This week, Senate Democrats introduced their FY 2022 budget resolution. In the accompanying press release, Senators Bernie Sanders (I-VT) and Chuck Schumer (D-NY) asserted that the budget would “end the days of billionaires and large, profitable corporations not paying a nickel in federal income taxes.” Indeed, the Democrats’ reconciliation package contains significant tax increases on high-income individuals and corporations. However, their proposals will not end profitable corporations reporting zero federal income tax liability in certain years.

Every year, the media and some organizations report that a handful of large, profitable corporations pay little or no federal income tax according to their annual financial statements. For example, Amazon reported earning $11.2 billion in profits in 2018 but received a federal income tax refund of $129 million that year (more recently, they reported a positive federal tax liability). Further, the Institute on Taxation and Economic Policy found that in 2020 39 companies had either a zero or negative income tax burden despite reporting profits to their shareholders between 2018 and 2020.

One significant reason corporations may report profits yet no federal income tax liability is due to differences in book and taxable income. Each year, corporations prepare two income statements, book or financial statement income for shareholders and taxable income for the IRS. Book income is designed to provide information to shareholders and creditors on a corporation’s performance. Taxable income, however, is meant to determine a corporation’s tax liability. It includes provisions to help properly measure a corporation’s income, such as the ability to carryforward losses into future periods. The tax code also includes provisions adopted by Congress to encourage or discourage certain activities, such as tax credits.

While the Biden administration’s proposals would increase the tax burden on corporations by about $2 trillion over the next decade, they would not change the basic structure of the corporate income tax. The Democrats’ proposal would not end corporations paying zero federal income tax in certain years. Corporations will still be able to carryforward losses, and credits will still be available for corporations to offset their tax liability.

The administration has proposed a minimum tax to address these headlines by tying federal tax liability to book income. The minimum tax would require corporations with net income over $2 billion to pay the greater of their ordinary corporate tax liability or 15 percent of their book or financial statement income. Corporations would still be able to offset the book minimum tax with losses and general business credits.

All that said, a tax code that eliminated instances of corporations paying no tax in certain years would not be desirable. The ability to carry losses forward is a necessary component of income taxation. Without loss carryforwards, profitable investment projects that may lose money in some years would be overtaxed. In addition, it’s unlikely lawmakers would want to significantly scale back many credits that lead to low effective tax rates. In fact, the Senate’s budget resolution memo proposes expanding tax credits for green energy investment.

Senators Sanders and Schumer shouldn’t make promises they
cannot keep.

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