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As the U.S. Senate races to consider the Inflation Reduction Act (IRA), a centerpiece of the proposed tax increases is the 15 percent minimum book tax on corporate income for firms earning over $1 billion, making up about 60 percent of the net revenue in the IRA. The minimum book tax puts one of the most pro-growth elements of the tax system at risk, penalizing investment right as it is needed to combat inflation and the current economic downturn.
The minimum book tax proposal has narrowed over the past two years since it was originally debated in the 2020 campaign. President Biden’s original proposal only provided exemptions for net operating losses and foreign tax credits. The IRA’s book tax proposal includes additional exemptions for items like general business tax credits and defined benefit pensions.
Accelerated depreciation deductions remain a central target of the Inflation Reduction Act book minimum tax. For many investments, firms are able to deduct their costs from their taxable income on a quicker timetable than under financial accounting rules. The minimum book tax would penalize applicable firms for fully deducting the cost of investment from their tax returns, discouraging further investment and reducing long-run economic growth.
One approach to mitigate the impact of the book tax on cost recovery would be to exclude the timing differences related to depreciation deductions from the minimum book tax. The proposal as currently written would increase corporate tax liabilities by about $266 billion from 2023 to 2032. If policymakers exempted timing differences attributable to accelerated depreciation deductions from the minimum book tax base, it would reduce corporate tax liabilities by 26 percent to about $197 billion.
| Change in Corporate Tax Liabilities | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | Total |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Minimum Book Tax including accelerated depreciation | $29.4 | $21.8 | $25.4 | $15.0 | $19.6 | $24.5 | $30.5 | $31.3 | $31.8 | $36.6 | $266.0 |
| Minimum Book Tax excluding accelerated depreciation | $22.0 | $16.6 | $22.0 | $12.0 | $14.8 | $19.4 | $15.1 | $24.4 | $18.2 | $32.3 | $196.8 |
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Source: Tax Foundation Corporate Model |
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While exempting accelerated depreciation would reduce some of the economic harm of the tax, there remain many unresolved problems within the design and structure of the minimum tax that make it a poorly chosen revenue option. Here are just seven:
- The book tax has disparate impacts across industries and companies, owing not only to use of accelerated depreciation but to other items that are treated differently in book and tax accounting, including stock-based compensation and spectrum expenses.
- The book tax would arbitrarily penalize companies for past losses. Many companies, and very clearly many of this country’s most successful companies, incurred losses for several years before earning profits. While the regular corporate tax allows past losses to be carried forward indefinitely, the new book tax disallows carryforward of any losses incurred prior to 2020.
- Making companies calculate their tax liability twice, both under the minimum tax and the regular tax code, would greatly increase complexity and compliance burdens.
- The tax would increase administrative burdens for the IRS at a time when the agency is already struggling to keep pace.
- Key aspects of the corporate income tax would be outsourced to financial accountants, potentially eroding the value of financial reporting.
- Revenue from the tax is uncertain and may diminish over time, as it did under a similar policy repealed in 2017.
- By reducing long-term economic growth, the tax could worsen inflation by constraining the productive capacity of the economy.