How a new corporate minimum tax could reshape business investments

WASHINGTON — At the heart of the new tax and climate package that Democrats appear poised to pass is one of the most significant changes to the US tax code in decades: a new corporate minimum tax that could change the way we the federal government collects revenue. and alter the way the most profitable companies in the country invest in their businesses.

The proposal is one of the last remaining tax increases in the package that Democrats aim to pass along party lines in the coming days. After months of disagreement within the party over whether to raise taxes on the wealthy or roll back some of the 2017 Republican tax cuts to fund their agenda, they have settled on a longstanding political ambition to ensure that large, profitable businesses pay more than $0 in federal taxes. .

To accomplish this, Democrats have recreated a policy last employed in the 1980s: trying to capture taxable income from companies that report earnings to shareholders on their financial statements while racking up deductions to lower their tax bills. .

The revival of the corporate minimum tax, which would apply to what is known as “accounting income” that companies report in their financial statements, has generated confusion and fierce lobbying resistance since it was announced last month.

Some initially conflated the measure with the 15 percent global minimum tax that Treasury Secretary Janet L. Yellen has been pushing as part of an international tax deal. However, that is a separate proposal, which in the United States remains stalled in Congress, that would apply to the foreign earnings of US multinational companies.

Republicans have also deceptively tried to use the tax increase as proof that President Biden was willing to renege on his campaign promises and raise taxes on middle-class workers. And manufacturers have warned that it would impose new costs at a time of rapid inflation.

In a sign of the political power of lobbyists in Washington, by Thursday night the new tax had already been watered down. At the urging of the manufacturers, Sen. Kyrsten Sinema of Arizona convinced her fellow Democrats to keep a valuable deduction, known as a depreciation allowance, that is associated with purchases of machinery and equipment.

The new 15 percent minimum tax would apply to corporations that report annual revenues of more than $1 billion to shareholders in their financial statements, but use deductions, credits, and other preferential tax treatments to lower their effective tax rates by far. below the legal 21 percent. It was originally projected to raise $313 billion in tax revenue over a decade, though the final tally is likely to be $258 billion once the revised bill is finalized.

The new tax could also inject a greater degree of complexity into the tax code, creating enforcement challenges if passed.

“In terms of implementation and fair bandwidth to deal with complexity, there is no question that this regime is complex,” said Peter Richman, senior counsel at the Tax Law Center at New York University Law School. “This is a big change and the number of admissions is big.”

Because of that complexity, the corporate minimum tax has faced substantial skepticism. It’s less efficient than simply eliminating deductions or raising the corporate tax rate, and could open the door for businesses to find new ways to make their income look lower to lower their tax bills.

Similar versions of the idea have been floated by Biden during his presidential campaign and by Sen. Elizabeth Warren, a Democrat from Massachusetts. They have been promoted as a way to restore fairness to a tax system that has allowed large corporations to slash their tax bills through deductions and other accounting measures.

According to an initial estimate by the nonpartisan Joint Committee on Taxation, the tax would most likely apply to about 150 businesses a year, and most of those would be manufacturers. That prompted an outcry from manufacturing companies and Republicans, who have opposed any policy that reduces the tax cuts they enacted five years ago.

Although many Democrats acknowledge that the corporate minimum tax was not their first choice of tax increase, they have embraced it as a political winner. Senator Ron Wyden of Oregon, chairman of the Senate Finance Committee, shared data from the Joint Committee on Taxation Thursday indicating that in 2019, between 100 and 125 corporations reported income on their financial statements greater than $1 billion, but their tax rates effective were less than 5 percent. The average income reported in financial statements to shareholders was nearly $9 billion, but they paid an average effective tax rate of just 1.1 percent.

“Companies are paying rock-bottom fees while reporting record profits to their shareholders,” Mr. Wyden said.

The Treasury Department had reservations about the minimum tax idea last year because of its complexity. If enacted, the Treasury would be responsible for crafting a series of new regulations and guidelines for the new law and for ensuring that the Internal Revenue Service can properly monitor it.

Michael J. Graetz, a professor of tax law at Columbia University, acknowledged that calculating minimum taxes was complicated and that the introduction of a new tax base would add new challenges from a tax administration perspective, but said he saw no such obstacles. as disqualifying. He pointed out that the current system has created opportunities for tax havens and has allowed companies to take losses for tax purposes that do not appear on their financial statements.

“If the problem that Congress is addressing is that companies report high accounting profits and low taxes, then the only way to align those two is to base taxes on accounting profits to some extent,” said Mr. Graetz, a former deputy assistant secretary. of fiscal policy at the Treasury Department, he said.

A similar version of the tax was included in a 1986 tax overhaul and allowed to expire after three years. Skeptics of revising such a measure have warned that it could create new problems and opportunities for companies to avoid the minimum tax.

“Evidence from studies of the results surrounding the Tax Reform Act of 1986 suggests that companies responded to that policy by altering the way they report financial accounting income: companies deferred more income to future years,” said Michelle Hanlon, an accounting professor at Sloan. School of Management at the Massachusetts Institute of Technology, he told the Senate Finance Committee last year. “This behavioral response poses serious risks to financial accounting and capital markets.”

Other opponents of the new tax have raised concerns that it would give more control over the US tax base to the Financial Accounting Standards Board, an independent organization that sets accounting standards.

“Potential politicization of the FASB will likely lead to lower-quality financial accounting standards and lower-quality financial accounting earnings,” Ms. Hanlon and Jeffrey L. Hoopes, a professor at the University of North Carolina, wrote in a letter to the members of Congress. last year it was signed by more than 260 accounting academics.

Business groups have strongly rejected the proposal and have pressured Sinema to block the tax altogether. The National Association of Manufacturers and the Arizona Chamber of Commerce and Industry on Wednesday released a poll of manufacturing workers, managers and advocates in the state that showed a majority opposed the new tax.

“It will make it harder to hire more workers, raise wages and invest in our communities,” said Chad Moutray, chief economist for the manufacturing association. “Arizona’s manufacturing voters clearly say this tax will hurt our economy.”

Ms Sinema has voiced her opposition to raising tax rates and had reservations about a proposal to reduce the special tax treatment hedge fund managers and private equity executives receive for “accrued interest.” Democrats scrapped her proposal at her urging.

When an earlier version of a corporate minimum tax was proposed last October, Ms. Sinema issued a statement of approval.

“This proposal represents a common sense step to ensure that highly profitable corporations, who can sometimes avoid the current corporate tax rate, pay a reasonable minimum corporate tax on their profits, just as Arizonans and small businesses do every day. Arizona businesses,” he said. Announcing that she would back a modified version of the climate and tax bill on Thursday, Ms Sinema said she would “protect advanced manufacturing”.

That won applause from business groups on Friday.

“Taxing capital expenditures (investments in new buildings, factories, equipment, etc.) is one of the most economically destructive ways to raise taxes,” said Neil Bradley, policy director for the US Chamber of Commerce. , it’s a statement. “As we look forward to reviewing the proposed new bill, Senator Sinema deserves credit for recognizing this and fighting for changes.”

emily cochrane contributed report.

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