TEI urges prompt enactment of economic stimulus legislation: November 13, 2001.

On November 13, 2001, TEI submitted its recommendations for Economic Stimulus legislation to the members of the House Ways and Means and the Senate Finance Committees. The recommendations follow-up on previous recommendations and comments TEI submitted to the House Ways and Means Committee on October 15, 2001. In addition to the November 13 and October 15 submissions, TEI forwarded a one-page summary of its recommendations to the House and Senate leadership on November 30, 2001. TEI's November 13 submission is reprinted below. The October 15, 2001, recommendations are reprinted in the September-October issue of The Tax Executive. The one-page November 30 document may be obtained by sending an e-mail message to asktei.org.

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As the Senate considers critically important legislation to stimulate the faltering U.S. economy, Tax Executives Institute is pleased to submit the following recommendations. As the preeminent association of in-house tax professionals, the Institute endorses the prompt enactment of legislation to provide significant tax relief to, and hence effectively stimulate economic activity by, the sectors of the American economy most affected by current economic conditions. Regrettably, overheated rhetoric has slowed progress on the bill. TEI strongly recommends that any desire for partisan advantage be put aside and that the parties work cooperatively to craft a bill to achieve the unassailable goal of stimulating the economy in an efficient, effective, and even-handed way.

No sector of the economy or of the Nation has been untouched by the current economic downturn and the aftermath of the September 11 attacks. To be sure, some industries and groups (including those directly affected by the terrorist attacks) have been more severely affected, but in our view the pending legislation needs to address the entire economy and the entire country. The key lies in developing the proper balance of tax and non-tax provisions and, further, the proper balance of individual and business provisions.

TEI represents a cross-section of the business community, and our members know first hand the ins and outs of the Internal Revenue Code and tax laws around the world. They live with them (and, indeed, with continual tax audits) on a day-to-day basis. TEI strongly believes that, rhetoric aside, it makes eminent sense to craft a stimulus bill that, at its core, includes provisions to directly and significantly stimulate business activity because such legislation will have a "multiplier effect" beyond that of narrow tax and spending programs; it will serve as a catalyst to the broader goal of economic growth. If the legislation spurs investments, jump-starts the economy, and decreases unemployment, all segments of society will benefit. Again, the key is balance. Keeping this in mind, Tax Executives Institute recommends the enactment of proposals--

* To lengthen the carryback period for net operating losses to five years.

* To repeal the corporate alternative minimum tax and to refund, immediately or over time, all accumulated AMT credits.

* To allow substantial additional first-year depreciation on qualified investments.

TEI supports these proposals because they can be enacted expeditiously; can be implemented with a minimum of administrative burden on either taxpayers or the government; and, most significantly, will place much needed funds in the hands of distressed businesses at a critical time. Simply stated, these proposals will accord tax relief to businesses and industries that need tax relief in a balanced, fair, and administrable manner and, by stimulating job retention and growth, benefit individual taxpayers as well.

Expand the Net Operating Loss Carryback Period to Five Years

TEI supports the extension of the net operating loss carryback period from two years to five years, effective for taxable years ending on or after September 30, 2000. Although TEI supports the permanent enactment of such legislation, we recommend that the five-year NOL carryback period be applicable to losses at least through December 31, 2003.

Section 172 generally permits a net operating loss (NOL) of any year to be carried back two taxable years and then carried forward 20 taxable years. The current carryback and carryforward periods were most recently set by the Taxpayer Relief Act of 1997, not for any policy reason but simply as a budgeting gimmick. Prior to that, the carryback and carryforward periods were 3 and 15 years, respectively.

The net operating loss carryforward and carryback provisions of section 172 permit taxpayers to ameliorate the unduly harsh and inequitable consequences of taxing income strictly on an annual basis. In effect, they permit a taxpayer to offset the income of good years with the losses and credits from bad years in order to strike an average taxable income and liability computed over the course of a full business cycle. By expanding the net operating loss carryback provisions, Congress can help smooth out swings in business income (and federal income taxes on that income) that result from business cycle fluctuations and unexpected financial losses and provide a much needed cash infusion to companies that are the most severely affected by the current downturn in the economy. Moreover, expanding the carryback periods will provide NOL taxpayers with a means of expeditiously recovering taxes already paid into the government, which can be immediately used in the business. Indeed, to provide cash to business taxpayers and inject money into the economy immediately, taxpayers should be permitted to file claims for refund based on their most recently filed tax returns. Accordingly, TEI recommends that the effective date of the provision be for losses incurred in taxable years ending on or after September 30, 2000. (1) In addition, the Treasury Department and Internal Revenue Service should be instructed to expedite the processing of claims and issuance of refund checks.

Corporate Alternative Minimum Tax

TEI supports the repeal of the corporate alternative minimum tax (AMT). Even assuming the corporate AMT made sense when it was enacted in 1969, it now lacks a legitimate tax policy basis. It exacts a heavy toll in terms of tax administration and is pro-cyclical, constituting an unnecessary drag on capital investment during economic downturns. Moreover, since accumulated AMT credits represent a prepayment of tax, TEI supports making those credits refundable, either immediately or over time. Refunding accumulated AMT credits will both provide an immediate economic stimulus and temper the horrendous complexity of the AMT regime.

Initially enacted in 1969 and substantially modified in 1986, the corporate AMT today has little effect on its original target--companies with substantial economic income that were paying little or no federal taxes. In its recent study on ways to simplify the Internal Revenue Code, the staff of the Joint Committee on Taxation concluded that the original purpose of the corporate AMT is no longer served in any meaningful way. The AMT does not necessarily produce a more accurate measurement of income than the regular corporate income tax, especially after the provisions of the Tax Reform Act of 1986, and subsequent legislation, became fully effective.

The AMT creates enormous administrative burdens and undermines the policies underlying substantive provisions of the Code. Tax payers should not be required to compute their taxes twice and to keep two sets of books. In addition, the AMT is counterproductive: It exacts its heaviest toll during recessions and thus aggravates, rather than ameliorates, the harsh effects of a business downturn. Thus, the AMT taxes corporations when they can least afford it--when they are struggling to survive. Because the calculation and payment of AMT is driven in large measure by a slower depreciation schedule for capital investments, the AMT is a substantial drag on one of the potential engines of economic recovery: capital investment in plant and equipment. (2) The AMT represented poor public policy when it was enacted and time has not tempered its lack of appeal.

In one stroke--repeal of the corporate AMT--Congress can both eliminate a flawed tax policy that can only serve to exacerbate the downturn and effect a major simplification of the Internal Revenue Code. (3) In addition, to provide further economic stimulus and investment, corporate taxpayers with accumulated AMT credits should be afforded the opportunity to recover those credits by way of a refund. TEI appreciates that the issue of AMT credit refundability has been quite contentious. The inflamed rhetoric that has marked the debate, however, should not mask these fundamental truths:

* Accumulated AMT credits generally represent a prepayment of a company's regular tax liability, not a liability in and of itself. While budget exigencies may make the immediate refund of accumulated credits difficult (and hence point to spreading their utilization over a period of years), they should not mask the reality that the refund of such AMT credits will not represent a new, unanticipated cost to the Treasury.

* Repeal of the corporate AMT is not a special interest provision. In 1998, more than 30,000 companies paid the tax, and that number is likely to increase given the pro-cyclical effect of the tax. Moreover, repeal was recommended on both tax policy and administration grounds by the nonpartisan Joint Committee on Taxation, as well as by the Nation's leading tax professional associations--the American Institute of Certified Public Accountants, the American Bar Association's Tax Section, and TEI

* Without repeal (or other action), the corporate AMT will greatly diminish the stimulative effect of other pending changes, including most notably those relating to the extension of the NOL carryback period and additional first-year depreciation.

For the foregoing reasons, TEI urges Congress to repeal the corporate AMT.

Additional First-Year Depreciation

TEI supports legislation to allow immediate expensing for 30 percent of qualified investments in capital, leasehold improvements, software, and property placed in service within the next 36 months, with the remaining 70 percent depreciated under current rules.

In order to stimulate capital investment, TEI urges Congress to enact legislation to permit taxpayers to deduct additional first-year depreciation basis for qualified property placed in service after September 10, 2001. Qualifying property should generally include property to which the Modified Accelerated Cost Recovery System applies with a recovery period of 20 years or less as well as computer software.

Some proposals call for only a modest depreciation "bonus" (10 percent). TEI believes, however, that to produce the desired stimulative effect, the additional first-year depreciation should equal 30 percent of the property's adjusted basis. Enactment of this proposal should immediately spur increased capital spending. An increase in orders for capital goods and software will, in turn, lead to an increase in manufacturing production levels and correspondingly in employment and jobs. Thus, the proposal represents an efficient and expedient means of providing an immediate economic stimulus, though we do acknowledge the change will require taxpayers to alter their information systems. We support the provision because any increased burden and complexity will be far outweighed by the stimulus effect.

Some proposals currently under consideration would sunset the bonus depreciation provision after a relatively short period (say, 12 months). Although TEI understands the motivation for limiting the bonus depreciation provision to investments made within a narrow time period, we suggest that the failure to provide at least a two- or three-year period of eligibility would be self-defeating. Although there is undeniably investment in machinery and equipment, it may not prove possible for many companies to make plans, secure the necessary financing, and place qualified property in service within 12 months. Because a longer period of time may be necessary to make reasoned investments, the time period should be extended.

Finally, we note that the stimulus effect of this depreciation provision would be significantly muted without a special provision permitting a deduction against both the alternative minimum tax and the regular tax computation. Absent such a provision, taxpayers claiming the additional first-year depreciation deduction might find themselves subject to the corporate AMT and thereby denied the full measure of economic stimulus intended by Congress. In the event the corporate AMT is not repealed outright, Congress should ensure the stimulus benefit of the additional first-year depreciation by allowing the enhanced depreciation deductions under the AMT.

Conclusion

Tax Executives Institute appreciates the opportunity to recommend legislative changes for pending economic stimulus legislation. We urge all parties to resist the temptation to resort to demagoguery and instead focus on the need for Congress to take immediate action. If you have any questions about the Institute's views or if we can be of further assistance as Congress considers this important legislation, please do not hesitate to call Timothy J. McCormally of the Institute's professional staff at 202.638.5601.

(1) There is fair body of economic evidence that the economy began slowing with a pullback in orders for capital goods and declines in manufacturing activity, beginning in the fourth quarter of the year 2000.

(2) The principal tax preference that contributes to taxpayers paying the corporate AMT is accelerated depreciation. Capital assets tend to produce a schedule of depreciation deductions that does not vary with economic conditions. As the economy enters a recession, business receipts fall. Consequently, corporate income as measured under the regular tax declines, but depreciation deductions generally remain the same. Because, in simple terms, a taxpayer becomes subject to the AMT when its AMT tax preferences and adjustments become large relative to its regular taxable income, a recession increases the likelihood that a business will become an AMT taxpayer.

(3) In addition to ameliorating the counterproductive nature of the tax, the repeal of corporate AMT would have a salutary effect in reducing administrative burdens and costs comparable or greater in value than the foregone revenues. Many taxpayers must undertake the AMT calculation to determine whether, in fact, they are liable. For example, the GAO reported that while only 28,000 corporations actually paid corporate AMT in 1992, 400,000 corporations filed the AMT form See General Accounting Office, Experience with the Corporate Alternative Minimum Tax, GAO/GGD-95-88, at 3 (April 3, 1995). The 400,000 figure would understate the number of corporations that did the necessary calculations to determine whether they had an AMT liability.