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Planned changes to the US tax system threaten to cut sharply the value of business tax credits used to encourage research and development and other investment spending, sparking protests from the technology industry.
As Republicans in the Senate sought to limit the cost of their tax bill shortly before voting to approve it at 2am on Saturday, they decided to retain the corporate Alternative Minimum Tax, which sets a limit on how far companies can use credits to reduce their tax bills.
The threat to the value of the credits has emerged as one of many potential unintended consequences of a wholesale upheaval of the tax system that is passing through Congress at speed.
One of the worst affected industries could be renewable energy, which faces not only a clampdown on the future availability of tax credits but also retrospective increases in tax on investments already made.
Business groups are trying to persuade members of Congress to preserve the value of business tax credits in the final version of the legislation that is expected to emerge from reconciliation between the House and Senate bills.
Caroline Harris of the US Chamber of Commerce, the business group, in a blog post described the retention of the AMT as “a very unpleasant surprise” that “eviscerates” the impact of the R&D tax credit.
The corporate AMT has, in the words of Jared Walczak, a senior policy analyst at the Tax Foundation, been “one of the most hated parts of the tax system” for decades because it adds complexity, forcing companies and individuals to do two sets of tax calculations to calculate how much they owe.
Put in place under President Ronald Reagan in 1986, it sets a minimum of 20 per cent for a company’s tax rate, with only limited potential to use credits to reduce that. Cutting the corporate tax rate from a maximum of 35 per cent to 20 per cent, as both the Senate and House tax bills would do, means that the AMT would affect many more companies.
The Congressional Budget Office estimated in March that companies in the US in 2012 faced an effective rate of 18.6 per cent, already well below the top statutory rate of 35 per cent, and just 13.3 per cent including the R&D tax credit.
The House version of the tax bill tackled the potential problems with the AMT by voting to scrap it, but the Republicans in the Senate decided they needed to preserve it so they could pay for cuts in other taxes.
Robert Murray, chief executive of coal mining group Murray Energy and a staunch supporter of President Donald Trump, described the decision to retain the AMT as “a crass effort to gain the votes of certain ineffective and befuddled United States Senators”. It would mean “further devastating coal communities and hampering our ability to provide for the healthcare and pension obligations for our coal mining families and retirees”.
Joe Kennedy, a senior fellow at the Information Technology & Innovation Foundation, argued that while the Senate’s version of tax reform might make companies in general better off, it would blunt the incentive to invest in research.
“The encouragement to do research, with its broad economic and social benefits, would be reduced,” he said.
The ITIF, set up to encourage investment in technology, has representatives of leading IT companies including Apple and Amazon on its board, and strong political connections including Orrin Hatch, the influential Republican senator from Utah, as one of its honorary co-chairs.
Mr Kennedy said the final outcome for the legislation was uncertain, but he hoped the value of the R&D tax credit could be preserved.
“I believe Congress will fix this, because it’s important to companies,” he said.
“The drafters of the Senate bill weren’t thinking about the interaction of the AMT and the R&D tax credit. Once it’s brought to their attention, I think they’ll find a fix.”
Mr Walczak said the AMT would be “one of the top issues that will have to be solved” in the conference process between the House and Senate.
Kevin McCarthy, the Republican majority leader in the House, told CNBC on Monday morning that the AMT “should be eliminated for sure”.
Renewable energy industries are threatened by the retention of the AMT, which would curb the value of some tax credits that benefit companies investing in wind farms, for example, and also face a new burden from a provision called the “base erosion anti-abuse tax”. This measure in the Senate bill, intended to incentivise American companies to invest in the US rather than overseas, would wipe out the value of renewable energy tax credits for any companies that are liable for it, under a complicated new formula.
Gregory Wetstone, president of the American Council on Renewable Energy, said the new tax threatened to hit “a critical part of the mix of capital that developers need for renewable energy projects to go ahead”.