Democrats target tax avoidance before cuts expire in 2025

Democrats are going after tax avoidance from big companies and wealthy individuals as the debate on taxes heats up ahead of tax code expirations scheduled for next year.

A new set of proposed rules from the Treasury Department is taking aim at corporations with profits more than $1 billion, while Senate Finance Committee Democrats last week called out strategies wealthy people use to get around their tax liability.

The Treasury Department said Thursday it was proposing new rules on the corporate alternative minimum tax (CAMT), a powerful and complicated section of the tax code that runs parallel to the main corporate tax laws, news that has some big accounting firms sounding nervous.

The rules would activate that parallel track, requiring corporations with more than $1 billion in profit to pay a 15 percent minimum tax. Without the new rules, the companies would have paid an effective federal tax rate of just 2.6 percent on average, the department said.

The Treasury Department estimates the new rules will bring in $250 billion over the next decade, helping to chip away at the tax gap, which is the amount the government is owed in taxes every year but doesn’t collect. The 2021 tax gap was around $700 billion.

Public comments on the newly proposed rules will be accepted through Dec. 12, and a hearing is scheduled for Jan. 16.

“The proposed rules released by the Treasury today are an important step toward realizing Congress’ efforts to address the most egregious U.S. corporate tax avoidance and ensure the largest and most profitable corporations in the country cannot pay little to no taxes,” Treasury Secretary Janet Yellen said in a statement.

Estimates from the Joint Committee on Taxation in 2022 put the revenue figure from the CAMT slightly lower, at $222 billion, amounting to an increase in corporate revenues for the government of 5.8 percent. That’s the equivalent of raising the overall corporate tax rate of 21 percent to just more than 23 percent, according to the Congressional Research Service (CRS).

However, the revenue effects may be smaller due to recent IRS funding rescissions, according to a report released last week by the Treasury Inspector General for Tax Administration, citing a $20.2 billion reduction in the IRS’s $80 billion funding bump passed in 2022.

The boosted CAMT would apply to just a handful of the biggest companies. The CRS cited a study that identified 90 corporations that would be subject to the tax in 2023, including Berkshire Hathaway, AT&T and Charter Communications. Amazon, Intel and Verizon would also be taxed.

Some of the nation’s largest accounting firms, which represent some of those companies, sounded apprehensive about the Treasury Department’s proposed rule change, saying it runs against previously issued instructions and raises questions.

“[It would] create a massively complex parallel regime requiring the calculation of, for example, CAMT basis in stock,” accountancy KPMG wrote in a Thursday analysis. “It is worth noting in areas where the proposed regulations ‘answered’ open questions, the answers may be viewed to raise even more (but potentially different) questions.”

Accounting firm EY observed that the new regulations “differ from the prior guidance in some notable respects,” mentioning corporate safe harbor regulations as well as property designations claimed by partnerships.

Tax experts sounded dubious notes about the CAMT, which exists because of the smorgasbord of deductions and credits in the tax code that allows many big companies to reduce their tax burdens to zero. Rather than addressing the credits and their interrelations in particular, which have various embedded constituencies, the CAMT is ostensibly a general workaround for that problem.

“The alternative minimum tax always was a weak cousin to a straight-out increase in the corporate tax rate,” the Tax Policy Center’s Steve Rosenthal told The Hill.

Rosenthal also mentioned timing advantages associated with the CAMT, which can shrink the long-term revenue estimates relative to Congress’s standard accounting window.

“By and large, it’s a timing play, because the alternative minimum tax can be applied later to the regular tax liability,” he said.

Meanwhile in the Senate, Democrats last week called out similar tax avoidance schemes by wealthy individuals, arguing that the last update to the tax code by Republicans during the Trump administration amounted to “class warfare.”

“When Congress gets around to looking at Social Security and the housing crisis, it’s going to find that the Trump class warfare has devastated the budget and made it impossible to come together and pass real solutions,” Senate Finance Committee Chair Ron Wyden (D-Ore.) said during a hearing on tax avoidance techniques held Thursday.

Several times during the hearing, Wyden mentioned a well-known tax dodge called “buy, borrow and die,” a legal trick whereby rich people borrow against their assets and then use the appreciation of those assets, which can be handed down to their heirs tax free thanks to a “step up” in basis, to cover their debts.

Other tax rorts brought up by Democrats in the hearing involved legal entities including grantor-retained annuity trusts (GRATs), individual retirement accounts (IRAs) and partnerships, which were given a special 20 percent deduction in the 2017 Trump tax cuts.

“Congress needs to address … the passthrough loophole that Donald Trump created in 2017,” Wyden said. “Unfortunately, that Trump policy was also a bait-and-switch. It became another Trump policy that made the biggest winners out of high-income individuals.”

As lawmakers draw lines in the sand ahead of expirations in the domestic tax code scheduled for next year, another tax game is playing out internationally, with big implications for the U.S., some of which may affect the CAMT, in particular.

Countries in the Organization for Economic Cooperation and Development (OECD) have failed to reach an agreement on international tax havens and profit shifting, as well as on implementing an agreed-upon 15 percent global minimum tax.

The Congressional Research Service said it’s not sure how the CAMT and other international taxes would come to bear within the OECD framework.

“It is unclear how these taxes would interact with [the 15 percent Pillar 2 global base erosion tax], which, if adopted, would allow foreign countries to tax income of U.S. multinationals if effective tax rates are below 15 percent,” researchers wrote last year.

Frustrations about the slow progress at the OECD have given momentum to a parallel initiative at the United Nations, which produced an early-stage vote over the summer.

“We will start a process in January 2025, which will run until mid-2027, to negotiate and agree a framework convention on international tax cooperation,” international tax policy advocate Alex Cobham told The Hill.

Republican lawmakers have expressed major hesitations about the U.N. process, with one former top Republican tax writer telling The Hill that the U.N. was not a desirable venue for the debate.