New bill would remove tax breaks for mergers

An unlikely pair of lawmakers is teaming up to propose legislation to eliminate tax breaks for corporate M&A activity.

Sen. Sheldon Whitehouse, D-Rhode Island, and J.D. Vance, R-Ohio, introduced Thursday the Stop Subsidizing Giant Mergers Act, a bill that aims to end tax-free mergers and taxpayer subsidies for acquisitions that consolidate corporate power. Whitehouse is generally considered liberal and Vance a staunch conservative, and their co-sponsorship points to a growing backlash on both sides of the aisle in Congress to corporate concentration.

The Biden administration too has been ramping up its antitrust efforts, most recently with a lawsuit filed on Thursday against Apple by the Justice Department.

The lawmakers pointed to megamergers in the past decade such as Facebook’s $19 billion acquisition of WhatsApp in 2014, and AT&T’s $85 billion acquisition of Time Warner in 2018, for which the companies received tax benefits. In 2022, AT&T spun off Warner Media, which then merged with Discovery in a $43 billion deal that will also be tax-free, as well as Canadian Pacific Railway’s $31 billion acquisition of Kansas City Southern and Capital One’s $35 billion acquisition of Discover.

“Record numbers of giant corporate mergers have created an anti-competitive economic landscape,” Whitehouse said in a statement. “The families who get stuck paying higher prices as a result of these mega-mergers should not also have to foot the tax bill for them. Our bipartisan bill will end a massive tax giveaway for giant corporate mergers and get our government out of the business of subsidizing corporate consolidation.”

Senator Sheldon Whitehouse, a Democrat from Rhode Island, speaks during a hearing in Washington, D.C.

When one corporation is sold to or merges with another, the acquiring firm usually pays tax on the appreciated gain of stocks and/or assets held by the target firm. However, the Tax Code contains a significant exception for certain types of mergers: If a corporate reorganization is structured so the acquiring firm is exchanging stock, then the appreciation in value of the target firm’s stock and/or assets can be fully tax-exempt. That means neither the corporation nor its shareholders may owe tax on the appreciation in value at the time of sale.

While the tax is deferred rather than forgiven, in practice the corporation and its shareholders can escape paying taxes on the appreciated stock forever. The Stop Subsidizing Giant Mergers Act would end this tax-free treatment for corporate mergers and acquisitions involving firms with combined average annual gross receipts exceeding $500 million during the prior three years. The legislation makes exceptions for mergers involving a small business, and corporations that are undergoing a purely internal reorganization would still be able to do so without incurring a tax obligation.

“Massive corporate mergers rarely produce their promised benefits but often leave American workers and families behind,” Vance said in a statement. “It’s past time to close the unfair loopholes that allow these deals to escape tax liability. This commonsense, bipartisan legislation will ensure our nation’s largest corporations are held to a fair standard while preserving protections for small businesses to grow.”