Three progressive senators and a representative have sent a letter to the tax prep firm Intuit
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At about the same time, House Ways and Means Committee chair Jason Smith (R-MO) has doubled down on his tax-related warning to certain universities that are acting in ways he disagrees with.
Doubling Down
In October, Smith questioned the tax-exempt status of colleges that, in his opinion, are anti-Israel. Smith was careful to stop just short of threatening to remove their tax-exemption, but his warning was hard to miss.
Now, in a second letter, he warned four university presidents that their unwillingness to curb campus anti-Semitism also jeopardizes their tax-exemption. He wrote, “These actions…raise several questions, including whether your institutions are fulfilling their educational purposes as required to receive 501(c)(3) tax-exempt status.”
It isn’t unusual for Congress to seek information on how business uses tax benefits. And expressing strong opinions on important political issues of the day is what lawmakers do. But it is troublesome when they threaten to use the revenue code as a political cudgel against their opponents.
Fighting Over Direct Filing
The Intuit letter came from Sens. Elizabeth Warren (D-MA), Bernie Sanders (I-VT
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Warren and Porter have been in an increasingly heated battle with the firm over whether the IRS should be allowed to create a new program to allow some taxpayers to file directly with the agency. That could reduce demand for commercial tax prep software, a big part of the firm’s business.
The tax prep industry aggressively resisted similar state initiatives in recent years. And they have been using their lobbying muscle to try to sink funding for the new IRS direct file pilot, which was included in the 2022 Inflation Reduction Act.
According to a report by the campaign finance watchdog Open Secrets, tax prep firms spent $90 million to lobby on the separate and controversial Free File program, direct filing, and other related issues since 2003. (Full disclosure: TPC receives funding from Intuit and H&R Block
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Warren and colleagues are trying to make a political case by saying Intuit’s research-related tax benefits at least equal the cost of the IRS’s direct file pilot program. According to their letter, “With the money that the federal government used to subsidize Intuit’s research, the IRS could have offered free, online tax filing to millions of Americans.” Are they suggesting Congress could take away the firm’s tax breaks and use the extra revenue to fund direct file?
Serious Questions
As a member of the Senate Finance Committee, Warren certainly can investigate the effectiveness of tax subsidies for corporate research. There are, in fact, questions about the effectiveness of the credit. For example, it benefits large and profitable firms but not smaller firms and start-ups that may not have taxable income to reduce, as my TPC colleague Thomas Brosy explains.
As part of a congressional exploration into how firms use these credits, it makes sense for lawmakers to request information about a representative sample of companies. And I’d love to know what they find. More broadly, a Hill review could open an important discussion about the costs and benefits of corporate and individual tax preferences.
But asking for information about how one company uses its tax credits feels like an effort to punish, or at least embarrass, a single firm. As the lawmakers’ letter says, “Americans deserve to know how their tax dollars are being spent, especially when their hard-earned money is being used to fund subsidies for corporations lobbying against federal programs that would benefit taxpayers.”
The lawmakers ask, for example, how much the company spent on research to improve its software, cybersecurity, and market research. But these uses appear to be perfectly legal. If legislators don’t like it, or believe the tax breaks are not delivering hoped-for benefits to the economy, they can change the law. For every company.
A Sordid History
There has been a long sordid history of politicians using the tax code to try to punish critics or political opponents. Presidents Franklin Roosevelt and John Kennedy did it (here and here). In 1971, President Nixon tried to get the IRS to audit those on his infamous enemies list. And former President Trump wanted the IRS to go after his many enemies, according to John Kelly, who had been a White House chief of staff for Trump.
Neither Smith nor Warren and her colleagues have crossed those red lines. And suggesting that Congress will repeal a tax benefit for a single company or university is a hollow threat. Still, these lawmakers are taking policy disputes in a very dangerous direction.
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