue this summer when American icon Burger King announced that it was going to merge with Tim Horton’s, the much smaller Canadian company, and declare itself a foreign company. This activity is problematic because it drains revenue from the Treasury, placing more of the tax burden on individual taxpayers while the corporation continues to enjoy the benefits of U.S. infrastructure, customer base, and legal protections. See CHN’s August 21 Voices for Human Needs blog for more background on inversions. In the early 1950s, businesses accounted for nearly one-third of federal tax revenue. Today, the amount is approximately 10 percent.
Specifically, the joint DOT and IRS notice reduces the tax benefits of corporate inversions by preventing companies from accessing its foreign subsidiary’s earnings tax free or engaging in a complicated loan structure with them to avoid taxes. It also strengthens the requirement that the former owners of the U.S. company own less that 80 percent of the new combined entity. Secretary Lew acknowledges that these targeted steps make progress in constraining inversions but that the best way to address the issue is through corporate tax reform legislation.
In May, Senator Carl Levin (D-MI), Chairman of the Permanent Subcommittee on Investigations within the Senate Homeland Security and Government Affairs Committee, and Representative Sander Levin (D-MI), Ranking Democrat on the House Ways and Means Committee, introduced the Stop Corporate Inversions Act of 2014 (S. 2360/H.R. 4679). The bill’s provisions include increasing the amount of stock that is foreign-owned in the new merged entity from 20 to 50 percent. The Coalition on Human Needs is a member of Americans for Tax Fairness, which has sent letters to Senator Levin and Representative Levin in support of their legislation.
Republicans claim to support legislation to address inversions but argue that the issue should be dealt with in comprehensive tax reform. While preferring to act in the context of comprehensive reform, in July Senate Finance Committee Chairman Ron Wyden (D-OR) called for immediate temporary action to stop the erosion of revenue. The Committee’s Ranking Member Orrin Hatch (R-UT) paid lip service to the idea but then proposed conditions he knew would not be acceptable to the majority – he insisted the legislation would not increase revenues, would not be “punitive” (which he considers S. 2360 to be), and would move the U.S. tax system closer to one which exempts offshore profits from taxes.
Despite the widespread outrage over inversions, corporate influence will make it difficult to pass this legislation aimed at reining in one form of corporate tax avoidance.