A push by some Republican senators to ward off future deficits by tucking a potential corporate tax increase into their tax-overhaul bill would set up a kind of economic booby trap—putting the GOP’s much-desired growth at risk, according to a half-dozen economists, lobbyists and tax experts.
“It’s a bad idea,” said Mark Zandi, the chief economist at Moody’s Analytics. “This reduces the economic benefit of the tax cut.”
Senators have debated behind closed doors whether to include a controversial revenue “trigger” in the tax bill that GOP leaders want to bring to a vote this week. The provision—which has yet to be released—would aim to boost revenue if the package of tax cuts for businesses and individuals doesn’t create enough growth to cover the estimated $1.4 trillion revenue loss it’s estimate to cause over 10 years.
The U.S. Chamber of Commerce and conservative interest groups have panned the idea. It has also drawn concern from one of the few U.S. companies that has committed to using proceeds from any tax cut to hire more workers.
“We believe a reduction of the corporate tax rate to 20 percent is the best way to stimulate investment, job creation and economic growth in the United States,” said a spokeswoman for AT&T Inc. in a statement late Wednesday. “It’s important that this rate be permanent in order to achieve these goals.” The company has pledged to increase U.S. investment by $1 billion in 2018 if Congress approves a tax overhaul.
The bill that Senate leaders are pushing toward a final vote by week’s end would cut the corporate tax rate to 20 percent from 35 percent starting in 2019. It would also give U.S. companies the right to immediately deduct their spending on equipment for five years and provide sharply discounted tax rates on an estimated $3.1 trillion in earnings that their foreign subsidiaries have accumulated.
‘Serious Economic Problem’
Inserting a revenue “trigger” into that package would create a “serious economic problem,” said Stephen Stanley, the chief economist at Amherst Pierpont Securities. Any revenue shortfall that would spark the trigger would probably be driven by economic weakness, Stanley said. As such, “having an automatic tax hike kicking in right when the economy is at risk of a recession would obviously be counterproductive.”
Senator Bob Corker, a Tennessee Republican and one of the leading proponents of the trigger idea, said late Wednesday that congressional tax writers were “having a few difficulties” with the provision. On Thursday morning, Senate Majority Whip John Cornyn said Corker had reached an “agreement in principle” on the provision after discussions with Senator Pat Toomey of Pennsylvania, who has criticized the concept. But Cornyn said “the details haven’t quite been finalized yet.”
While the situation remained fluid, Senate Republicans on Wednesday were discussing a provision that would trigger as much as $350 billion in automatic corporate tax increases over 10 years beginning in 2022, according to two people briefed by congressional staff members on the plan.
And Senate Finance Chairman Orrin Hatch, the chamber’s chief tax writer, said it’s likely the final bill will include a trigger of some sort. “We are probably going to have one but I prefer not having it,” he said.
The bill already includes little-noticed triggers of another sort, for three new taxes on foreign intangible income that are aimed squarely at companies that depend on intellectual property—such as tech and pharma firms.
Those spring-loaded hikes would begin after 2024 if the economy doesn’t grow as fast as predicted. Without accounting for such macroeconomic effects, the bill is estimated to increase federal deficits by more than $1.4 trillion over a decade. Its backers argue that the package of cuts would spark annual economic growth of 3 percent that would help cover the shortfall. Independent studies have found that wouldn’t happen.
Specifically, some economists question whether a 20 percent corporate rate—which is higher than the effective rate that many multinationals pay currently—is low enough to spur businesses to hire and expand.
Additionally, allowing the “full expensing” provision for just five years is “unlikely” to provide enough incentive for companies to boost investment and hiring, said Jane Rohrs, a director for the Federal Tax Accounting Periods, Methods & Credits Group at Deloitte Tax LLP.
“Companies have already determined what they’re going to spend” for the next few years, said Rohrs, a former staff member at Congress’s Joint Committee on Taxation.
Finally, economists also expect companies with large stockpiles of overseas earnings will use that “repatriated” money on shareholder dividends and share buybacks, not on expansion or hiring.
Meanwhile, conservative interest groups have aligned against the trigger concept.
Tim Phillips, president of Americans for Prosperity, a conservative lobby backed by the billionaire industrialist brothers Charles and David Koch, on Wednesday called the proposal “a nutty idea” with “devastating economic consequences.”
Still, the uncertainty that a trigger would produce for big business is preferable to having no tax bill pass at all, said J.D. Foster, the chief economist for the U.S. Chamber of Commerce.
After calling the trigger “impractical, unreasonable and unnecessary” on Tuesday, he told Bloomberg that “while inclusion of a trigger would be regrettable and could diminish the bill’s positive growth effects, that is still preferable to failing to reform our uncompetitive tax code.”
Senate Republican leaders need 50 of their 52 members to support the bill in order to pass it, meaning that Corker and two other pro-trigger Republicans—James Lankford of Oklahoma and Jeff Flake of Arizona—could doom the bill.
Amherst Pierpont’s Stanley said the trigger concept seems like “a political fig leaf for the deficit hawks to justify supporting the bill.”
A trigger “doesn’t seem good tax policy,” Rohrs said. “It infuses uncertainty into the whole decision-making process and makes it hard for companies to plan their investment decisions.”