NCPA - National Center for Policy Analysis

Firms Pass up Tax Breaks, Citing Hassles, Complexity

July 24, 2012

For years, politicians have used targeted tax breaks to try to influence corporate behavior. But executives, particularly at small and medium-size companies, complain that many of the tax deductions are either too cumbersome or too confusing. In some cases, the cost of obtaining the tax benefit is greater than the benefit itself -- a wrinkle that has helped spawn a cottage industry of tax-credit consultants. Also problematic is the threat of pushback from the Internal Revenue Service, says the Wall Street Journal.

The result: many companies are saying "no, thanks" and are likely paying more taxes than legally required. And corporate breaks that Washington hopes will boost the economy often prove ineffective. As a result, simplification of the corporate tax code has become a bipartisan rallying cry.

So why does the complexity persist? In part, both the White House and Congress can't seem to resist fine-tuning the tax code to satisfy their diverse goals. And once a break is created, the IRS must issue rules to prevent people from taking inappropriate advantage.

  • Tax consultants estimate that eligible businesses obtain as little as 5 percent of the main domestic tax breaks that they are entitled to claim.
  • That means firms are leaving tens of billions of dollars on the table every year.
  • Out of 1.78 million corporate tax returns in the United States, only about 20,000 claimed any of the three dozen main business tax credits in the code, according to IRS estimates.
  • In the latest global rankings of national tax systems by the World Bank and PricewaterhouseCoopers, the United States came in 142nd out of 183 countries for the time it takes a hypothetical small manufacturer to calculate its corporate income tax (the higher the rank, the more time it takes).

One example of the tough-to-take breaks is the federal Work Opportunity credit, designed to reward companies for hiring workers from several disadvantaged groups. The break typically lowers a company's taxes by up to $2,400 per employee. For businesses hiring unemployed veterans, it can be worth as much as $9,600 per worker. The credit frequently goes unclaimed, largely because it is such a hassle. It requires extensive paperwork for each worker for whom it is claimed and the paperwork can often take a year or more to process. Sarah Hamersma, a University of Florida professor, estimates that companies claim the credit for just 20 percent to 35 percent of all eligible workers.

Source: John D. McKinnon, "Firms Pass up Tax Breaks, Citing Hassles, Complexity," Wall Street Journal, July 22, 2012.

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