'Corporate Tax Loopholes' and the Fiscal Cliff

The government can get more money from businesses -- but not without a fight

December 10, 2012, 5:47 PM

Dec. 11, 2012— -- Closing "corporate tax loopholes" sure sounds good to the average, non-corporate American -- so good, in fact, that politicians talk about it all the time.

House Speaker John Boehner's fiscal-cliff proposal purports to raise $1.6 trillion in revenue by "clos[ing] special-interest loopholes and deductions while lowering rates."

The White House, meanwhile, has complained that Boehner hasn't offered specific loopholes to cut.

On the other side of the aisle, House Democrats have repeatedly offered up "closing overseas tax loopholes" as a means to pay for spending bills -- a plan Republicans routinely reject. In the last two and a half years, President Obama has often been heard griping about writeoffs for corporate jets.

For both Republicans and Democrats, "corporate tax loopholes" are an old saw. But, like most things in politics, raising revenue from "loopholes" gets a bit stickier when the specifics are hashed out.

A misconception about tax "loopholes," some experts say, is that they're loopholes -- gaps in the tax law that corporations have exploited against the law's intent.

"Most of these proposals were not 'loopholes,' these were incentives," said Eric Toder, co-director of the left-leaning Tax Policy Center.

For example, take the research-and-development tax credit. During the campaign, both Obama and Mitt Romney suggested making it permanent.

"One wouldn't call the research credit a loophole," Toder said.

Cashing in by closing the biggest "loopholes" could be a politically fraught endeavor. To generate meaningful revenue, House Republicans would have to sign off on measures that raised it from taxing the overseas profits of multinational corporations, from ending immediate writeoffs of equipment purchases, or from ending a credit for domestic manufacturing.

When the Joint Committee on Taxation scored some of these provisions, as part of a tax-reform bill pushed by Democratic Sen. Ron Wyden and then-GOP-senator Judd Gregg, it found the government could save significantly:

Savings Over 10 Years: 2011-2021

Taxing Overseas Profits of Multinational Corps: $582.7 billion. In other words, the "overseas tax loophole" Democrats are fond of trashing. While most countries with large economies tax only profits made at home, the U.S. code taxes all income everywhere. To offset the difference, U.S. multinational corporations receive credits to prevent double taxing. They also can defer paying any tax on foreign income, until they transfer the money back to the United States.

Taxing that profit could generate significant revenue. But this could be controversial, and large corporations would fight it. A senior aide to one business lobbying group said ending foreign-income deferral would amount to double-taxing U.S. companies and put them at a disadvantage to foreign competitors; one supporter of ending deferral suggested U.S. companies have been able to hide profits overseas, avoiding taxes altogether.

Ending Immediate Writeoffs of Equipment Purchases: $582.7 billion. This is also known as "bonus depreciation." Let's say you own a factory, and you buy a new conveyor belt. Under this tax exclusion, you'll be able to deduct the total cost of that equipment eventually, as its value depreciates. "My favorite example is a NASCAR track," said Rebecca Wilkins, a senior counsel at Citizens for Tax Justice. "You've got the track itself, you've got the fencing and the stands and the administrative building ... the tax code allows all of that to be written off over seven years." When Obama castigated corporate-jet owners, this is what he was talking about: Writing off the purchase of a corporate jet as equipment.

Thanks to stimulus provisions that accelerated the depreciation writeoff, businesses have been able to write off half or all of their equipment purchases immediately, according to the Tax Foundation. Going back to a slower schedule would make equipment purchases less enticing to businesses, but it would raise billions. The catch is that closing this "loophole" would mean rolling back an incentive for businesses to invest -- an incentive magnified under Obama's own stimulus bill.

Ending the Domestic Production Credit: $154.3 billion This credit applies to domestic manufacturing -- but that covers more than just factories. Oil and gas drilling is an oft-cited example.

"That is something that was introduced in 2004 as a way to reduce the effective tax rate of manufacturers ... and that is a special loophole that doesn't need to be there," the Tax Foundation's Will McBride said. "There should be no special treatment for manufacturers, and it created the problem of defining manufacturing."

But the political difficulties of ending this credit are obvious. Who wants to propose making that Made in America label more expensive?

Along with writeoffs for public bonds, those three are the biggest corporate tax expenditures. While the corporate tax code is thick with credits and exclusions -- 134 scored by the Joint Committee on Tax Reform, not to mention those that apply to small business that file as individuals -- some experts say it would be tough to generate meaningful revenue by nickel-and-diming the smaller provisions, most of which are worth tens of billions of dollars, not hundreds.

"If you're just dealing with the little cats and dogs, you can't buy much rate reduction, and I think some of the big ones are things that would probably be politically very difficult to do," said Toder of the Tax Policy Center.

In other words: Closing "corporate tax loopholes" can generate enough revenue to play meaningfully into a deal to avoid the so-called "fiscal cliff," as Obama and Boehner look for trillions in savings. But the politics can be tough, and even supporters of corporate tax reform are skpetical that credits and exclusions alone can buy enough savings without a political fight.