[ The business tax credits in the Wyden-Smith deal are five times
as generous as the Child Tax Credit expansion, according to government
scorekeepers.]
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AN UNEQUAL TAX TRADE  
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David Dayen
January 18, 2024
The American Prospect
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_ The business tax credits in the Wyden-Smith deal are five times as
generous as the Child Tax Credit expansion, according to government
scorekeepers. _

Silvestre, 6, of Washington, sleds over a snow bump on the hill at
the U.S. Capitol, as schools are closed due to a winter storm, January
16, 2024., Jacquelyn Martin/AP Photo

 

Often in politics, you see politicians from opposing parties explain
the compromises they make with one another differently to different
audiences. But I’m not sure I’ve seen anything quite as stark as
the tax deal reached Tuesday by House Ways and Means chair Rep. Jason
Smith (R-MO) and Senate Finance Committee chair Sen. Ron Wyden (D-OR).
What they separately describe in the announcement of the agreement
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not sound like the same deal.

Wyden highlights how “fifteen million kids from low-income families
will be better off” from an expansion of the Child Tax Credit (CTC),
as well as a change to the Low-Income Housing Tax Credit that “will
build more than 200,000 affordable housing units.” Smith doesn’t
mention either of these specifically, but has much to say about how
the deal “locks in over $600 billion in proven pro-growth,
pro-America tax policies.”

It’s to be expected that Democrats and Republicans, talking about a
deal that trades a Democratic priority (Child Tax Credit expansion)
for a Republican priority (business tax cuts), would highlight the
particular partisan victories. But let’s go back to what Smith said
about locking in $600 billion. That doesn’t match the topline
reporting
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the deal, which has a total cost of $78 billion, fully offset by
curtailing the pandemic-era Employee Retention Credit.

It does, however, resemble the Joint Committee on Taxation score of
the deal, which was released last night
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And when you read that, you can understand why some progressives,
including some of the biggest backers of an expanded CTC, are opposed
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this deal. Because it is aggressively tilted in the direction of
corporate tax breaks.

The final version
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the Tax Relief for American Families and Workers Act was pretty close
to the expectation. There are some additional bells and whistles in
addition to the main CTC-for-corporate-tax-cut swap, including about
$6 billion to expand the developer tax credit for low-income housing,
$5 billion to make payments to victims of the East Palestine, Ohio,
train disaster tax-exempt, and roughly $1.5 billion to raise the
threshold for businesses to report 1099-NEC or -MISC income (a
straight denial of information to the IRS
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could also increase the trend of misclassification that strips
part-time workers of benefits). But the main event here is the trade
that negotiators have been trying to make for a year.

The changes to the CTC—and I explained this all
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week before it was released, so you can go read that for the
details—mostly improve the refundability of the credit, meaning the
ability for families with no tax liability to receive it. Multi-child
families with more than $2,500 in annual income will be better off,
and while that means the lowest-income families are left out, it does
get more of the credit to, as Wyden said, more than 15 million
children
[[link removed]].

But reporting like this piece from Vox
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which claims that after 2025 “poor taxpayers get the same $2,000
credit as everyone else,” is incorrect. The CTC expansion in this
deal is only operative for three tax years. You can see this quite
clearly in the JCT score
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where the CTC costs a total of around $33.5 billion in 2024-2026, and
then stops abruptly after that.

In fact, what we know is that, after the expiration of the Trump tax
cuts in 2025, the CTC is scheduled to go back to only $1,000, without
these changes to refundability. So the fate of the CTC after this
modest three-year boost (about $11 billion per year) will be dependent
on the 2024 elections.

On the business tax side, there are four main benefits: a full credit
for domestic research and development, added business deductions for
depreciation and amortization costs (in general, a gift to private
equity firms by subsidizing debt), an immediate deduction for capital
expenses known as bonus depreciation, and an increase in “Section
179” small-business capital expensing. That last one is made
permanent, though it’s relatively minor (about $2.5 billion in the
first ten years).

Settling for less now makes an unequal trade more likely in a future
under divided government.

The other three are quite a bit bigger but generally phase out at the
end of 2025 (although the R&D credit is made retroactive all the way
back to 2022, and partial bonus depreciation is kept on for a couple
years more). And the JCT score lays out exactly how expensive this all
is, and why Jason Smith is talking about $600 billion in tax credits.

In the years when these three credits are mostly operative, between
2024 and 2026, they cost the government $177 billion, outstripping the
cost of the CTC expansion in that period by more than 5 to 1. Because
a credit like bonus depreciation, which allows for immediate expensing
rather than waiting for the value of the capital expenditure to
depreciate, pulls forward tax deductions that would be taken later,
the JCT score has the effect of bringing in government revenue after
2025. The same is true of the score of the R&D tax credit and the
depreciation and amortization credit.

As the Institute on Taxation and Economic Policy explains
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“Since many of these provisions deal with the _timing _of when tax
liabilities occur, extending them temporarily means that the
government reaps back some of the losses after the extensions
expire.” But of course, Congress rarely lets a business tax credit
expire. If extended again, they will pull forward more tax credits,
and so on. So the revenues never really get realized.

These business tax credits were actually eliminated to help “pay
for” the Trump tax cuts. Republicans knew all along that they could
get them back down the road, and that they wouldn’t pay for
anything.

That’s why Smith can boast about $600 billion. He knows that these
credits are unlikely to go away, and previous JCT estimates for making
them permanent put it at more than $500 billion
[[link removed]]. That’s what you’re
trading for a three-year, $33 billion CTC fix that is positive in
trend but modest in impact, even if extended.

The point is that, while the claim is that there is “parity”
between the short-term CTC expansion and the business taxes, that is
an artifact of the way things are scored. The true cost of the
business tax cuts are hidden by the short-term expiration. In the time
period when all the tax credits are actually in place, the business
tax changes are five times more costly than the CTC changes.

Maybe people think that giving millions of poor families with kids
help in exchange for a far larger benefit for corporations is worth
it. Maybe they think investment tax credits are good, and this is all
win-win. (In my view, subsidizing debt over equity has really boosted
private equity’s pernicious presence in the nation, and the kind of
“research” that is deducted in the R&D tax credit is frequently
not research at all.)

But the problem with the lack of parity is all about the Trump tax cut
expiration. As I said last week, settling for less now—much less, as
the JCT score makes clear—makes an unequal trade more likely in a
future under divided government, which is quite possible. After 2025,
the CTC is chopped in half. If this deal becomes a “tax extender”
precedent, in 2026 Republicans would get their favorite business tax
credits and Democrats would get a little more refundability on a
$1,000 CTC. Democrats would have to give up more to get the CTC back
to its previous level; in fact, the Trump campaign has a bunch of
other corporate tax cuts
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mind should they win the election.

Who knows if this deal can pass in time to take effect in the upcoming
2023 tax season, if ever. Sen. Mike Crapo (R-ID), the ranking
Republican on the Senate Finance Committee, is already asking for
changes
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make it even more generous to businesses. That’s in part a function
of the dissembling that there is “parity” in the deal. The truth
is that this is not an equal trade. And it may extend that inequity
well into the future.

_DAVID DAYEN is the executive editor of The American Prospect. He is
the author of Monopolized: Life in the Age of Corporate Power (2020)
and Chain of Title: How Three Ordinary Americans Uncovered Wall
Street’s Great Foreclosure Fraud (2016), which earned the Studs and
Ida Terkel Prize. He was the winner of the 2021 Hillman Prize for
excellence in magazine journalism._

_Follow @ddayen [[link removed]]_

_Read the original article at PROSPECT.ORG.
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Used with the permission. © The American Prospect, Prospect.org, 2024
All rights reserved. 
Click here to support the Prospect's brand of independent impact
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