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POLICY INSIGHT
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Congress Shouldn’t Prioritize Corporate Tax Interests Over Children and Low-Paid Workers

Corporate lobbyists are mounting an aggressive push for Congress to delay a tax increase enacted in the Trump 2017 tax law related to the tax treatment of research and experimentation (R&E) expenses, either in an upcoming economic package or in legislation to improve the U.S.’s international competitiveness (the so-called COMPETES Act). Congress shouldn’t place corporate tax interests ahead of two other tax priorities: delivering the full Child Tax Credit to the children who need it most and strengthening the Earned Income Tax Credit (EITC) so the federal government no longer taxes low-paid workers into, or deeper into, poverty.

Instead, lawmakers should put the Child Tax Credit and EITC improvements in the same bill as the corporate tax provision. That’s what they did when they reached a bipartisan compromise on a 2015 bill that paired Child Tax Credit and EITC improvements with a permanent extension of a separate R&E provision (a tax credit) and other corporate provisions.

Here’s some background:

  • Child Tax Credit: The American Rescue Plan boosted the Child Tax Credit in three main ways, for 2021 only. It raised the maximum credit (to $3,600 for children under age 6 and $3,000 for older children), included 17-year-olds for the first time, and — most importantly — made the credit “fully refundable,” meaning families with low or no earnings could receive the full credit. (Previously, an estimated 27 million children received a partial credit or none at all because their families earned too little. This group included roughly half of all Black and Latino children, roughly 1 in 5 white children, and roughly half of children living in rural areas.) The credit amounts were deposited monthly in parents’ bank accounts during the second half of 2021.

    The expansion was a striking success. Families spent the funds at the grocery store, so fewer kids were facing the risk of hunger, and to pay bills that meet other basic needs. Monthly child poverty dropped substantially during 2021 despite the continuing economic disruptions caused by the pandemic. By December 2021, the Child Tax Credit as a whole lifted an estimated 3.7 million children above the monthly poverty line; when advance payments expired in January, monthly child poverty rose more than 40 percent, researchers at Columbia University concluded.

    Making the credit fully refundable on a permanent basis would bring much-needed help to families coping with rising costs for food, energy, and other needs. And over the long term, this investment to lower child poverty would improve the lives of millions of children. A raft of studies suggest more income support for children in low-income families would result in higher school enrollment, higher reading and math test scores, higher high school graduation rates, less drug and alcohol use, higher rates of college entry, better health, and greater earning power in adulthood. The cost of making the full credit (without the increase in the credit amount or adding 17-year-olds) available to the lowest-income children permanently, which is the main driver of child poverty reduction, would be modest: roughly $65 billion over the next ten years, according to our calculations based on a Joint Committee on Taxation (JCT) estimate.

  • EITC: Prior to the Rescue Plan, nearly 6 million hard-working adults who are paid little were taxed into, or deeper into, poverty, largely because the EITC for workers not raising children at home was paltry or non-existent. The Rescue Plan addressed this glaring flaw in the tax code for 2021, boosting the incomes of over 17 million people by increasing the credit from its very low level of roughly $540 to roughly $1,500 (still well below the credit for families with children) and making the credit available to younger and older workers who were previously excluded. Continuing this improvement would cost roughly $13 billion per year, according to JCT.
  • Research and experimentation (R&E) expenses: The 2017 Trump tax cut slashed the corporate rate from 35 percent to 21 percent, which is a big reason why the law — which has a net cost of roughly $2 trillion over 2018-2027, according to the Congressional Budget Office — is so expensive. To bring down some of the cost of the corporate rate cut, the law requires businesses, beginning in 2022, to deduct the costs of their R&E investments gradually (or “amortize” them) over five years instead of deducting the full costs immediately. The ability to accelerate deductions is a valuable tax benefit for companies. In fact, delaying the requirement to amortize R&E expenses, as corporate lobbyists are pressing Congress to do, would cost over $29 billion this year, according to JCT. It’s important to understand that even with the scheduled tax increase, corporations still are reaping the benefits of very large tax cuts under the 2017 tax law.

Each of these provisions, in some form, is in the House-passed Build Back Better bill, which includes possible elements of an economic package that Congress would consider this year under the fast-track reconciliation process. The House bill extends the Rescue Plan’s expansions of the Child Tax Credit and EITC for one year, makes permanent the Child Tax Credit’s full refundability feature, and delays the Trump tax law’s R&E tax increase until 2026. All three of these provisions could be addressed in an economic package considered under reconciliation rules, which should also include a strong and progressive revenue-raising package along the lines of the what’s in the House-passed bill.

With the timing of Senate action on an economic package uncertain, however, corporate lobbyists are trying to attach the R&E provision to other legislation such as the pending COMPETES Act, which is now being considered in a bipartisan House-Senate conference. This, in effect, would allow corporations to jump ahead of families and low-paid workers and should be a non-starter for policymakers.

Moreover, if for some reason the Child Tax Credit and EITC improvements don’t move forward in reconciliation, Congress should leave the R&E provision out of any reconciliation bill and only consider the R&E provision in legislation that addresses the critical expiring tax provisions for families and low-paid workers. Children and low-paid workers shouldn’t take a back seat to corporate tax interests.

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Vice President for Federal Tax Policy