As the US races to lead in wireless communication and innovation, the tax burden imposed by the Inflation Reduction Act’s (IRA) book minimum tax on future purchases of spectrum cannot be overlooked. This tax burden could potentially distort the value of spectrum licenses and slow the build-out of 5G technology, moving in the opposite direction of countries like China that are actively subsidizing 5G expansion.
When Congress debated a minimum tax on book income in 2022 as part of the IRA, it grappled with the unintended consequence of taxing wireless spectrum investments. Without explicit provisions to address it, levying a minimum tax on book income would retroactively tax past spectrum purchases and raise the tax burden on future spectrum purchases. While Congress exempted past spectrum purchases in the IRA’s book minimum tax, the tax will still apply to new spectrum purchases.
For example, if a company purchased $45 billion worth of licenses, the company would deduct $3 billion a year over the next 15 years. However, the IRA’s 15 percent minimum tax on book income for corporations with profits over $1 billion exacerbates this problem. Spectrum licenses are one of the few purchases that receive no deduction for book income purposes—companies spend the cash, but when calculating their financial income, they do not factor in that expenditure because spectrum licenses are treated as indefinite-lived assets.
President Biden proposed increasing the book minimum tax from 15 percent to 21 percent in his Fiscal Year 2025 Budget. Under a 21 percent minimum tax, the potential tax liability that arises due to the disallowed deduction would increase to $630 million. A larger group of firms would also be exposed to the minimum tax as the minimum rate goes up, increasing the distortions when firms make decisions about the value and timing of investment.
These higher tax costs of additional purchases add complexity to telecom companies’ decision-making processes and could decrease the amount that firms are willing to pay for new spectrum licenses. It could also provide unfair advantages across firms depending on the timing of an auction and whether a firm is subject to the book minimum tax that year or expects to be over the next several years.
Unfortunately, policymakers in the United States are not the only ones looking at taxing book income to raise revenue. The international tax agreement at the Organisation for Economic Co-operation and Development (OECD) now being implemented also largely relies on financial statements as a starting point for its tax base, raising similar concerns about permanent gaps and timing-related gaps between book and tax income.
On top of these penalties for investment, beginning in 2022, the Tax Cuts and Jobs Act (TCJA) limited business interest expense deductions from 30 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) to 30 percent of earnings before interest and taxes (EBIT). Depending on a firm’s financing structure, the change could result in a tighter limit on interest deductibility, penalizing companies that borrow to finance new investments, like building out 5G and future telecommunications networks.
While it would be ill-advised to copy the statist approach in China—which may well threaten future growth and innovation—the US should at a minimum reverse its tax burdens on investment and innovation and resist efforts to add to those burdens. The US must ensure that its tax policies do not hinder the growth and development of crucial technologies like 5G.