The Senate tax bill’s $250 billion problem

Let’s talk about the corporate alternative minimum tax.

A massive corporate tax cut is the Republican tax overhaul’s entire reason for being. It is the star around which the rest of the plan orbits.

But Senate Republicans, in a frantic rewrite of their tax bill late last Friday, appear to have screwed it up. Kind of. At least for now.

The price tag for the apparent mistake, added hastily in a late-night, partially handwritten draft, is $250 billion or more, according to some rough outside estimates. Businesses are furious. Correcting the Senate’s error is expected to be priority No. 1 as House and Senate members start negotiating a final tax package this week.

But this episode is a potent reminder of how haphazardly this once-in-a-generation tax rewrite was put together before the Senate passed it, and the enormous consequences of such a freewheeling approach.

If Republicans struggle or, worse, fail to correct their error, they risk undermining the entire internal logic of their bill: that this dramatic, permanent corporate tax cut will kick-start the economy, lifting up all Americans as the benefits trickle down.

The whole kerfuffle is over the corporate “alternative minimum tax” or AMT. The issue is really wonky, but it also undergirds the very foundations of the Republican plan.

The corporate alternative minimum tax, explained

This is a separate tax calculation under current law, used to make sure that businesses are forced to pay at least a base level of federal taxes and can’t totally avoid taxes by taking various deductions and credits. Few businesses pay it currently, because their regular rate is usually higher than the AMT rate, which works out to about 20 percent.

The Senate bill, like the House bill, originally repealed it entirely while slashing the regular corporate tax rate from 35 percent to 20 percent. But Senate Republicans, as they tinkered with their tax plan just hours before they put it up for a vote, stuck the corporate AMT back in at the last minute to make sure the bill didn’t raise the federal deficit too much.

At first it looked like a comparatively minimal provision, about $40 billion in revenue over 10 years, according to the Joint Committee on Taxation’s quick-hit analysis, in the context of a $1 trillion corporate tax cut.

But over the past few days, policy experts, lobbyists, and the business community have come to believe the stakes are much bigger. Senate Republicans may have accidentally created this new tax system where many or even most businesses would end up paying the AMT — and would lose many prized tax breaks.

The corporate AMT problem in the Senate tax bill

The problem is that the current AMT rate is about the same as the new corporate rate that Republicans want to institute. Under the Senate bill, businesses were supposed to be able to have the new 20 percent rate, but then also take advantage of tax credits and deductions to drive their tax burden even lower.

But if the AMT remains instead of being repealed, then businesses largely wouldn’t get their effective tax rate any lower than that. The AMT rate is usually substantially lower than the regular rate. But under the Senate bill, the AMT and the new corporate rate would be about the same: 20 percent. Companies would no longer be able to take advantage of tax breaks for research and development and the like. The whole point of the AMT is to eliminate deductions.

“Basically everyone would pay it,” one lobbyist tracking the tax bill told me, adding for emphasis that fixing it would be the No. 1 and No. 2 priority for Republicans now.

Based on some rough estimates, under the Senate tax bill the corporate AMT would bring in $300 billion or more over 10 years, substantially eating into the $1 trillion tax cut for businesses that Republicans thought they were passing.

A lobbyist for the Information Technology Industry Council told the Wall Street Journal that the provision was “hugely problematic.”

WSJ’s Richard Rubin explained:

Business lobbyists argue that keeping the corporate AMT would make it harder for tech companies to claim tax credits for research and development spending and for banks to claim credits for investing in troubled U.S. areas. It also could undermine the international-tax structure Republicans created elsewhere in the same bill, undercutting incentives to put intellectual property in the U.S., tax experts say.

As Rubin noted, there is one other aftereffect of the GOP’s mistake. Republicans are trying to create a tax system where companies are mostly only taxed on the money they earn within the United States, shifting to a territorial tax system instead of the worldwide system that exists today.

But with the corporate AMT still in place, many of the tax breaks that Republicans designed to create that territorial tax system would be rendered moot.

“This late change to the Senate bill has a number of apparently far-reaching (and hopefully unintended) consequences for corporate taxpayers, including potentially undoing many of the benefits of the international tax reform provisions that are part of the bill,” reads an analysis for Davis Polk, a major New York law firm that appears to have been the first to notice the problem.

Lily Batchelder, a New York University professor who served as an economist under President Obama, walked through these issues in a brief tweetstorm on Tuesday night.

(I asked a handful of tax experts and lobbyists, liberal and conservative, about Batchelder’s take, and all agreed that it seemed plausible. Even the experts are still picking through the Republican bill.)

Batchelder even raised the possibility — though she told me in an email she was by no means sure of this, as no single person can be an economic simulator — that the Senate’s tax bill would start raising taxes on corporations, in the aggregate, in 2027.

Republicans really want to fix this, and it might be messy

This problem is really wonky, really deep in the weeds. But it also cuts to the core of the Republican tax bill. These three points tell the story:

• Republicans want to cut corporate taxes dramatically. Keeping the AMT limits their plan’s ability to do that.
• Republicans want to create the new territorial tax system described above. Keeping the AMT makes it harder for them to do that.
• Republicans are working with a thin margin of error for votes in the Senate and with the federal deficit under the Senate’s budget rules. Fixing the AMT problem could make it harder to get the votes and make the math work.

Senate Republicans, who voted Wednesday to start negotiations with the House, sounded like they wanted to address the issue. But they know the budget constraints they’re working under. (Not to make this even more complicated, but the Senate tax bill can raise the deficit by $1.5 trillion over 10 years under the Senate rules and not a penny more. It currently clears the threshold with $50 billion to spare — not much in the context of a major tax bill.)

So they weren’t quite making ironclad promises either.

“It would nice if we could eliminate the AMT. However, I’d like to see what the pay-for would be,” Sen. Mike Rounds (R-SD) told reporters Wednesday.

The AMT issue doesn’t create any immediate political problems, perhaps, but, as Batchelder noticed, it could drag out the debate for a tax bill that is overwhelmingly unpopular with the American public. Republicans can’t really afford to lose any of the 51 senators who voted for the plan. If support in the Senate does waver, the AMT issue would probably make it impossible for Republicans to take a backup plan and have the House just pass the Senate bill.

This whole drama also reveals just how foundational a drastic corporate tax cut — at a time when most Americans actually want businesses to pay higher taxes — is to the Republican plan. Fixing their bill to make sure it delivers the deepest possible tax break for businesses will take priority over everything else.

At the same time, the bill is projected to send most of its individual tax breaks to the wealthy, eventually raise rates on the poorest Americans if a future Congress doesn’t intervene, and lead to 13 million fewer Americans with health insurance by repealing Obamacare’s individual mandate.

“It’s fairly instructive that of all the things that are harmful about this bill — including tax increases on households, 13 million more uninsured — this is the one that now seems to be the priority going into conference,” a progressive tax analyst noted.