S. 2942

Floor Speech

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Ms. MURKOWSKI. Mr. President, I rise today to say how pleased I am to join with the Senator from New Hampshire in introducing S. 2942, a bill to revise the tax treatment of certain contributions to the capital of corporations.

S. 2942 corrects a provision in the 2017 Tax Cuts and Jobs Act that disqualified government grants to corporations from treatment as tax- free contributions to capital. The provision resulted in the imposition of income tax on all such grants. At the same time, a companion provision in the act imposed income tax on ``contributions in aid of construction,'' CIAC, to regulated water utilities, reversing a longstanding rule of prior law that shielded regulated water utilities from tax on such payments. The term CIAC refers to payments--from either governmental sources or other sources that are used by a utility to expand its physical plant.

Our bill corrects the TCJA, first, by restoring the tax exemption for CIAC received by water utilities. That change will ensure that Alaskans, along with all water utility customers around the country, who make payments to a water utility to help the utility expand its service territory or otherwise improve its physical plant will not thereby saddle the utility with a tax charge that could translate into an increase in rates for water service or that, alternatively, could be passed back to the payer of the CIAC.

There is no plausible basis for taxing CIAC received by water utilities and thereby saddling the utility and its customers with the tax charge. CIAC does not at all resemble normal taxable income received by a business in exchange for goods or services. In fact, our bill specifically precludes the utility from including CIAC in its rate base and thereby earning a return on it.

The treatment of CIAC as taxable income might not matter if water utilities could expense the cost of the capital improvements funded through CIAC. The expensing deduction would offset the income. But under the TCJA, regulated utilities do not qualify for expensing. Thus, they incur the tax on the receipt of CIAC and pass the tax on to the payer of the CIAC.

One unintended consequence of the taxability of CIAC, coupled with the ineligibility of regulated utilities for expensing, is the creation of an unjustifiable incentive for the development of water infrastructure outside regulated utilities--i.e. outside the companies that are best equipped to build and manage the infrastructure. The incentive exists because non-utility corporations, unlike regulated utilities, qualify for expensing and can thus eliminate the tax on the receipt of CIAC. Our bill eliminates the incentive by restoring the tax exemption for CIAC received by regulated water utilities.

The other correction our bill makes in the TCJA is to reverse the rule in the act that treats all government grants to corporations as taxable income. Under prior law, government grants that were not in the nature of ordinary purchases of goods or services could qualify as tax- free contributions of capital.

The TCJA failed to distinguish among different types of government grants in writing the new rule. For example, there is no apparent reason why government grants made to spur investment in rural broadband infrastructure should be taxable. The effect of the tax is to reduce the value and effectiveness of the grants. Nor should tax logically be imposed on grants intended to spur investment that would protect the environment or public health, including Investment in water infrastructure.

There are, of course, types of government grants that could probably be taxed without adverse consequences. One example would be grants made to influence corporate decisions on the location of corporate headquarters or facilities.

To create a simple starting point, our bill simply eliminates the TCJA rule taxing government grants. As the Finance Committee and leadership consider the issue, we anticipate that, this time around, they will take the time to consider more carefully which types of grants should be taxable and which should be tax-free. At a minimum, the broadband and environmental grants described above should be tax- free, but there are probably many similar types of grants that should have the same treatment.

Mr. President, I look forward to working with the Senator from New Hampshire and with the members of the Finance Committee to craft sensible corrections to the TCJA to restore the tax exemption for CIAC received by water utilities and restore the tax exemption for government grants received by corporations where the grants are demonstrably in the public interest.

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