Corporate Tax Cut Bonanza
Without fanfare, Congress gives
big tax breaks to U.S. corporations.
by Amy Gluckman
Dollars and Sense magazine, November/December
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
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"
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
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
Amy Gluckman is a Dollars & Sense