Two of the Senate's leading tax experts, who often disagree on major tax questions, have urged Treasury Secretary W. Michael Blumenthal to allow businesses that cannot take full advantage of the investment tax credit to get a cash refund from the government.
Senator Russell B. Long (D-La), chairman of the tax-writing Senate Finance Committee, and Sen. Edward M. Kennedy (D-Mass.) said such a refundable tax credit should be included as part of the administration's tax reform package due to be presented to Congress in the fall.
Long and Kennedy made their recommendations in a letter to Blumenthal last Friday.
The investment tax credit permits businesses and individuals to deduct from the taxes they owe the government 10 per cent of the cost of buying a new piece of equipment or machinery. The credit is designed to spur capital investment by reducing the effective purchase price of new equipment.
For example, if a company owed the federal government $1 million in taxes, but had spent $1 million on new machinery, its tax bill would be reduced by 10 per cent of its capital investment, or by $100,000. The company would then owe the government $900,000. Kennedy and Long said that the credit will reduce corporate taxes by $8.6 billion in the current fiscal year (which ends September 30) and by $2 billion for individuals.
However, they note, restrictions on the use of credit - which they call "the largest single program by which the federal government provides financial assistance to private industry" - prevent many firms, especially small ones and ones that are losing money, from taking advantage of the credit.
Only two-thirds of the potential investment credits earned this year will be used and if the credit is raised to 12 per cent that will dwindle to one half. Long and Kennedy wrote. Two companies in the same industry may make identical investments, but the firm that cannot take advantage of the credit will be hurt, they said.
"It is difficult to understand, for example, why a major federal subsidy like the investment tax credit should be designed in a way that enables General Motors to pay $90,000 for a $100,000 machine; while requiring American Motors to pay the full $100,000," Kennedy and Long said.
The law allows a company or individual to use the credit to offset no more than half his tax liability. Often, the company or the individual tax-payer is not able to use some, or any, of the tax credit.
Long and Kennedy recommend permitting taxpayers to get a refund from the Treasury for the portion of the tax credit they cannot use to offset the taxes they owe.
Making the tax credit refundable would probably cost the Treasury another $3.5 billion in the fiscal (or federal spending) year, which starts October 1.
Long and Kennedy also suggested that tax exempt institutions such as hospitals and universities, which are "eligible to participate in a variety of other federal subsidy programs," should also receive payments from the government for investment in equipment and machinery.
Allowing tax exempt institutions to take advantage of the refundable credit would cost the Treasury about $200 million, they say.
Kennedy and Long, who admit in their letter to Blumenthal that they do not always find themselves "marching to the same drummer on tax reform," said that while making the tax credit refundable would cost the government many tax dollars, such a change is necessary and should be included in the administration's tax reform package.