Obama is looking more and more like an ideal Republican president with every passing day. The Washington Post reports that the Administration is on the verge of giving companies like Dow Chemical, Boeing, and Lockheed Martin hundreds of millions in tax breaks, which drops directly to their bottom line.
The concession involves research and development tax credits. They were launched under President Reagan in 1981, intended to be a temporary program, out of concern that the US was falling behind Japan in innovation. The problem with this scheme is that it frequently winds up subsidizing activities that companies would have engaged in anyhow. And notice how it did nothing to stop the dismemberment of great corporate research efforts like Bell Labs.
Here’s the gist of the account:
Marty Sullivan, chief economist for the nonprofit Tax Analysts, called the new rules “a significant giveaway to business.”
“The IRS is under a lot of pressure from lobbyists to be accommodating,” Sullivan said. “So over the years, business has been successful in pushing that boundary out.”…
Currently, the IRS forbids companies from claiming tax breaks for costs associated with experimental products they ultimately sell. But after losing a number of recent lawsuits, the Treasury Department proposed last fall to let firms claim the credit for prototypes of new products, even when the companies are able to sell the prototypes themselves to their customers.
Any tax benefits under the new rules would be retroactive, permitting firms to reduce tax bills dating back years….corporate tax lawyers who are paid to follow such changes say the new rules could prove to be a bonanza for a wide range of companies whose expenses are not currently eligible.
“Almost anybody who is making, designing things in the United States potentially could qualify for some of these benefits,” said Jeremy Fingeret, senior managing director at Alliantgroup, a tax consulting firm. “It’s a very, very broad scope.”
The big change is that Obama not only wants to make this credit permanent (not as big a deal as you think; huge portions of the tax code are routinely re-approved every year) but wants to extend it as described above. IRS officials appear to have been put in the embarrassing position of trying to position this gimmie as a clarification. But the driver appears to be that companies kept suing to get credit for deductions that the IRS nixed, most importantly, trying to get credit for developing what they designate as experimental products that they are actually able to sell, such as prototypes. And even though the IRS appeared to lose these cases enough of the time to lead it to pull in its horns, this is likely to be a case of the IRS simply being outgunned. Tax litigators are one of the highest paid types of attorneys; I met one in the 1980s who billed at $1000 an hour, and I shudder to think what current charges would be.
One has to wonder how many giveaways Obama will engineer before he leaves office. Presidential libraries are expensive, after all, so you gotta keep those donors happy.