Top corporate executives, testifying before the House Ways and Means Committee not long ago, were asked whether they would prefer abolition of the corporate tax altogether or retention of the tax in its currently legislated form. Well, said they, they guessed they'd rather keep the current law.
How can it be that for some corporations the corporate tax is better than no tax at all? The reason is that the tax law passed last year not only allows corporations to pile up tax preferences from investments so as to wipe out all corporate tax liability; it also allows them to convert any surplus preferences into cold, hard cash by entering into tax leasing deals with other companies.
Originally this negative income tax for corporations was meant to let unprofitable companies share in the generous investment incentives provided to tax-paying firms. Corporate tax law already allowed temporarily unprofitable firms to apply unneeded tax preferences against past or future profits for several years, but the so-called safe-harbor leases allow firms to convert unneeded tax offsets into ready cash.
You may wonder whether it makes sense for the government to be investing broadly in noneconomic ventures. And you may also wonder about the efficiency of providing help through lease-back arrangements--a peculiar form of welfare in which the recipient can only cash his check if he shares it with a rich neighbor. But the strongest objection to safe-harbor leases is that many beneficiary firms aren't unprofitable at all.
Correcting this situation requires amending other portions of the tax law that create an excess of tax offsets in firms that, by any reasonable definition, are not in need of federal handouts. The chief offender in this regard is the excessively generous "accelerated cost recovery" system that, together with the investment tax credit, can encourage firms to buy equipment, machinery and vehicles that could not otherwise be justified by their expected contribution to profits. As the full set of business incentives phases in over the next three years, the number of firms with surplus tax breaks will grow.
Unless firms with excess tax preferences can sell those preferences through lease deals, the firms could become targets for takeovers by other companies still facing corporate tax liabilities. But here again, the safe-harbor lease is being pushed as a cure for an ailment created elsewhere in the tax code--in this case, the overly beneficial tax treatment of assets acquired in a corporate takeover.
Repealing, or at least curtailing, safe-harbor leases is high on Congress' list of possible ways to restore the federal tax base. But Congress should take the time to address the deeper troubles in the corporate tax code--the welter of incentives and counter-incentives that not only create the need for Band-Aid remedies like tax-leasing but also distort corporate decision-making.