U.S. corporations want a retroactive tax break from Congress that would cost Americans $33 billion

By Robert Pozen

Retroactive removal of deduction limits is a giveaway to corporations

This tax relief for corporations bestows a windfall on a select group of shareholders without benefitting the rest of us.

The Business Roundtable loudly applauded the passage of a federal tax act in 2017 (the 2017 Act), which lowered the corporate tax rate from 35% to 21%. The revenue loss from the 2017 Act was offset, in part, by several limits on corporate deductions that came into effect between 2022 and 2025.

However, the Business Roundtable is now pushing to delay the limits on business relief through 2025, including lifting the limits retroactively for expenditures made in 2022 and 2023.

The retroactive elimination of these deduction limits is now enshrined in a compromise bill, which recently passed the House by a 357-70 vote because it also includes a temporary expansion of the child tax-credit. Although I support the expansion of the child tax credit, I strongly urge the Senate to offer business relief only to the future years when the relief could influence corporate behavior.

Corporate lobbyists are now arguing that removing the deduction limits in the 2017 Act would incentivize companies to grow their capital investments and create more jobs. While these arguments may be credible for future years, they cannot possibly change company behavior for 2022 and 2023 because these years are already past. The retroactive removal of deduction limits is simply a giveaway to corporations, which undermines the fundamental trade-off in the 2017 Act between lower corporate tax rates and limits on corporate tax deductions.

The 2017 Act included three main limits on corporate deductions that were supposed to become effective in 2022 or 2023. The elimination of these three limits through 2025 may seem technical, but together they would cost $33 billion in lost tax revenues according to the non-partisan Joint Committee on Taxation. Let's review each of these limits.

First, the 2017 Act limited a corporation's deductions for interest to 30% of its Adjusted Taxable Income (ATI), which was calculated without any subtractions for depreciation and amortization of corporate assets. From 2022 onwards, the 2017 Act tightened this limit by requiring ATI to be calculated after subtracting depreciation and amortization. The compromise bill would retroactively remove this tightening for 2022 and 2023, as well as for 2024 and 2025.

The change would mainly benefit highly leveraged companies.

This retroactive change would mainly benefit highly leveraged companies, like those owned by private equity firms, which have substantial profits. It would not help startups since they generally do not have substantial profits against which to deduct interest.

Second, the 2017 Act allowed U.S. corporations to deduct 100% of their research expenditures in the year they were made, rather than being spread out over five years. But the 2017 Act went back to spreading out deductions for domestic research expenditures starting in 2022. The compromise bill would retroactivity reverse this provision of the 2017 Act, thus allowing companies to deduct 100% of their domestic research expenditures in the year they were made from 2022 onwards.

It is unclear whether this acceleration of deductions for research expenditures is a significant factor in corporate decisions to engage in research. This provision of the compromise bill must be distinguished from the research and experimentation tax credit, which also applies and seems to be more important to corporate research decisions. In any event, the retroactive acceleration of tax deductions can have no impact on corporate research decisions in 2022 and 2023.

Third, the 2017 Act allowed U.S. corporations to deduct 100% of qualifying investments in equipment and other qualifying property. But the 2017 Act begins to phase out this so-called bonus depreciation starting in 2023. The compromise bill would retroactively change this aspect of the 2017 Act by delaying the phase-out of bonus depreciation from 2023 to later tax years.

Again, there is a credible argument that bonus depreciation may encourage some corporations to increase their investments in equipment and other qualifying property. However, the reinstatement of bonus depreciation for 2023 can have no impact on corporate investments since that year has already passed. A better approach would be to reinstate bonus depreciation only for 2024 or 2025 when it might incentivize corporations to increase their capital investments.

All the benefits of retroactive provisions go to a lower corporate tax bill, which helps corporate shareholders.

More broadly, Congress should consider the distributional effects of retroactively handing out tax benefits to corporations. When Congress enacts tax benefits for corporations, analysts generally attribute the majority of the benefits to corporate shareholders and a substantial minority to labor. That's because higher corporate investments in equipment or research usually are associated with increased productivity of workers, which drives up their pay. However, for years gone by, investment decisions have already been made. So, all the benefits of retroactive provisions go to a lower corporate tax bill, which helps corporate shareholders but does not increase worker productivity.

In short, retroactive removal of the deduction limits in the 2017 Act can have no positive impact on the decisions of corporate executives. At least two Republican senators, Charles Grassley (R-Iowa) and Thom Tillis (R-North Carolina), have publicly expressed concern that such retroactivity is problematic tax policy for this reason.

If the Senate removed retroactive tax relief in the compromise bill, Congress could use the extra revenue to bolster a business tax benefit going forward Alternatively, Congress could further expand the tax benefits for working families. However, retroactive tax relief for corporations bestows a windfall on a select group of shareholders without benefitting the rest of us.

Robert Pozen is a senior lecturer at MIT Sloan School of Management. He is a former president of Fidelity Investments.

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-Robert Pozen

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03-23-24 1220ET

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