The IRS vs. Microsoft and the Future of the “Clean Hydrogen” Industry

This week, we’re diving into two stories that show the push and pull of Bidenomics. The IRS’s case against Microsoft could strike a real blow against corporate tax avoidance, a problem that costs Americans tens of billions of dollars in potential tax revenue every year. However, the administration’s new “clean hydrogen” plan, which is meant to form the basis of an entirely new industry, has drawn negative reviews from climate organizations that say it’s too dependent on an old industry—fossil fuels.

The Rebalancing​

Three cheers for the tax man

If there’s one thing that Americans can agree on, it’s their frustration that corporations don’t pay their fair share of taxes. Even though the nominal corporate tax rate is 21 percent, most big corporations pay much less in taxes; in some cases, they don’t pay anything at all. According to a recent GAO study, the effective rate among profitable large corporations fell from 16 percent in 2014 to 9 percent in 2018—and about half of all large corporations had no federal income tax liability at all.

For decades, big corporations knew they could get away with aggressive tax avoidance strategies because IRS regulators were under-resourced to take on vast armies of corporate lawyers, lobbyists, and accountants. The “. . . 1 percent, they’re not afraid. They make the IRS afraid of them,” said an attorney who works on large corporate audits.

The IRS’s audit of Microsoft has the potential to change that.

The IRS recently concluded one of the largest audits in US history, of Microsoft, the second-most profitable company on earth, and found they owed $28.9 billion in back taxes, plus penalties and interest. The IRS claims that Microsoft created a tax loophole by selling all its intellectual property to a factory it owned in Puerto Rico, funneled all its profits to the factory, and used a sweetheart tax deal with the island to avoid billions in federal taxes.

That strategy of moving profits to tax shelters through dubious accounting maneuvers became increasingly common since the IRS was gutted in the 2010s by conservatives intent on giving corporations more leeway to avoid taxes. But with increased government funding from the Inflation Reduction Act, the IRS could be entering a new era of modernization—and could become more willing and able to take on corporate tax avoidance like in the Microsoft audit.

As Roosevelt Institute President and CEO Felicia Wong says, a modernized IRS could “help shift power away from the very wealthy and corporations that have hoarded too many resources and too much influence for too long.” When dominant corporations hire expensive tax and lobby teams to distort the rules in their favor and don’t pay their fair share in taxes, the general public is forced to cover with higher taxes and worsened services. And big corporations that use their power to avoid paying their taxes gain a competitive advantage that further concentrates and distorts markets. Every dollar Microsoft saved in taxes from this tax shelter was another dollar of “dry powder” it could use to acquire competitors and extend its market power.

The Microsoft case will set the tone for what the IRS is willing and able to do on corporate tax law enforcement for the foreseeable future. The whole tax bar is watching this case closely to see just how far the administration is willing to go to fight corporate power on behalf of working people.

Some Like It Hot

Clean hydrogen: hot or not?

This month, the Department of Energy awarded $7 billion to seven regional hydrogen hubs that are to form the basis for a new “clean hydrogen” industry. Hydrogen is seen by many energy experts as a necessary addition to the energy portfolio, because of its use as a potentially low-to-no emissions input into so-called “hard-to-decarbonize” sectors like steel, heavy trucks, container ships, and airplanes. The funding for the hubs came from the Infrastructure Investment and Jobs Act, which includes another $1 billion to fund demand-side projects to build out the new clean hydrogen industry. The Biden administration hopes these hubs attract another $40 billion in private investment to form the backbone of an industry that can trade globally by the 2030s.

On the one hand, the Biden administration’s decision to invest so heavily in developing the clean hydrogen industry is a clear win for industrial policy. The Department of Energy’s “liftoff” report estimates that a robust deployment of hydrogen could amount to an $150 billion market, cut US emissions by 10 percent, and directly and indirectly employ hundreds of thousands of workers in the coming decades. “You get very few chances to set up the political alliances and funding of a new industry,” Craig Segall, vice president of policy at environmental policy group Evergreen, told Vox. “You never get a crack at this. It’s as if we were at the beginning of coal or gas.” The initial investments provided by the IIJA, combined with the clean energy tax credits in the IRA, are likely to provide enough support to get the production, distribution, and demand for hydrogen fuel up to scale. The administration chose the seven locations, which cover 16 states, to account for regional energy and economic differences, which will place jobs and infrastructure at critical junctures in the process of production.

However, the announcement is tempered by questions about whether hydrogen produced using fossil fuels should be considered “clean hydrogen.” Hydrogen can be produced using solely renewable energy sources (“green hydrogen”), using natural gas and carbon capture technologies (“blue hydrogen”), or nuclear power (“pink hydrogen”), among other methods. But, despite the claims of fossil fuel companies and their lobbyists, some studies have found that the process of producing and burning blue hydrogen might actually add more greenhouse gas to the air than fossil fuels.

The White House claims that two-thirds of the energy produced by the hubs will be from green hydrogen, but four out of the seven hubs include blue hydrogen in their energy mix. “Dozens of oil and gas companies, from Chevron and ExxonMobil to EQT and Dominion Energy to Xcel Energy and Marathon Petroleum, are poised to benefit from federal funding explicitly described as going towards the ‘clean energy transition’ to ‘tackle the climate crisis,'” says the Revolving Door Project.

The administration deserves credit for using creative policy solutions to develop new, strategic industries, but all of those efforts could backfire if the purportedly clean energy ends up being net-carbon positive. We’re watching this closely here at the Bidenomics Brief, and you can, too: Take a listen to how upcoming implementation decisions could shape this balance, with Rachel Fakhry on David Roberts’ Volts podcast, and Emily Pontecorvo at Heatmap.

What to Read

All the news that’s fit to link

• Rohan Sandhu has a review of the bottom-up solutions that are part of the industrial policy playbook in Time Magazine.
• Writing in The American Prospect, Robert Kuttner argues the goal of industrial policy should be prioritizing American workers, not American corporations.
• In a pre-publication paper released in August, Réka Juhász, Nathan Lane, and Dani Rodrik review the recent, more positive literature on industrial policy, and offer some lessons from the East Asian experience and the realities of deindustrialization.
• Check out this new series from the American Economic Liberties Project on industrial policy and competition, which starts with an analysis of the structure of the heat pump market.

Who Said It: JRB or FDR?

Every week, we close with a quote from either President Biden or FDR that sheds some particular light upon the prior week’s news.

If you guessed last week’s quote that “all workers—including writers, actors, and auto workers—deserve a fair share of the value their labor helped create” was from President Biden . . . you were right!

And this week’s quote:

“When the United States invests considerable resources in new industry, does it encourage or discourage businesses to get in? And the answer is clear. It encourages them to get in.

Federal investments attract private sector investments. A lot of it. It creates jobs and industries, like clean energy, and demonstrates we’re all in this together. And that’s what this is all about today.”