Minimum TaxOpinion by Senate Finance Committee Ranking Member Mike Crapo (R-Idaho)
While Republicans and Democrats may disagree on the best tax policies to create high-paying U.S. jobs and lasting economic growth, some are so bad that they transcend partisan politics. Democrats’ proposed tax on the financial statement income of certain U.S. companies (the so-called “book minimum tax”) is an example. When Congress experimented with a book minimum tax in the late 1980s, the policy proved so flawed and unworkable that Republicans and Democrats alike rejected the tax after only three short years in law. Now is not the time to resurrect a harmful policy that would damage American manufacturers and supply chains, undercut critical research and development, and investment in renewable energy and other emerging technologies.
The book minimum tax included in the House-passed Build Back Better Act is fundamentally flawed. It would impose a 15 percent minimum tax on American businesses, though not on the income they are required to report to the Internal Revenue Service (IRS) as taxable income. Rather, the tax would be levied on the income businesses report for financial statement purposes—known as book income—discarding the tax code in favor of taxing companies based on accounting standards. Those standards are determined without congressional input or oversight, and may not reflect the business cycle.
Because business investments are treated differently for book and tax purposes, the proposal would impose a particularly burdensome tax on capital investment made by American manufacturers, energy companies, and other major job-creators. This would eliminate or significantly reduce the benefit of the very tax policies Congress has spent decades crafting to encourage investment in American facilities and to support American jobs. As the National Association of Manufacturers rightly highlighted, “[I]mposing a book tax would not only undermine the recovery but also make it harder for the next manufacturing dollar to be spent in America, negatively impacting growth in family-supporting American manufacturing jobs.” Taxation based on these book-tax differences would have a devastating impact on many companies and sectors, including manufacturing, insurance, renewable energy, wireless, and projects relying on state and local financing.
The book minimum tax that was attempted in the late 1980s ultimately failed, with bipartisan acknowledgement the policy was unworkable. As the then-Democrat Ways and Means Chairman observed, “When used for tax purposes, the book income concept not only invites manipulation, but can lead to inequitable results because of timing differences between tax and accounting rules.”
Also concerning is the current proposal’s delegation of congressional tax-writing authority to unelected boards, such as the Financial Accounting Standards Board. Rather than abdicate and outsource its responsibility to unelected members of a board, Congress should continue to fulfill its constitutional obligations to the American people by remaining firmly in control of the tax-writing process.
Even more alarming is that the current proposal, which targets hundreds of American companies, millions of American jobs and a massive share of the American economy, is being pursued without so much as a hearing or markup by either chamber’s tax-writers. As a result, unintended consequences are sure to follow, requiring carve-outs beyond the one recently and hastily added for pension plans. Setting important tax policies affecting all Americans requires a formal markup process, as was done with the Tax Cuts and Jobs Act in 2017, to allow varied input, instead of unilateral and partisan decision-making.
Congress must once more reject this flawed proposal. It would exacerbate supply-chain disruptions, kill jobs, and muddle income-tax law with decisions on rules made by unelected members of accounting boards. Instead, Congress must preserve its constitutional authority over the tax-writing process and work together to fortify U.S. job creation and economic growth and opportunities.
This opinion piece was first published by The Hill on February 4, 2022.