Tax writers mull new breaks for innovators

Tax writers mull new breaks for innovators

Lawmakers seeking progress on tax reform are considering a new incentive for innovation that would help companies that already pay comparatively little in taxes.

The preference, called a “patent box” or “innovation box,” essentially gives companies a tax break on income from their intellectual property, making it especially attractive to high-tech and pharmaceutical businesses.


But while there’s bipartisan interest in patent boxes, congressional tax writers also acknowledge they face challenges getting the policy right, and the idea itself has a host of political obstacles.

Sen. John ThuneJohn Randolph ThuneRepublicans ready to become deficit hawks again under a President Biden Democrats brush off calls for Biden to play hardball on Cabinet picks Overnight Defense: Pentagon set for tighter virus restrictions as top officials tests positive | Military sees 11th COVID-19 death | House Democrats back Senate language on Confederate base names MORE (R-S.D.), one of the leaders of a Finance Committee working group on business taxes, called patent boxes “en vogue” and “kind of the latest thing” in tax reform.

But Thune, the No. 3 Senate Republican, also stressed there “are really serious questions we have” about patent boxes. “It’s more complicated than I think people think,” he said.

The pitch from patent box supporters is simple: The U.S. needs incentives to keep the technology and pharmaceutical jobs that policymakers have long prioritized, as well as to create new ones.

Companies have historically had a tax credit for conducting research. But other developed countries have already put patent boxes into place, leading advocates to insist the U.S. risks getting left behind in fields that rely on intellectual property.

“These companies are competing globally, and other countries are competing for them,” said Rob Atkinson of the Information Technology and Innovation Foundation. “If you end up giving the tax cuts to this kind of industry, there’s more competitive effects than if you just lower the rates for everyone.”

Sectors that pay higher effective tax rates, like retail, are seeking to bridge the gap with tech industries that pay a lower rate. But Atkinson called that idea foolish.

“I think computer chips are vastly more important than potato chips,” he said.

Lawmakers from both parties are taking an interest in patent boxes as they work to narrow their scope on tax reform negotiations, searching for an unlikely deal. 

Sens. Rob PortmanRobert (Rob) Jones PortmanBiden says transition outreach from Trump administration has been 'sincere' The Hill's 12:30 Report: Trump holds his last turkey pardon ceremony The Hill's Morning Report - Presented by the UAE Embassy in Washington, DC - Trump OKs transition; Biden taps Treasury, State experience MORE (R-Ohio) and Charles SchumerChuck SchumerUS national security policy in the 117th Congress and a new administration Voters say Biden should make coronavirus vaccine a priority: poll New York City subway service could be slashed 40 percent, officials warn MORE (D-N.Y.), who have headed up a working group on international tax issues, are discussing a single-digit tax rate on income from intellectual property, according to lobbyists.

In the House, Rep. Charles BoustanyCharles William BoustanyPartial disengagement based on democratic characteristics: A new era of US-China economic relations Lobbying world March tariff increase would cost 934K jobs, advocacy group says MORE Jr. (R-La.), a senior tax writer, hopes to release an international tax reform bill soon that would include the innovation tax break.

“It’s not without complications and challenges, but it is a viable proposal,” Sen. Ben CardinBenjamin (Ben) Louis CardinDemocratic senators urge Facebook to take action on anti-Muslim bigotry On The Money: Biden, Democratic leaders push for lame-duck coronavirus deal | Business groups shudder at Sanders as Labor secretary | Congress could pass retirement bill as soon as this year Top Democrat: Congress could pass retirement bill as soon as this year MORE (D-Md.), another tax writer, said about patent boxes.

Senior lawmakers and the White House remain intrigued by the idea of pairing tax reform — and taxing the roughly $2 trillion in foreign profits currently offshore — with an infrastructure deal. 

But Republicans have been frustrated that President Obama and Democrats have talked of a two-step process for reform and don’t want to lower tax rates for small businesses that pay taxes through the individual system.

Aides and lobbyists say that any deal this year might leave out lowering corporate tax rates. Democrats speculate that the lure of a highway deal could get Republicans on board.

Still, lawmakers and lobbyists acknowledge there are plenty of barriers facing the patent box this year.

On the policy side, lawmakers have to grapple with, essentially, what sort of intellectual property would qualify.

Both Portman and Boustany said recently that any incentive would have to go beyond patents, to at least include copyrights and trade secrets. 

In designing an innovation box, policymakers would also have to decide what sort of income is eligible.

The problem for lawmakers is that they could easily design an innovation box that cuts a lot of federal tax revenue if they allow a wide range of intellectual property to get the lower rate.

Creating a new, expensive preference for innovation would also make it more difficult to lower the U.S.’s high corporate tax rate, which is currently at 35 percent. Heavyweights in both parties want at least to lower it into the 20s.

“Those are all concerns that we have to work through,” Boustany said, speaking of both political and policy challenges.

Tax lobbyists have said they have just as many questions about the political feasibility of a patent box. 

Research from New York University has shown many, though not all, industries that would benefit from an innovation box already pay a fairly low effective tax rate.

But perhaps even more importantly, lawmakers and international organizations have also singled out tech giants like Amazon, Apple and Google for making complex maneuvers to drastically lower their tax bills. 

Such companies already have found ways to shift intellectual property from the U.S. to jurisdictions with lower taxes. 

The Organization for Economic Cooperation and Development, which is also seeking to crack down on those sorts of tax tricks, wants to make sure that patent boxes encourage economic activity in the countries that use them, and aren’t merely another tool to allow companies to shift profits.

Because of that, lobbyists say, they expect it would be difficult for Congress to give a new tax break to those sectors while telling small businesses to wait and potentially striking a deal that gives fewer benefits to retailers and manufacturers.

“Republicans were wary of business-only tax reform, because that could leave behind leave pass-throughs,” one tax lobbyist said, referring to small businesses that pay taxes as individuals. “If you do international only, you not only leave pass-throughs behind, you leave manufacturers behind too.”