Sen. Kyrsten Sinema (D-AZ) appears to have gotten a concession in the new Democratic inflation legislation that would preserve a feature of the tax code favored by Republicans and many economists as a way of increasing business investment and economic growth.
Sinema, a key swing vote in the Senate, announced that a compromise had been made with Democratic leadership and that she would vote for the Manchin-Schumer legislation to expand clean energy subsidies and implement negotiation of drug prices in government healthcare plans. A key concession extended to Sinema was exempting what is known as bonus depreciation from the portion of the bill that would apply a minimum tax to the book income of corporations.
At the heart of the Democratic proposal to raise revenue is a minimum 15% tax on the adjusted financial statement income of big corporations — “book income.” In other words, the companies would have to calculate their taxable income twice: Once using the tax code and applying a 21% rate, and a second time using financial accounting and applying a 15% rate.
But manufacturers and Republicans cried foul, saying that the 15% minimum tax would eliminate the value of tax incentives intentionally put in the code, most notably the accelerated depreciation provisions of the 2017 Trump tax cuts, also known as the Tax Cuts and Jobs Act.
That feature of the Trump tax cuts allowed companies to write off certain capital expenditures immediately, for instance, machinery, instead of having those deductions written off over a calculation of the useful life of the asset. That provision was favored by Republican supply-siders, such as Sens. Pat Toomey of Pennsylvania and Ted Cruz of Texas, as a way to encourage business investment.
So, for example, a bakery that bought a new, expensive oven could deduct that cost from their taxes that year. Previously, the bakery would have had to deduct portions of the cost each year according to a complicated depreciation schedule.
SINEMA STOCK BUYBACK TAX WOULD HIT RETIREMENT ACCOUNTS, BUSINESS GROUPS SAY
Sinema’s proposal works to scale back the 15% corporate minimum tax proposal by including an exemption for such deductions — meaning that companies will still be allowed to write off the cost of investments more quickly.
“To the extent it would return bonus depreciation, yes, that would be a pro-growth move,” William McBride, vice president of federal tax and economic policy with the Tax Foundation, told the Washington Examiner of the compromise negotiated by Sinema.
McBride said it’s “very well established” that taking faster deductions for investment is an effective means of stimulating investment.
There were major concerns among manufacturers, who rely on quick write-offs for equipment purchases, that the book income tax would cause their businesses great harm at a time when they are already hamstrung by soaring inflation and supply chain problems.
NAM President and CEO Jay Timmons said the group was “glad to hear that accelerated depreciation provisions are removed, but we remain skeptical and will be reviewing the revised legislation carefully.”
The U.S. Chamber of Commerce also acknowledged the change to the book tax provision in a statement following Sinema’s negotiation.
“Taxing capital expenditures — investments in new buildings, factories, equipment, etc. — is one of the most economically destructive ways you can raise taxes. It punishes innovation, leaves a country poorer and less capable of growing. While we look forward to reviewing the new proposed bill, Senator Sinema deserves credit for recognizing this and fighting for changes,” said Neil Bradley, chief policy officer at the chamber.
Bonus depreciation was expanded under the Trump tax cuts, but on a temporary basis. The provision is set to start phasing out next year, when it will go from 100% of new investments to 80%. It is then set to fade even further before sunsetting in 2026.
McBride said that his group has long advocated making bonus depreciation permanent and going even further than that, making expensing a solidified part of U.S. tax code — which would allow companies to write off their expenses for investment immediately.
“The new version — which we have not seen the text for — but to the extent that it does carve out bonus deprecation or more broadly accelerated depreciation — then yes, it would improve the economic effect of the bill,” McBride said.
Bonus depreciation isn’t the only concession that Sinema was able to get.
As part of the agreement, Democratic leadership agreed to nix raising taxes on carried interest, a form of income earned by private equity fund managers that is subject to a lower tax rate.
In order to compensate for the revenue losses from paring back provisions in the book tax and slashing carried interest changes, Sinema and leadership agreed to impose a 1% excise tax on stock buybacks.
Stock buybacks are when corporations think their shares are undervalued and gobble up their own company stock to reduce the number of outstanding shares in the market. Proponents see the practice as a good way to generate value for shareholders, but detractors contend that the practice helps the company’s wealthiest executives make money that could be used to expand the business.
While the chamber praised Sinema for maintaining an exemption on bonus depreciation, it said the corporate buyback proposal would filter down and harm the investments of ordinary Americans.
“Unfortunately, the new excise tax on stock buybacks will only distort the efficient movement of capital to where it can be put to best use and will diminish the value of Americans’ retirement savings,” said Bradley.
With Sinema signing on to the legislation, it appears the Senate has the 50 votes necessary, with Vice President Kamala Harris’s tiebreaking vote, to get the legislation passed.
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Senate Majority Leader Chuck Schumer (D-NY) said after Sinema’s agreement that a final version of the bill would be introduced this weekend.
“I am pleased to report that we have reached an agreement on the Inflation Reduction Act that I believe will receive the support of the entire Senate Democratic Conference,” he said. “I have had many productive discussions with members of our conference over the past three days, and we have addressed a number of important issues they have raised.”
