Academic journal article Journal of Accountancy

President Clinton's Tax Proposal: A Fiscal Balancing Act

Academic journal article Journal of Accountancy

President Clinton's Tax Proposal: A Fiscal Balancing Act

Article excerpt

When President Clinton presented his State of the Union Message on February 17, 1993, he dedicated much of the speech to his economic proposal - especially its revenue provisions, which have a net revenue goal of $296 billion (according to administration estimates as of April 8) for the five-year period from 1993 to 1998. This article reviews the initiatives based on information released by the Clinton administration.


Investment tax credit (ITC). The ITC proposed is estimated to cost $29 billion in revenue over the six-year period. It will be some,what different from the credit taxpayers are used to dealing with; it will be both temporary and incremental and will be earned at a 7% rate, as opposed to the 10% rate in effect before the previous credit's 1986 repeal. The proposed credit will apply to investments made between December 3, 1992, and December 31, 1994.

Central to an understanding of the ITC is the concept of eligible property. Such property historically included depreciable tangible personal property with a useful life of at least three years. As was the case in the past, President Clinton's ITC will continue to exclude most buildings and their structural components, so real estate will not qualify for the credit. The cost of eligible property will be converted into a qualified investment figure to arrive at a taxpayer's ITC.

Qualified investment is the key ITC concept and will encompass the cost of depreciable tangible personal property adjusted to reflect its estimated useful life. The credit will equal 7% of the amount by which the qualified investment exceeds a fixed base (a taxpayer's average historic investment from 1987 to 1991 or from 1989 to 1991, indexed for growth in gross domestic product and multiplied by 70%, for 1993, and 80%, for 1994). In no event will a taxpayer be able to claim credits for more than 50% of its qualified investment in a taxable year.

The ITC also will feature stringent recapture rules: Credits earned must be repaid if the taxpayer's investment for 1995 to 1997 falls below 80% of the fixed base, computed by multiplying indexed average historic investment by 80%.

The credit will offset no more than 25% of a taxpayer's alternative minimum tax (AMT) liability. This is a matter of concern because the companies most affected by the AMT are the very companies that can be counted on to invest most heavily in production equipment. A 25% limit on offsetting AMT will partially dilute the ITC'S stimulative impact.

For small corporations with gross receipts of $5 million or less, the credit will be permanent and initially will begin at a 7% rate; after 1994 it will scale down to a 5% rate. For these corporations the credit will not be incremental but will be earned on the first dollar of qualified investment.

Research and development (R&D) credit. This stimulus provision will have a revenue cost of $10 billion over the six-year period. The credit will be extended permanently retroactive to July 1, 1992. While this credit has a fairly high revenue loss estimate, it will be taken by a small number of companies, principally those in the pharmaceutical and computer industries.

The R&D credit will equal 20% of the excess of qualified research expenditures over a base amount. (Historically, it was an incremental credit, like the proposed ITC.) Calculating the base amount will be fairly complex: It will equal a taxpayer's fixed-base percentage (aggregate research expenditures divided by aggregate gross receipts for the period from 1984 to 1988) multiplied by its average gross receipts for the preceding four years. It is important to note the base period amount can never be less than 50% of the current year's qualified research expenses.

To encourage multinational companies to perform R&D in the United States, the proposal will allow them to allocate R&D expenses attributable to activities performed here solely to U. …

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