Reconciliation Deal Pulls Accounting Rulemaker Into Tax Politics

A panel of unelected accountants in suburban Connecticut would play an outsized role in shaping tax policy for the nation’s largest corporations under a provision inside Senate Democrats’ sweeping tax, climate, and healthcare bill.

The draft legislation uses a version of company income, as measured under US financial accounting rules, to determine what businesses owe in taxes. It’s designed to ensure that large companies making big “book” profits get taxed at a minimum rate of 15%. It puts pressure on what companies report in their financial statements, the rules for which are crafted by the Financial Accounting Standards Board.

Any move the seven-member rulemaker makes to change what numbers companies report could affect the likes of Amazon.com Inc., Apple Inc., and AT&T Inc. Companies might be eager to manage down their earnings to avoid big tax payouts, and they will be scrutinizing those moves. Congress, too, could take extra interest in the work of the private-sector board.

The process of setting accounting rules is supposed to be independent, focusing only on defining the numbers companies report, so investors, creditors, and analysts get insight on their financial health. When politics and business interests intervene, that threatens the system, said Michelle Hanlon, accounting professor at MIT’s Sloan School of Management, whose research focuses on the intersection of tax and accounting.

“I worry about integrity of the financial accounting system and the quality of information that goes into the capital markets,” Hanlon said. “The whole reason we have financial accounting separate from the government now is for good reason. Now we’re going to possibly ruin that.”

The bill calls for a 15% minimum tax on corporations that report $1 billion or more over three years in “adjusted financial statement income,” a term that isn’t defined by US generally accepted accounting principles. The income figure would be based on what companies report as net income, adjusted for various factors—including whether they have already paid foreign taxes or if they received research and development or green energy credits.

That 15% rate could raise $313 billion, according to a Joint Committee on Taxation estimate cited by Senate Democrats.

FASB declined to comment on how the latest bill, brokered by Senate Majority Leader Charles Schumer (D-N.Y.) and Sen. Joe Manchin (D-W.Va.), would affect its work. When lawmakers were debating President Joe Biden’s Build Back Better plan, which contained a similar book tax provision, FASB Chair Richard Jones sounded the alarm. Using income as defined by financial accounting rules as the basis to collect tax revenue “would be an additional pressure, there’s no doubt, on our mission and what we do,” Jones said in November at a meeting with the board’s oversight body.

Potential meddling by lawmakers is a concerning aspect of the plan, said Kyle Pomerleau, senior fellow at the American Enterprise Institute.

“Members of the FASB will likely be taking more trips to D.C. if this is passed,” Pomerleau said.

FASB members and the trustees of the organization that oversees it will have to work extra hard to insulate themselves from political and business pressure, said Robert Herz, who served as chair of FASB from 2002 to 2010. Herz, who led the board during the height of the financial crisis, was hauled before Congress to defend accounting rules as the market melted down.

“It will be important for the FASB board, the trustees, and the foundation and, very importantly, investors, to say: ‘No, the tax rules are the tax rules, and the accounting rules are the accounting rules’,” Herz said.

Established in 1973, FASB is authorized by the US Securities and Exchange Commission to write accounting rules for US companies and not-for-profit organizations. Its founders purposely established it in Norwalk, Conn., so it could at least be geographically separated from the money of Wall Street and the politics of Washington.

That hasn’t stopped businesses or lawmakers from lobbying the board. In 2020, Congress—in a massive coronavirus relief law—allowed banks to delay when they adopted a major FASB-enacted bank accounting change, although the majority of banks declined.

Businesses and trade groups also often inject their interests into how accounting rules get shaped, said Jack Ciesielski, founder of R.G. Associates, Inc. The tax plan could now change what they ask for.

“Now they’re going to be more enthusiastic about lowering income,” Ciesielski said. “It doesn’t inject new players into it. It just changes the mindset of the existing players.”

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