Revenue & Spending
What We Could Invest In if We Ended Special Corporate Tax Breaks
by Jessica Schieder, 5/6/2014
Services for American families have been under constant attack over the past several years. Head Start slots were cut, Meals on Wheels deliveries were curtailed, and the Supplemental Nutrition Assistance Program (SNAP) has been squeezed. House leaders have repeatedly insisted the country cannot afford such programs while continuing to push forward hundreds of billions of dollars in tax breaks for corporations. What could we as a nation invest in if we ended these special tax favors?
What's Being Cut and Who's Being Hurt?
Slots for 57,000 young, underprivileged learners in the Head Start program, as well as jobs for thousands of Head Start teachers, were cut in 2013 as funding for the program was reduced by $400 million. This is the most severe budget cut the highly successful program has encountered since its inception in 1965.
Across-the-board budget cuts also slashed more than four million meals to vulnerable seniors through the well-respected and effective Meals on Wheels program. Because many of these seniors are unable to cook for themselves, their only alternative is to enter a nursing home. In April 2013, we estimated that the $39 million in Meals on Wheels cuts would result in $479 million in additional costs borne by Medicaid for nursing home care, a bad deal for seniors and Americans as a whole.
In November, an estimated $5 billion per year was cut from food assistance to hungry Americans through the SNAP program, formerly known as the food stamp program. As a result, the per-meal subsidy dropped to less than $1.40 per meal for the one in seven Americans the SNAP program helped feed in 2013.
No Money to Help People, but Plenty of Cash for Corporations
Congress claimed we could not afford $5.5 billion to help give poor children a leg up on their schooling, to help seniors stay in their homes, or to help Americans feed their families. However, lawmakers seem to have no problem endorsing more corporate tax cuts – hundreds of billions of dollars' worth – and leaving all of them "unpaid for," meaning these tax cuts will either add to the deficit or further increase the pressure to cut programs that help people.
Both the House and Senate have in recent weeks prioritized retroactively extending tax loopholes that expired late last year. These tax breaks include troubling incentives for corporations to shift jobs and profits overseas.
In April, the Senate Finance Committee approved the EXPIRE Act (Expiring Provisions Improvement Reform and Efficiency Act), which will renew virtually all tax breaks that expired at the end of 2013. The package, known in Washington, DC as "tax extenders," would extend 55 tax breaks (mostly corporate) for two years at a cost of $85 billion (about $42 billion a year).
Continuing to renew all of these extensions over the next decade will cost approximately $700 billion – roughly 85 percent of the total cost of funding SNAP to feed our nation's hungry for the next 10 years. Despite the bill's substantial giveaways to corporations, there are no demands that these tax expenditures be "paid for" with reductions in expenditures elsewhere in the tax code, as has been demanded when programs that help working families come up for renewal.
After the Senate Finance Committee moved on the issue, the House Ways and Means Committee took up tax extenders and approved making six of the 55 expired tax provisions permanent – a decision that could lock these corporate giveaways into the tax code and budget indefinitely. The cost of these six provisions over the next 10 years alone is estimated to be as follows:
- H.R. 4429, Active Financing Exception: $58.8 billion
- H.R. 4438, Research and Experimentation Tax Credit: $155.5 billion
- H.R. 4453, Reducing the built-in gains recognition period for S Corporations: $1.5 billion
- H.R. 4454, Making permanent certain benefits regarding S Corporations: $700 million
- H.R. 4457, Permanent increases to expensing limitations: $73.1 billion
- H.R. 4464, Permanent CFC Look-Through Act of 2014: $20.3 billion
The total cost of extending the six provisions the House leadership would make permanent is more than $300 billion over 10 years and hundreds of billions more in the future.
Regardless of which bill is signed by the president – and it appears certain that there will be bipartisan agreement to extend these provisions for some duration of time – the "winners" will overwhelmingly be corporations who have gamed the system. The losers will be the American people – who need the government to provide public services. This unfair playing field means that programs, like unemployment benefits for the long-term unemployed, will continue to need funding while substantial giveaways to corporations go unquestioned, even by those who profess to be concerned about the deficit.
We Could End Special Favors for Corporations and Invest in America
There are workable alternatives. For example, instead of encouraging corporations to hide profits offshore, we could eliminate the six tax extenders the House has proposed making permanent and invest in early childhood education for 35 million children through the Head Start program. This, in turn, would stimulate local economies, as the families and teachers of these students circulate money into those economies.
But education isn't the only area where we could invest if we ended special tax favors for corporations. Putting a stop to two particularly egregious tax extenders could help fund other programs, as well.
The Active Financing Exception
Making the "Active Financing Exception" permanent sounds relatively innocent. In reality, this would be a massive victory for multinational corporations that shift profits and jobs overseas. The measure essentially allows corporations to avoid taxes on profits from financing activities by shifting those profits abroad.
The "Active Financing Exception" is often referred to as the "GE Loophole," as General Electric (GE) has used it to achieve stunningly low effective tax rates. Between 2008 and 2012, GE paid an effective U.S. tax rate of -11.1 percent, and the GE Loophole contributed significantly to this result. GE spent $61 million and hired a small army of 48 lobbyists between 2011 and 2013 to persuade Congress to renew the tax extenders package, including this loophole.
Making this tax loophole permanent would cost the country $58.8 billion over the next decade. By comparison, eliminating this loophole would allow us to invest in the Children's Health Insurance Program (CHIP), fully funding the program for the next decade. CHIP ensures that more than 8 million children in families without other health insurance have an opportunity to see a doctor. The program has recently been under attack as Republican proposals have supported cutting the program by as much as 70 percent in recent months.
The CFC Look-Through Rule
For the most part, Americans pay taxes in America, Canadians pay taxes in Canada, and the Irish pay taxes in Ireland. However, when it comes to corporations, there are plenty of exceptions.
Companies like Apple have learned to exploit tax loopholes such that it owes no taxes to any country on a huge percentage of its profits. How is it that billions of dollars in profits can go untaxed? Sen. Carl Levin (D-MI) described the scheme in a hearing, saying, "Apple successfully sought the holy grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere."
Apple used a combination of "look-through" and "check-the-box" tax loopholes to avoid paying $44 billion in U.S. taxes between 2009 and 2012.
Making this tax treatment permanent would cost taxpayers $20.3 billion over a decade, as described in H.R. 4464, and benefit corporations shifting profits to foreign subsidiaries. But if we ended this loophole, we could invest in updates to our public housing structures, of which more than 10,000 units are lost every year due to crumbling infrastructure. Suffering a shortage of funding from Congress to repair these homes, the Department of Housing and Urban Development (HUD) has begun selling them off to the private sector in a desperate, one-time attempt to raise the $26 billion needed to maintain the remaining buildings.
It's Time to Put People First
Smaller, U.S.-based businesses and average Americans, who do not exploit tax loopholes to stash profits offshore or otherwise dodge their obligations, are put at a competitive disadvantage by tax avoidance strategies. Additionally, profitable corporations that engage in this behavior force other taxpayers to pay a larger percentage of tax receipts.
Partially because corporations have become so well versed in tax avoidance, they are paying a smaller percentage of the nation's bills, while American workers are paying an ever-greater share of our nation's expenses.
With each extension of corporate tax loopholes, billions of dollars of taxpayer money is given away to Wall Street. Government budgets are pressured when corporations fail to pay their fair share, forcing difficult choices about cutting basic services to American families.
Over 10 years, the cost of the two tax extenders discussed above would total $80 billion and promote the shifting of profits to offshore tax havens. Putting that $80 billion into fixing our nation’s bridges – instead of putting it in the pockets of tax-avoiding corporations – would put the country on track to repairing our nation's backlog of structurally deficient bridges by 2028.
Advocates for tax extenders frequently suggest that these loopholes should be protected because they produce jobs, but the connection between tax loopholes and job creation is tenuous, at best. Between 2008 and 2010, 30 profitable Fortune 500 companies that paid low effective tax rates actually destroyed 51,289 jobs, whereas 30 corporations that paid relatively high effective tax rates created almost 200,000 jobs.
Public programs like Meals on Wheels, Head Start, and unemployment insurance are not "too expensive" for the country to afford; they are critical public investments and are more important to the quality of life for average Americans than corporate tax breaks. It is morally bankrupt to insist that extending unemployment insurance to help jobless Americans looking for work be paid for with cuts to other public programs while allowing the corporate tax extenders package to fly through with no "pay-for."
For working Americans, there is a justified sense that corporations are getting the better end of the bargain. It's time to put the American people first.