Corporate Tax Cut Bonanza

Without fanfare, Congress gives big tax breaks to U.S. corporations.

by Amy Gluckman

Dollars and Sense magazine, November/December 2004

 

Today, U.S. corporations are sitting on unusually large piles of cash and not investing much, their profits are rising much faster than workers' wages, and they're paying a smaller share of taxes, by any reckoning, than they have in decades. And the 2004 federal budget deficit is over $400 billion. So what's Congress to do? Pass a large corporate tax cut, of course.

Dubbed the American Jobs Creation Act, the megalith tax bill, which the Wall Street Journal termed "the most sweeping rewrite of corporate tax law in nearly two decades," passed in October. The original impetus for the bill was the need for a relatively minor fix: ending a tax subsidy for U.S. exporters that the World Trade Organization had ruled to be an illegal trade barrier.

Ending this tax subsidy would have raised $49 billion in federal revenue over 10 years. Congress could have taken the $49 billion and either applied it against rising federal deficits or used it to stem cutbacks in housing, environmental protection, or other important programs. Or, legislators could have given the $49 billion back to U.S. companies in the form of alternative tax breaks, creating a "revenue-neutral" bill.

Instead, legislators took the opportunity to lavish what will likely turn out to be about $210 billion over 10 years in tax breaks on a wide swath of U.S. corporations. (The actual sum of the tax breaks in the bill as written is about $138 billion. However, this figure assumes that those tax breaks which are supposed to last for only one or a few years will actually sunset when specified. Experience suggests this is unlikely. An analysis by the Center on Budget and Policy Priorities of provisions likely to be extended suggests the true 10-year total will be about $80 billion more.)

The biggest tax break, at $76.5 billion over 10 years, is a deduction for a share of profits from manufacturing; bolstering domestic manufacturing was the bill's main selling point. The "manufacturing" being bolstered is defined broadly, though; oil and gas producers, architecture and engineering firms, and large farming operations, for example, are all included.

Dozens of provisions in the bill are designed to benefit specific corporations and industries. Among them:

A one-year tax holiday for companies that repatriate profits from overseas operations. The bill drops the tax rate on these profits from 35% to 5.25%. The biggest likely beneficiaries are technology and pharmaceutical firms including Johnson & Johnson, Hewlett Packard, Schering-Plough, and Oracle. All belong to the patriotically-named Homeland Investment Coalition, which has lobbied for the provision, claiming it would create jobs in the United States. Even the president's Council of Economic Advisers, however, concluded easing repatriation "would not produce any substantial economic benefits," the Wall Street journal reports.

A change in the depreciation rules governing certain aircraft outside of the transportation industry. Citizens for Tax Justice (CTJ) suggests this provision is designed to aid GE, which stands to benefit from other provisions in the bill as well, such as those dealing with interest costs and foreign tax credits. The interest allocation and foreign tax credit changes alone will reduce federal revenues by an estimated $22.3 billion over 10 years.

* Higher tax write-offs for certain film and television productions. Likely beneficiaries are entertainment companies such as Disney and TimeWarner.

* A modification in the tax treatment of some pipeline property in Alaska. According to CTJ, this provision affects one particular project; partners in the project include ExxonMobil, Conoco Phillips, and BP.

* Other beneficiaries of specific provisions in the new law, according to the Wall Street journal, include defense giants General Dynamics and Northrup Grumman, importers of Chinese ceiling fans, and NASCAR race track owners.

The law does manage to shrink a few tax loopholes; for example, it reduces the ability of companies to avoid taxes by reincorporating in tax havens like Barbados. However, House leaders stripped out of the final bill a number of Senate provisions aimed at stopping other forms of corporate tax evasion.

Before its final passage in October, the Washington Post reported that the Bush administration had doubts about the bill and was trying to slow it down "until at least after the election." Perhaps the president just wanted to avoid signing a huge corporate giveaway a few weeks before November 2. In any case, Treasury Secretary John Snowe wrote the HouseSenate conference committee that the bill included "a myriad of special interest tax provisions that benefit few taxpayers." For once, a Bush administration economic policy official got it right.

 

Amy Gluckman is a Dollars & Sense co-editor.


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