As lawmakers debate reauthorizing the Federal Communications Commission’s spectrum auction powers, they TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the cost of general government services, goods, and activities.
Put a burden on inflationInflation is a general increase in the prices of goods and services throughout an economy, resulting in a decrease in the purchasing power of currency and the value of certain assets. The same salary covers fewer goods, services and bills. Inflation is sometimes called a “hidden tax” because it increases the spending power of governments while reducing taxpayer income through rising costs and “higher tax rates.”
There will be no IRA book minimum tax imposed on future spectrum purchases, nor will there be any other tax-driven barriers to the U.S. competing to lead in wireless communications and innovation.
When Congress debated the minimum tax rate Book RevenueBook profits are the amount of profit a company reports to shareholders in its financial statements. Although this metric is useful for assessing a company’s financial health, it often does not reflect the real economy and may result in a company appearing to be profitable but paying little or no income tax.
In 2022, we addressed the unintended consequences of taxing radio spectrum investments as part of the Inflation Control Act. Without explicit provisions to address this, imposing a minimum tax on book income would retroactively tax past spectrum purchases and increase the tax burden on future spectrum purchases. Although Congress exempted past spectrum purchases from the book minimum tax in IRAs, this tax still applies to new spectrum purchases.
Conversely, a minimum book tax could distort the value of future spectrum licenses and slow the buildout of 5G technology as the U.S. competes with other countries, moving in the opposite direction to countries such as China, which are actively subsidizing the expansion of 5G.
Spectrum, or radio waves, makes wireless communication possible with modern technology, and the federal government allocates and licenses various portions for non-federal use, often through auctions. Buying spectrum at auction is a form of investment.
Strong demand for 5G technology has led telecommunications companies to pay record amounts for spectrum licenses to the federal government, paying about $80 billion in 2021, for example. But for tax purposes, telecommunications companies cannot immediately deduct their spectrum costs, instead writing off the costs over 15 years in accordance with intangible asset amortization rules.
So, for example, if a company purchases $45 billion worth of licenses, the company would have to deduct $3 billion each year for the next 15 years. Delaying the deduction increases the cost of the investment: a dollar in the future is worth less than a dollar today, so the company effectively never recovers its investment costs.
A minimum 15% tax on IRA book income for companies with profits over $1 billion exacerbates this problem. Spectrum licenses are one of the few purchases that do not qualify for a book income deduction. Although the company expends cash, the expense is not taken into account when calculating financial income because spectrum licenses are treated as indefinite assets.
Differential treatment of spectrum purchases creates permanent differences between book revenues and actual revenues. Taxable incomeTaxable income is the amount of income subject to tax after deductions and exemptions have been subtracted. For both individuals and corporations, taxable income is different from, and less than, gross income.
For example, if companies purchase $45 billion in licenses in 2024, $3 billion Tax CreditA tax credit is a provision that reduces your taxable income. The standard deduction is a single, fixed deduction. Itemized deductions are popular among higher-income taxpayers who often have large amounts of deductible expenses, such as state and local tax payments, mortgage interest, and charitable contributions.
This would reduce taxable income by $3 billion, but no such deduction would be allowed for book-based income calculations.
Assuming the company is subject to the book minimum tax for that year, it would be subject to tax on the $3 billion credit, resulting in an increase in its tax liability of $450 million.
In his fiscal year 2025 budget, President Biden proposed increasing the book minimum tax rate from 15% to 21%. With a 21% minimum tax rate, the potential tax liability from the disallowed deduction would increase to $630 million. A higher minimum tax rate would subject more companies to the minimum tax, increasing distortions in how companies determine the value and timing of investments.
Over time, a company will have prior year minimum tax credits that can be applied against its regular corporation tax liability, so its tax burden may be partially reduced, but not fully offset, depending on whether the company falls within or outside the book minimum tax bracket.
These high tax costs of additional purchases could complicate telecom companies’ decision-making process and reduce what companies are willing to pay for new spectrum licenses. That is, while the government may earn some revenue by taxing purchases within the book minimum, it will lose revenue due to lower prices and the resulting lower auction proceeds. There could also be unfair advantages among companies depending on the timing of the auctions and whether the companies are subject to the book minimum tax in the current year or expect to be subject to it in the coming years.
A book minimum tax rate is likely to affect complementary investments such as mobile phone towers and other supporting infrastructure, as rules on taxable income and book income vary from country to country. DepreciationDepreciation is the act of measuring the “useful life” of a business asset, such as machinery or plant, and determining the multi-year period over which the cost of that asset can be deducted from taxable income. Depreciation requires a business to deduct the cost of the investment over time, rather than immediately (i.e., expense it in full), reducing asset values and discouraging investment.
Deductions for other types of investments, such as machinery and equipment.
Raising the tax rate to 21% and doubling the minimum book tax rate would exacerbate an already complex and uncertain tax environment for investment in the telecommunications industry. It has taken the Treasury Department almost two years to issue regulations and guidance for affected companies, reducing certainty about future earnings and likely slowing investment.
Unfortunately, U.S. policymakers are not alone in trying to tax book income to raise revenues: the ongoing international tax treaty of the Organization for Economic Cooperation and Development (OECD) also relies heavily on financial statements as the starting point for its taxation. Tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, and other economic activities that are subject to taxation by the tax authorities. A narrow tax base is non-neutral and inefficient. A broad tax base reduces the cost of tax administration and allows for higher tax revenues to be raised at lower tax rates.
Similar concerns have been raised about permanent and timing-related gaps between book revenues and tax receipts.
In addition to penalties for these investments, the Tax Cuts and Jobs Act (TCJA) will limit business interest expense deductions from 30% of earnings before interest, taxes, depreciation and amortization (EBITDA) to 30% of earnings before interest and taxes (EBIT) starting in 2022. Depending on a company’s financing structure, this change could result in tighter limitations on interest deductions, penalizing companies that borrow to fund new investments, such as building 5G and future communications networks.
Bonus DepreciationSpecial depreciation allows companies to deduct a larger portion of certain “short-term” investments in new or improved technology, equipment, and buildings in the first year. Allowing companies to depreciate more of their investments partially negates the bias in the tax code and encourages companies to invest more, which in the long run increases worker productivity and wages and creates more jobs.
The phasing out of investment in machinery and equipment began.
Rising tax burdens on private infrastructure investments in things like radio frequencies, 5G technology, and machinery and equipment exacerbate existing problems, especially in the context of outright subsidies from countries such as China, where state support for telecommunications companies reached at least $75 billion between 2008 and 2018, about a third of which came in the form of tax incentives to promote technology.
China’s headline corporate tax rate is 25 percent, lower than the U.S. federal and state average of 25.7 percent. Additionally, China offers lower corporate tax rates for certain technology-related sectors. In terms of tax deductions, China tends to have faster and more generous expense recovery policies for investments. For example, intangible assets can be deducted over 10 years (versus 15 years in the U.S.), and research and development expenses qualify for special deductions.
While it would be unwise to emulate China’s nationalistic approach, which could threaten future growth and innovation, the United States should at least roll back taxes on investment and innovation and resist efforts to increase these taxes.
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