Corporate Tax Payments Plunge As Ai Feasts On New Incentives

Corporate tax payments are plummeting even as profits soar.

A big reason: all that AI spending.

The tech world is pouring oceans of money into chips, data centers, power supplies and other components of the artificial intelligence infrastructure. And that’s eligible for generous tax breaks on investments Republicans included in their 2025 tax cuts.

The tax incentives weren’t designed with AI in mind specifically — they’re available for all kinds of business investments. But it’s the tech industry that’s making the most of them, putting a major dent in corporate tax receipts.

Budget forecasters say payments are down 25%, or $96 billion, after falling 15% last year. That’s fueling complaints those investment breaks are providing a windfall for the tech world, and giving a bad deal to taxpayers as Google, Microsoft and others would be spending oodles of cash on AI regardless of the tax incentives.

“The notion that they’re doing this because of the tax laws doesn’t pass the laugh test,” said Matt Gardner, a senior fellow at the liberal Institute on Taxation and Economic Policy.

The AI-fueled hit to the Treasury comes amid a voter backlash against the data hub-building boom that’s now roiling Congress ahead of the midterm elections. Lawmakers are pointing fingers over who is responsible, with some Democrats blaming Republicans’ tax cuts. A July POLITICO poll found more Americans oppose data centers than support them, a reversal from earlier this year. The budget impact also comes amid mounting concerns over the government’s towering debt, which now tops $40 trillion. Wall Street is increasingly worried about red ink, with bond traders steadily pushing up the government's borrowing costs.

Some Democrats, including Sens. Ron Wyden (Ore.), the ranking member on the tax-writing Finance Committee, and Mark Warner (Va.), are now pushing to curb investment breaks for data centers.

“Massive corporations should pay their fair share,” Wyden said in a statement. “This starts by fixing the corporate income tax” including “repealing big giveaways for data centers.”

New incentives well-timed for AI boom

Corporate tax payments typically rise in the wake of strong profits, and companies are now reporting their best results in years.

But Republicans included a bevy of long-sought investment provisions in their "big, beautiful bill," including expanded breaks for research and development programs; “expensing” provisions that allow companies to immediately deduct the cost of investments instead of spreading them out over many years; and a new subsidy for manufacturing structures.

The Treasury Department also loosened a Biden-era minimum tax on big businesses that threatened to blunt the impact of the new provisions. Left in place, it would have taken back some of the tax benefits when companies’ tax rates fell too much. Meta told investors in April that change alone saved it billions of dollars in taxes.

The new incentives came online just as businesses were ramping up AI-related spending. Goldman Sachs figures AI expenditures this year will approach $600 billion in the U.S. and $1 trillion worldwide.

“Now that we have a full expensing regime, and a secular trend towards an AI buildout — in which much of that is expensed — you’re going to see that exert downward pressure on corporate taxes,” said Donald Schneider, deputy head of U.S. policy at Piper Sandler, an investment advisory firm.

Companies in the thick of it have been reporting big drops in their tax bills. In July, Microsoft told investors that its current tax bill amounted to $2.5 billion, down from $14.1 billion the previous year, even as its income soared.

The Congressional Budget Office underestimated business investment this year, which means the tax breaks will likely cost more than anticipated. In the second quarter of this year, nonresidential investment was $178 billion more than projected, according to the Bureau of Economic Analysis.

The provisions are “offsetting the increases in those receipts that otherwise would have been expected, given the rise in corporate income,” CBO said in an updated tally of government revenues and spending.

It’s impossible to know precisely how much AI spending is cutting into receipts because big companies pay their taxes in quarterly installments without much information explaining the payments. Forecasters have to wait to see companies’ annual returns to understand the math behind them.

'They're going to do it either way'

To be sure, there are other factors contributing to the decline in corporate taxes.

As part of their 2017 tax cuts, for example, Republicans created a big, one-time charge on companies’ overseas profits. But they gave companies the opportunity to pay it in installments over eight years, and many wrapped up their payments last year, which means receipts now will look smaller in comparison.

Also muddling the picture: the back-and-forth over the Trump administration’s tariffs, which initially forced companies to pay up before they were issued refunds after the Supreme Court struck down the duties.

A perennial question with tax incentives is whether they are pushing people to do something the government wants them to do, and which they wouldn’t have done otherwise — or whether they’re simply giving people money for things they were going to do anyway.

The depreciation breaks look like the latter, Gardner said. Companies are racing to build up artificial intelligence because they think it will be highly profitable, not because they are trying to reduce their tax bills. And many companies announced AI development plans well before Republicans’ tax cuts became law.

“They’re going to do it either way,” Gardner said. “That they’re getting generous tax breaks for doing so is just icing on the cake for them.”

Wyden wants to ban entities building data centers from claiming expensing, as well as tax benefits tied to the Opportunity Zone program and to real estate investment trusts.

Warner would prevent corporate taxpayers from tapping the depreciation break unless data centers meet certain energy efficiency standards, a move intended to limit their use of electricity, water and other resources.

It’s also possible that artificial intelligence will eventually prove a boon for federal coffers.

If the investments translate into supersized profits, that should mean companies will have significantly higher taxable incomes. And businesses can only deduct the cost of investments once, so if they use up their depreciation allowances now, they won’t have them in the future to offset profits as they do today.

“The government is a silent partner in these investments,” said Kyle Pomerleau, a senior fellow at the American Enterprise Institute. “If Google and Meta and all these companies make it big, then the federal government is going to share in that."