There are five basic legal forms of business structures found in the United States: C corporations, S corporations, sole proprietorships, partnerships, and Limited Liability Companies (LLCs). In order to understand...
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- Cash for Washers and Dryers Undermines Corporate Tax Reform
Cash for Washers and Dryers Undermines Corporate Tax Reform
While there is a lot of talk in Washington about cutting the corporate tax rate and eliminating tax loopholes, mark Whirlpool Corporation down as a company that will likely be strongly against such a move.
Bloomberg recently reported that:
"Whirlpool Corp. will claim $300 million this year in U.S. tax credits for making energy- efficient appliances, collecting almost four times the government's estimate for what all companies would receive from the tax incentive.
The credit will generate about one-third of Whirlpool's earnings this year, according to the company's projections.
Company filings show that as of Dec. 31, 2010, Whirlpool had $555 million in stockpiled business credits and $2 billion in tax losses. Both can typically be used to offset up to 20 years of future income and taxes."
There are so many issues raised by this story it is hard to know where to begin. But it provides a good learning moment for why we should not use the tax code to incentivize economic behavior—no matter how noble the cause.
First, when Congress created the tax credit in 2005 to encourage consumers to purchase, and manufacturers to produce, energy efficient appliances, it seems unlikely that lawmakers envisioned that the credit could someday comprise one-third of a company's profits. For Whirlpool, the benefits of the energy credit is no different than role the EITC serves for a poor family—an income subsidy.
Secondly, as we have seen with the tax credits for hybrid vehicles and the homebuyer's credit, these industries become dependent upon the credit to drive sales and will fight to the death to keep the credit from expiring. And as we saw with the ill-fated "Cash for Clunkers" program, the credit can greatly distort the market, causing an unnatural spike in sales followed by a severe collapse. In the end, these credits have about the same effect on these markets as steroids have on the human body.
Lastly, the stockpiling of tax credits has a perverse effect on company's attitudes toward corporate tax reform. These credits are booked as "assets" on the company's balance sheet and have a value linked to the corporate tax rate of 35 percent. Should the corporate tax rate be lowered, to say 25 percent, then their value will fall by about one-third, directly impacting the book value of the company. What CEO wants that?
Does it seem impossible that companies would lobby against cutting the corporate tax rate? Many actually did in 2004 during the debate over replacing the Foreign Sales Corporation rules in the "American Jobs Creation Act." Then-Ways and Means Chairman Bill Thomas wanted to reduce the corporate tax rate instead of creating another export-subsidy tax program. But after some companies complained that the lower rate would reduce the value of their company, he relented and created the Domestic Manufacturing Credit. The rest is history.
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