TL/DR –
The Inflation Reduction Act’s (IRA) book minimum tax could potentially increase the tax burden on future purchases of spectrum, creating barriers for the US in the race to lead wireless communication and innovation. The minimum tax could distort the value of spectrum licenses and potentially slow the build-out of 5G technology. The tax treatment of spectrum purchases could additionally create a permanent difference between book income and taxable income, complicating decision-making processes for telecom companies and potentially decreasing the amount that firms are willing to pay for new spectrum licenses.
Impact of IRA’s Book Minimum Tax on 5G Competition & Investment
As the reauthorization of the Federal Communications Commission’s authority to run spectrum auctions is debated by lawmakers, the tax burden the Inflation Reduction Act’s (IRA) book minimum tax would put on future spectrum purchases shouldn’t be overlooked. This tax could create barriers for the US in leading wireless communication and innovation.
In the Inflation Reduction Act of 2022, Congress grappled with the consequence of taxing wireless spectrum investments. While past spectrum purchases were exempted from the IRA’s book minimum tax, it will still apply to new spectrum purchases, potentially distorting the value of spectrum licenses and slowing the rollout of 5G technology.
Spectrum, or radio waves, enables wireless communication. The federal government allocates and licenses different parts of it for non-federal use, often through auction. Spectrum purchases at auction are a form of investment.
The demand for 5G technologies has led to record sums being paid for spectrum licenses, but companies do not get an immediate deduction for these expenses. For example, a company that purchased $45 billion worth of licenses would stagger the deduction over 15 years. The delay in deductions raises the cost of investments.
The IRA’s 15 percent minimum tax worsens this problem by reducing financial income for companies. This creates a permanent difference between book income and taxable income, potentially increasing tax liability.
President Biden’s Fiscal Year 2025 Budget proposal further complicates this by raising the book minimum tax to 21 percent. This could increase distortions when firms decide on the value and timing of investment.
The higher tax costs of additional purchases add complexity to telecom companies’ decision-making 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.
The different treatment of spectrum purchases may also impact complementary investments, such as cell towers and other supporting infrastructure, because the rules for taxable income and book income differ across depreciation deductions for other types of investments, like machinery and equipment.
Furthermore, from 2022, the Tax Cuts and Jobs Act (TCJA) limited business interest expense deductions, potentially penalizing companies that borrow to finance new investments, like 5G network expansion. Starting in 2022, the TCJA also began requiring companies to amortize their R&D costs over five years, instead of deducting them immediately.
These tax-related investment headwinds contrast starkly with state subsidies in countries like China, which has provided at least $75 billion in support of telecommunications companies from 2008 through 2018, about a third of which came in tax incentives for tech promotion.
Unintended consequences of tax policy could hinder the US in the global race to lead wireless communication and innovation. Policymakers should look to reverse the current tax burdens on investment and innovation.
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