How a Last-Minute Lobbying Blitz Watered Down a Climate Bill Tax

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WASHINGTON — An hour after Democrats released the text of their climate and tax legislation, Washington lobbyists for the private equity industry sprang into action.

With a final Senate vote nearing on the major package on Sunday, a late addition would have subjected companies controlled by private investment funds to a new 15 percent corporate minimum tax in the legislation that was supposed to apply to America’s biggest corporations.

But a last-minute mobilization of political muscle and direct pleas to Senator Kyrsten Sinema, the Arizona Democrat who opposes tax increases and is sympathetic to private equity, got the measure scrapped. The blitz was emblematic of the messy nature of tax policymaking and how policies meant to curb tax avoidance can spring new carve-outs on the fly.

The issue stems from how private equity firms work: They typically invest in a portfolio of companies. Under the provision that was the point of contention, if the combined “book income” of companies controlled by the same private equity fund exceeded $1 billion, all of those companies, even if they were small or medium-size, would be liable to pay the new 15 percent tax on the income they reported to their shareholders.

“Looks like someone is trying sneak one past everyone,” Neil Bradley, chief policy officer at the U.S. Chamber of Commerce, said on Twitter on Saturday.

Freedom Works, a conservative organization that lobbies for lower taxes, blared out warnings on its Twitter feed, claiming that Democrats were targeting small firms that rely on capital investment to expand.

Private equity industry groups circulated opposition research on what they called a “stealth” tax, which they said would hit more than 18,000 companies.

At the urging of Ms. Sinema, the measure was removed after hours of horse-trading over how to replace an estimated $35 billion in government revenue that would be lost by taking out of the proposal. Ultimately, lawmakers opted to extend a rule limiting deductions that companies can take on business losses that Republicans enacted in 2017.

The new corporate minimum tax had already been whittled down before the changes over the weekend. Ms. Sinema pushed last week to preserve deductions that manufacturers use to offset the cost of equipment purchases, and lawmakers decided to keep a deduction for wireless spectrum purchases that telecommunications companies said was important for the rollout of high-speed broadband.

What’s in the Climate, Health and Tax Bill

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What’s in the Climate, Health and Tax Bill

Auto industry. Currently, taxpayers can get up to $7,500 in tax credits for purchasing an electric vehicle, but there is a cap on how many cars from each manufacturer are eligible. The new bill would eliminate this cap and extend the tax credit until 2032; used cars would also qualify for a credit of up to $4,000.

What’s in the Climate, Health and Tax Bill

Energy industry. The bill would provide billions of dollars in rebates for Americans who buy energy efficient and electric appliances. Companies would get tax credits for building new sources of emissions-free electricity. $60 billion is set aside to encourage clean energy manufacturing and penalties for methane emissions that exceed federal limits starting in 2024.

What’s in the Climate, Health and Tax Bill

Health care. For the first time, Medicare would be allowed to negotiate with drugmakers on the price of some prescription medicines. The bill would also extend subsidies available under the Affordable Care Act, which were set to expire at the end of the year, for an additional three years.

What’s in the Climate, Health and Tax Bill

Tax code. The bill would introduce a new 15 percent corporate minimum tax on the profits companies report to shareholders, applying to companies that report more than $1 billion in annual income but are able to use credits, deductions and other tax treatments to lower their effective tax rates. The legislation would bolster the I.R.S. with an investment of about $80 billion.

What’s in the Climate, Health and Tax Bill

Low-income communities. The bill would invest over $60 billion to support low-income communities and communities of color that are disproportionately burdened by climate change. This includes grants for zero-emissions technology, as well as money to mitigate the negative effects of highways and other transportation facilities.

What’s in the Climate, Health and Tax Bill

Fossil fuels industry. The bill would require the federal government to auction off more public space for oil drilling and expand tax credits for coal and gas-burning plants that rely on carbon capture technology. These provisions are among those that were added to gain the support of Senator Joe Manchin III, Democrat of West Virginia.

What’s in the Climate, Health and Tax Bill

West Virginia. The bill would also bring big benefits to Mr. Manchin’s state, the nation’s second-largest producer of coal, making permanent a federal trust fund to support miners with black lung disease and offering new incentives to build wind and solar farms in areas where coal mines or coal plants have recently closed.

The big win for private equity’s lobbyists was on so-called carried interest. Democrats had proposed curbing the special tax treatment that hedge fund managers and private equity executives get on the investment gains they take as compensation. After Ms. Sinema objected, the curb on carried interest was replaced with a 1 percent excise tax on corporate stock repurchases.

Tax experts were already skeptical about the corporate minimum tax, saying companies would be able to maneuver their way around paying it.

“The minimum tax has always been like a 10th-best solution, and when you start taking out more elements, is it now the 12th-best solution?” said Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, noting that relatively few companies would now face the new tax. “There may be more government staff dedicated to auditing these companies than there are companies subject to the tax.”

The Joint Committee on Taxation had estimated that the new corporate minimum tax would apply to 150 companies, but that was before more exceptions were added to the legislation. The tax was projected to raise more than $300 billion in new revenue over a decade, but the slimmed-down version is likely to raise just over $200 billion.

“There’s still the issue that companies are going to end up paying little tax under this anyway,” said Kyle Pomerleau, a senior fellow at the American Enterprise Institute.

Mr. Pomerleau also lamented that by taxing book income, Congress was ceding some control over tax policy to the Financial Accounting Standards Board, an independent organization that sets accounting rules. Book income is the profit that companies report to shareholders and investors on their income statements, which are generally governed by those accounting rules.

The new tax is intended to target big companies, like Amazon and Meta, that have for years found ways to lower their tax rates by capitalizing on deductions in the tax code. Tax experts generally favor increasing tax rates — the current corporate rate is 21 percent — or scaling back deductions. But because Republicans were united against that approach, and Democrats did not have enough votes for it, they settled on the corporate minimum tax.

Progressives expressed disappointment after Democrats removed the measure that would have affected businesses that are controlled by private equity and accused Ms. Sinema of being beholden to Wall Street and lobbyists.

“Whatever job she gets with Wall Street after losing her primary, they can’t pay her enough,” Adam Green, co-founder of the Progressive Change Campaign Committee, wrote on Twitter.

The House is expected to pass the Senate bill this week and President Biden to sign it into law soon after. The tax changes would take effect next year, and the Treasury Department would be racing to develop regulations and guidance to interpret parts of the law.

Ms. Sinema said in a tweet on Sunday that she was proud of the outcome of the negotiations, which she said would spur innovation and job creation.

Mark Mazur, a former deputy assistant secretary for tax policy at the Treasury Department, said that the corporate minimum tax was “not the best policy” and that accounting firms were likely combing through the legislation to determine how their clients could avoid the new levy.

“It’s almost an admission that Congress can’t do the right thing and claw back the tax breaks that were given, and so it has to do it in a backdoor way,” said Mr. Mazur, who left the Treasury Department in October and held senior roles in the federal government for nearly 30 years.

Predicting that companies would find new ways to lower their tax bills, he added: “There are options to do things, and you can expect at least aggressive taxpayers to explore those options.”

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