Author: Minnie Arwood

February 02,2022

Flawed proposal would cost U.S. jobs, weaken supply chains

Washington,
D.C.–Republican
members of the Senate Finance Committee, led by Ranking Member Mike Crapo
(R-Idaho), urged Senate colleagues to reconsider efforts to implement a tax on
financial statement income of U.S. companies, or a “book minimum tax,”
detailing the problematic and unaddressed issues that have resulted from such
proposals in the past.  As the senators note, Republicans and Democrats
rejected a previously enacted book minimum tax due to its numerous flaws and
negative effects.  

From the letter:
 

“This
fundamentally flawed proposal, which has not been properly vetted by either
Congressional tax-writing committee, risks severely harming American
manufacturers, exacerbating supply-chain disruptions, and ultimately costing
U.S. jobs and investment. . . . Now is not the time to resurrect a harmful
policy that would overwhelmingly hit American manufacturers and supply chains,
as well as undercut critical research and development and investment in
renewable energy and other emerging technologies.”

… 

“Simply
stated, book income is not calculated and reported for tax purposes, and
taxable income is not calculated and reported to provide a statement of
financial condition for investors.  Blending the two would muddle
different concepts and purposes, to the detriment of both tax policy and
standards of accounting.”

… 

“Even more
alarming is that this proposal, which would affect hundreds of American
companies, millions of American jobs, and a massive share of the American
economy, is being pursued without proper consideration by either the Senate
Finance Committee or the House Ways and Means Committee in a hearing or
markup.  As a result, unintended consequences are sure to follow,
requiring carve-outs beyond the one recently and hastily added for pension
plans.” 

Full
text of the letter, signed by all Republican Finance Committee members, is
available here
and below.  

________________
 

Dear
Colleague: 

We
urge you to reconsider the proposed tax on financial statement income of U.S.
companies (the “book minimum tax”) included in the Build Back Better Act (H.R.
5376).  This fundamentally flawed proposal, which has not been properly
vetted by either Congressional tax-writing committee, risks severely harming
American manufacturers, exacerbating supply-chain disruptions, and ultimately
costing U.S. jobs and investment.  While Republicans and Democrats may
disagree on the best tax policy to create high-paying U.S. jobs and facilitate
lasting economic growth, both parties rejected a previously enacted book
minimum tax due to its numerous flaws and negative effects.  Now is not
the time to resurrect a harmful policy that would overwhelmingly hit American
manufacturers and supply chains, as well as undercut critical research and
development and investment in renewable energy and other emerging
technologies.   

As
currently proposed, the book minimum tax would impose a 15 percent minimum tax
on American businesses, though not on the income they are required to report to
the IRS—so-called taxable income.  Rather, the tax would be levied on
income they report for financial statement purposes, known as book
income.  In doing so, the proposal would forgo taxation based on the tax
code in favor of accounting standards, which are determined without
Congressional oversight and may not reflect current realities of the business
cycle.   

Because
capital 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.”   Taxing 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.     

Notably,
a book minimum tax was attempted in the late 1980s and ultimately failed, with
bipartisan acknowledgement that the policy was unworkable.  The policy
proved so flawed that it was rejected resoundingly by Republicans and Democrats
alike after three short years in law.  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.”   This is a
widely held view among experts.  As the American Institute of CPAs (AICPA)
stated, “Income tax provisions should not influence company decisions as to the
adoption of accounting methods.  These types of distortions could
potentially harm shareholders and creditors who depend on financial statements
for important information.  Public policy taxation goals should not have a
role in influencing accounting standards or the resulting financial
reporting.  Independence and objectivity of accounting standards are the backbone
of our capital markets system.”   A book minimum tax, however
well-intentioned, will introduce more, not less, unfairness and uncertainty
into our tax system.  

Simply
stated, book income is not calculated and reported for tax purposes, and taxable
income is not calculated and reported to provide a statement of financial
condition for investors.  Blending the two would muddle different concepts
and purposes, to the detriment of both tax policy and standards of
accounting.   

Also
of significant concern is this proposal’s delegation of Congressional
tax-writing authority to an unelected and unaccountable board, such as the
Financial Accounting Standards Board.  As noted by AICPA, “[I]mposing tax
according to financial statement income takes the definition of taxable income
out of Congress’s hands and puts it into the hands of industry regulators and
others.”   However, these industry regulators and others are not best
suited to carry out a role that would be by its very nature both political and
policy driven.  Rather than abdicate its responsibility to an unelected
and unaccountable board, Congress should continue to fulfill its constitutional
obligations to the American people by remaining firmly in control of the
tax-writing process. 

While
we oppose many of the tax proposals included in the Build Back Better Act, our
concerns about fundamental flaws of the book minimum tax are shared
overwhelmingly by policy experts.  Economists acknowledge that the book
minimum tax will increase the cost of capital for affected companies, and
distortions will arise because “[c]ompanies in similar economic situations
could face vastly different costs of capital for the same
investment.”   Similar concerns have even been raised within
President Biden’s Treasury Department.  According to the Washington Post,
officials in the Treasury Department’s Office of Tax Policy expressed concerns
that “the new 15 percent minimum tax could lead to unintended consequences –
such as limiting clean energy investment – and prove difficult to implement
while making the tax code less efficient.”  

Even
more alarming is that this proposal, which would affect hundreds of American
companies, millions of American jobs, and a massive share of the American
economy, is being pursued without proper consideration by either the Senate
Finance Committee or the House Ways and Means Committee in a hearing or
markup.  As a result, unintended consequences are sure to follow,
requiring carve-outs beyond the one recently and hastily added for pension
plans.  Given the apparent delay in the Senate’s processing of H.R. 5376,
there is ample time for the Senate Finance Committee to properly consider this
legislation and contemplate its effect on Congress’s constitutional authority
over the tax-writing process.  Setting important tax policies that will
affect all Americans requires a formal markup process, as was done with the Tax
Cuts and Jobs Act in 2017, to allow input from both sides, instead of
unilateral and partisan decision-making.     

Sincerely,