Some members of Congress are pushing a tax reform deal that would kill two birds with one stone: It would remove pressure on U.S. companies to move out of the country and unlock billions in tax revenues to replenish the empty highway trust fund. But the idea, which some analysts have described as a fad for its sudden popularity, faces some major obstacles.
Sens. Rob Portman and Chuck Schumer, the bipartisan co-chairmen of a working group on international taxation, on Wednesday released an outline of a plan to create a special low tax rate for income from intellectual property and essentially cease collecting taxes on U.S. companies' foreign income. It would raise money for the trust fund with a one-time tax on the estimated $2.3 trillion in profits currently held overseas by U.S. multinationals to avoid taxation.
But while the plan has some bipartisan support at this stage, there are a few reasons why it will require legislative genius to see it passed into law:
1. Would wary liberals support it?
Although the broad outline of the plan has the support of Schumer, the New Yorker who is likely to be the next Democratic leader, liberal analysts are wary of the "patent box" provision creating a special low rate for intellectual property income.
Bob McIntyre, the director of nonprofit group Citizens for Tax Justice, responded to the plan by saying that "the nation's lawmakers are demonstrating that they are more interested in satisfying the concerns of corporate interests instead of thinking about the greater good."
He described the patent box as a "special low tax rate on companies with legal monopolies (patents, copyrights and so forth) to benefit technology firms, movie makers, drug companies and others hugely profitable industries."
Critics point out that the tax code already has breaks that cut effective tax rates on intellectual property-related income to near zero or even below. Those include a provision allowing business to write off research expenses immediately and a separate tax credit for research expenditures.
Two of the three Democrats alongside Schumer in the working group, Sens. Tom Carper of Delaware and Mark Warner of Virginia, favor exploring the idea of a patent box, their offices said.
But the specifics of the legislation have not even been hinted at. It remains to be seen how many Democrats would favor the measure when the terms are spelled out, showing the winners and losers from the policy.
2. What's in and what's out?
Another problem is counting what income qualifies for the patent box. Lawmakers will have to decide what's in and what's out, a tricky process that would be hard to limit.
"If you ask a baker, 'what was the cost of the eggs that went into the cake?' she could tell you down to the penny," Tax Analysts chief economist Martin Sullivan told the Washington Examiner in a recent interview. "But if you asked a baker, 'what are the incomes from those eggs?' it's very difficult to even comprehend what that means."
The policy is meant to incentivize cutting-edge research that drives innovation, such as for new drugs or software, not low-tech intellectual property, but defining the difference for tax purposes can be difficult.
Congress will have to determine what's included — whether it's just patents, or know-how, proprietary technology, copyrights, trademarks or simply all intangible assets. The broader the box is, the more expensive to the Treasury it becomes.
3. Would there be a backlash from other businesses?
The patent box would be a boon to tech and pharmaceutical companies that invest heavily in intellectual property. Currently, without the patent box, they could lower their taxes by moving to low-tax countries, especially countries such as the U.K. that have patent boxes.
If it were to become law, however, it would make it harder to reduce rates for other kinds of companies, noted Sullivan. Businesses across all industries have chafed at the 35 percent U.S. corporate tax rate, highest among advanced countries.
"This tax benefit, whether it's meritorious or not, is going to lose revenue, and therefore make the tax rate higher than it's otherwise going to be" for other companies, Sullivan said.
Members of Congress began talking about the patent box idea after it became clear that talks on comprehensive tax reform were going nowhere. But if there are groups that would lose out if the patent box were enacted, they could become a political obstacle.