According to a report published in the Wall Street Journal last week, the two communications giants are set to reap the benefit of renewed federal tax breaks, designed to help them increase both investment and job creation. The catch? These tax breaks have been in action since 2008, and so far, they haven’t helped Verizon or AT&T do either.
This is a frustrating development, and not just for these two phone companies. Ultimately, the failure of the AT&T and Verizon tax breaks is symptomatic of larger government problems, but doubly frustrating here, considering the importance of supporting the technology sector.
The whole thing falls under the category of “bonus depreciation,” a practice which allows companies to counterbalance revenue with investments more quickly. As the Wall Street Journal’s Thomas Gryta puts it, it was enacted “with the goal of giving companies an incentive to build more factories or upgrade more equipment, creating jobs and giving a boost to sluggish economic growth in the process.” However, since 2008, Verizon and AT&T have kept their spending comparatively flat, while their employee count has gone down by over 10,000—or a fifth of their total work forces.
On top of which, most experts agree that bonus depreciation simply doesn’t work. According Chuck Marr and Brandon DeBoo of Center on Budget and Policy Priorities, “studies have shown that bonus depreciation ‘is largely ineffective as a policy tool for economic stimulus,’ according to the Congressional Research Service (CRS).” Marr and DeBoo write, “Moreover, enacting bonus depreciation late in the year and making it retroactive to the start of 2014—as the pending proposals would do—makes even less sense as an incentive, since it would give taxpayer funds to corporations as a windfall to companies for purchases they have already made.”
Marr and DeBot also note the dangerous precedent bonus depreciation sends to major corporations. “Whatever modest stimulus bonus depreciation may provide stems entirely from its temporary nature,” they continue. “If it is permanent—or if repeated short-term extensions lead firms to expect it will be routinely extended—it will no longer encourage them to accelerate their purchases during economic downturns, as they will get the same tax break regardless of whether the purchases occur when the economy is weak or when it’s strong.”
So basically, bonus depreciation sends the message that you never have to fulfill your promises, because the government will continue to support tax subsidies as long as the companies who are being rewarded remain less than perfect. Moreover, the unfairness continues in that companies employing the practice pay markedly less than the statutory 35 percent corporate tax rate on profits which stem from bonus depreciation.
Not that any of this should be a surprise where companies like AT&T and Verizon are concerned. In point of fact, Verizon promised that it would wire up Pennsylvania with fiber optic cables in 1994 for $2.1 billion in tax breaks, pretty much failed to do so, and then essentially did the same thing again in New York ten years later.
What makes the whole thing so complicated, and also so troubling, is that Verizon and AT&T aren’t just important to the technology sector, they also set the standard for U.S. infrastructure, with their towers and cables spanning across the country. So when they fail to deliver in regards to federal tax breaks, that just makes it OK for everyone else to fail, too.
Because we’ve seen this kind of thing before. The Bush administration failed miserably when they provided big tax breaks to overseas corporations. And then there’s Wall Street, who received $11 billion in tax breaks in 2012 and 2013 alone, thanks to negotiations concerning the fiscal cliff. In Wall Street’s case, they escape the standard 35 percent federal tax rate. According to CNN Money’s Jennifer Liberto, here’s why: “While the companies that sell things overseas can defer taxes of profits from those items, financial services companies can’t do that because of the nature of their business. So they get what’s called an ‘active financing exemption’ that allows them to defer U.S. taxes on overseas profits on financial transactions.”
But while Wall Street might be the most egregious in terms of these tax abuses, it’s worth mentioning the auto industry, too. “For years, mayors and governors anxious about local jobs had agreed to GM’s demands for cash rewards, free buildings, worker training and lucrative tax breaks,” writes the New York Times’ Louise Story. “Yet at least 50 properties on the 2009 liquidation list were in towns and states that had awarded incentives, adding up to billions in taxpayer dollars, according to data compiled by the New York Times.”
These type of economic policies ensure that companies like Verizon and AT&T get rewarded for a minimum amount of effort and an even smaller rate of improvement. While executives insist that the government’s current tax breaks are essential for them to keep investing, the truth is that such tax breaks are a zero sum gain for anyone but Verizon and AT&T executives themselves. It would be nice for the government to put their foot down and create a mandate to put an end to bonus depreciation, but since no one is technically doing anything illegal and the law is set up in these companies’ favor, this seems sadly unlikely.
The real tragedy, though, is that it is essential for the government to keep investing elsewhere in the tech sector, and companies like Verizon and AT&T are taking away from that. The federal IT budget has already been slashed for 2015. Meanwhile, Silicon Valley continues to have a major diversity problem, an issue that will require not only more jobs, but a wider variety of jobs to fix.
Job growth in the technology sector slowed last year, but it’s still the driving industry of the 21st century. True, it’s always estimated that increased technology will eliminate some jobs, too, but the reality is much more nuanced than knee-jerk technophobia would suggest. Google Chairman Eric Schmidt probably summed it up best when he argued that “new jobs are not created by small businesses but by new businesses, many of which have a technological component.”
It’s not like we haven’t seen this in action before. Arts and entertainment have seen a 50 percent increase in jobs since the inception of the digital revolution. And at Forbes, Greg Satell points to various government programs that have driven technological innovation over time, such as the Defense Advanced Research Projects Agency, the National Institutes of Health, Small Business Innovation Research, and In-Q-Tel, which invests in startups related to fields such as big data analytics and quantum computing.
For the moment, the U.S. is the world leader in technology, but for it to stay that way, we need to put more money into companies that can truly innovate and stimulate job growth. Our government has a notoriously complicated relationship with technology, but pouring money into communications companies who don’t change their economic policies year in and year out is not getting us anywhere. AT&T and Verizon may be getting the good tax breaks, but until they show they can use those tax breaks to benefit anybody but themselves, we’re just setting ourselves up for another useless bailout.
Photo via reynemedia/Flickr (CC BY 2.0)