By Daniel Lyons
As the midterms approach, the White House may resurrect earlier proposals to overhaul the corporate tax program. One component, sometimes called the “Amazon Tax,” would impose a 15 percent minimum tax on large corporations’ book income (the income reported to investors on financial statements) rather than taxable income, to make sure all companies pay each year. This impulse may seem egalitarian. But because of a quirk in accounting rules governing spectrum licenses, this proposal disproportionately harms wireless companies and could deter broadband buildout.
Explaining the “Amazon Tax”
The book income tax is intended as the equivalent of an alternative minimum tax for corporations. It was a cornerstone of Sen. Elizabeth Warren’s (D-MA) presidential campaign and later found its way into President Biden’s proposed reform package as a way to fund the now-defunct Build Back Better Plan. The goal is to curtail large corporations’ ability to reduce their taxable income through tax incentives by requiring those companies pay a minimum annual tax bill equal to 15 percent of their book income. Book income is calculated according to financial accounting rules set by the apolitical Financial Accounting Standards Board to provide transparency to investors. This is different from tax accounting, which Congress designs to achieve certain goals through tax incentives. A 2021 Treasury Department report suggests the book income tax would apply to corporations with a net income of $2 billion or more.
The Spectrum Wrinkle
While the book income tax targets large corporations generally, wireless companies and others that hold spectrum licenses are uniquely impacted by the proposal. This is because unlike most other corporate assets, the costs of spectrum licenses are not deducted for book income purposes when calculating a firm’s financial income. As the nonpartisan Tax Foundation explains, financial accounting rules treat spectrum licenses as indefinite-lived assets. They do not deteriorate with use over time like a building or vehicle does, and thus do not depreciate over time. Companies spend significant sums on these licenses—over $80 billion in 2021 alone—but those costs are not reflected in the company’s financial income. The tax code corrects for this by allowing firms to deduct the cost over 15 years, to encourage companies to invest in these licenses. But a shift to book income erases that incentive.
As a result, the shift to taxing book income would effectively make spectrum licenses more expensive. Again from the Tax Foundation: “A minimum tax on book income would retroactively tax past spectrum purchases and raise the tax burden on future spectrum purchases.” Companies would pay for spectrum licenses, but unable to deduct those costs, they would pay the 15 percent tax as if those purchases were not made—essentially making licenses 15 percent more expensive. The Tax Foundation estimates this would increase spectrum licensees’ tax burden by $7.2 billion over the next decade based on their past spectrum purchases alone, without including the effect on future spectrum purchases.
This markup is likely to deter investment in spectrum moving forward: Raising prices 15 percent could lead firms to purchase fewer licenses, or to bid lower prices because of the tax penalty. This result is particularly absurd given that the seller of those licenses is the US government, which auctions spectrum and deposits the proceeds in the US Treasury. At most, the government is merely robbing Peter to pay Paul. But as the Tax Foundation notes, there are likely to be knock-on effects for complementary investments in cell towers and other infrastructure, leading to a reduction in overall spending and deployment. As Professor Michael Santorelli notes, it would be preposterous for American tax policy to deter 5G investment precisely when China and others are subsidizing it.
The effect is also likely to fall disproportionately within the broadband industry. Spectrum markets will be distorted by the difference in bids offered by firms subject to the book minimum tax versus those which are not. And because the effect is felt uniquely by spectrum licensees, it tilts future broadband investment away from wireless solutions and toward wired broadband deployment, reducing the intermodal competition that has historically propelled industry growth.
Unquestionably, America’s structural deficits are problematic, and it’s wise for the White House to explore ways to make future programs like Build Back Better revenue-neutral. But I agree with Duke Professor Scott Dyreng: If the problem is that large corporations aggressively increase tax deductions to reduce their tax burden, then the answer is to reform those tax deductions. Shifting instead to a minimum book income tax risks politicizing our financial accounting rules and creates a host of unintended consequences, particularly for a broadband industry that is working to deploy cutting-edge wireless broadband nationwide.
Originally published by the American Institute for Economic Research. Republished with permission under a Creative Commons Attribution 4.0 International License.