As a member of the tax community, I am particularly sensitive to the phrase, “The devil is in the details” as so much of where we live is, in fact, in the details. I prefer instead to say, “The purpose is in the details” as it is so often those granular items which combine to delineate the ultimate purpose or value of the system in question.
Likewise then, since the purpose of taxation as a whole is to provide the government with the resources necessary to protect and improve the public good, I consider our roles in the tax community to be quite important. Logically, it follows that the modalities by which corporations and legal entities are able to offset taxation responsibilities should match in societal impact the vacated value of the tax offset. For the purposes of this article, I will group these modalities into two generalized clusters I will call C&I (short for Tax Credits & Incentives) and NOLs (short for Net Operating Losses). Again, for the purposes of this article I will define them thus:
- C&I is any offset generated by a formal and specific agreement made between an issuing jurisdiction and a legal entity (generally, a corporation).
- NOL is any offset generated by a loss incurred by a legal entity (again, generally a corporation) and which is not preceded by any specific arrangement with an issuing entity.
By and large, NOLs are not considered to be media worthy. Neither their accrual nor their utilization are featured in even the most obscure trade magazines much less larger publications. Yet they are a mainstay of corporate accounting as many of us know firsthand. Understanding NOLs is a foundational part of all CPA training as well as a cornerstone of non-tax professionals concept of tax. After all, most people seem to know that the way to pay less in taxes is to write off losses (I am not framing this in the larger moral implications of tax offset rather from the pure revenue liability standpoint). Alternatively, C&I is a field in which many if not most CPAs are uncomfortable. Running contrary to NOLs, C&I is regularly in the headlines of the most widely viewed outlets. One can look at Amazon HQ2, Tesla’s gigafactories, or, as we will in this discussion, the Foxconn plant in Wisconsin.
Going further into the Foxconn example, CNN previously reported, with thinly veiled suspicion, on the company’s large deal that hinged on some form of impropriety if not outright corruption. Fast forward to 2020 where 3 years has since elapsed and the first round of compliance requirements came do, Foxconn appears to have missed the mark and will, as of this writing, not receive the actual credit. Public outcry ensued – “How could Wisconsin be this corrupt as to have ever ratified such a deal?” Respectfully, I would suggest this is the wrong reaction as in fact, Foxconn will not be receiving the credit and more to the point, not monetizing it. I would suggest that the Foxconn story demonstrates the unique value of C&I as it securitizes the financial impact against the societal impact. Noticeably absent from this discussion is any accounting of accrued or monetized NOLs.
The Foxconn story trails in the footsteps of the one which famously torpedoed the Amazon HQ2 package in New York. Likely, you are at least peripherally familiar with these stories and rather than spend our time here addressing them in detail, I would rather bring this back to the greater discussion of C&I and NOLs.
NOLs must maintain legality, of course, but they are not inherently tethered to societal impact to the same standard as C&I. Additionally, NOLs are seldom the subject of media inquiries and, to my knowledge, never the topic of CNN headlines. And this is not to pick on CNN as they are far from the only organization to cover Foxconn or Amazon HQ2, it is to call attention to the critically incorrect story of C&I as “corporate welfare.”
Unequivocally, C&I is not “corporate welfare.” After all, welfare requires recipients to maintain a certain level of need while C&I requires recipients to maintain a certain level of quantifiable achievement. In this context, NOLs, adhere closer to that definition.
The truth is that C&I reveals the public-private alignment to create large projects, important technology and environmental improvements critical to a better society. A significant amount of the progress made in solar technology was created by C&I, and the life-saving COVID medication Remdesivir was developed through the Federal R&D Credit and has since been priced well below market value.
While the purpose of this article is not to denigrate NOLs, it is to bring what I believe is a much needed counterpoint to the greater narrative around morality in tax. The societal impact of an NOL vs. C&I is complex and inherent to the specific deduction or agreement, but I do think that the greater point is valid: tax offset is a more exercise. I would close by noting that issuing jurisdictions such as the state of California contending with the budgetary crises of COVID-19 fallout are entirely suspending NOLs while maintaining C&I allowances. This would seem to indicate that at least some governments consider some C&I to be more central to their charge of protecting and improving the public good than they do NOLs. I would urge my fellow members of the tax community to more strongly consider the application of C&I as an offset mechanism since the execution of the details of our professional responsibilities reveal our greater purposes as human beings. To close as I began, the purpose is in the details.