Biden Softens Tax Plan Aimed at Profitable Companies That Pay Little
Treasury Department plan sets $2 billion threshold for minimum tax, up from $100 million level pitched during campaign
WASHINGTON—A 15% minimum tax on large, profitable corporations that is part of President Biden’s infrastructure agenda would affect far fewer companies than the version he campaigned on, according to details the Treasury Department released Wednesday.
The tax—aimed at companies that report large profits to investors but low tax payments—would apply only to companies with income exceeding $2 billion, up from the $100 million threshold that Mr. Biden pushed during the campaign. The Biden plan would now also let companies subject to the tax get the benefit of tax credits for research, renewable energy and low-income housing, a recognition that the campaign-trail version could have undercut the president’s preference to encourage companies to invest in those areas.
The result is that just 180 companies would even meet the income threshold and just 45 would pay the tax, according to administration estimates that assume the rest of the administration’s plan gets implemented. Nearly 1,100 U.S.-listed companies would meet the $100 million threshold, according to S&P Global Market Intelligence. Many of them would still face sharply higher tax bills from the rest of the Biden agenda, which raises rates on domestic and foreign income.
The 15% minimum tax “is a targeted approach to ensure that the most aggressive tax avoiders are forced to bear meaningful tax liabilities,” the Treasury Department said in a new report.
The Treasury report outlines the arguments for the Democratic administration’s broader corporate tax agenda, which would raise more than $2 trillion over 15 years to pay for eight years of spending on roads, bridges, transit, broadband and other infrastructure projects.
The administration argued that the current corporate tax system raises too little money and contains features that encourage companies to shift jobs abroad. Mr. Biden faces an uphill challenge to get his plan through Congress with slim majorities and some moderate Democrats already calling for smaller tax increases.
The administration’s overall plan includes partly reversing the Republican Congress’s 2017 reduction in the corporate tax rate to 21% from 35%, boosting it to 28%. It also involves changing several key features of that tax law and rallying the world for minimum tax rates on corporate income. The Biden administration’s less-aggressive version of the 15% minimum tax on financial-statement income suggests that this particular idea is taking a back seat as policy is being written.
The Treasury Department report contends that the 2017 tax cuts went too far and generated little economic benefit, pointing out that foreign investors received a significant share of any gains.
“It changes the game we play,” Treasury Secretary Janet Yellen said of the administration’s tax plan. “America will compete on our ability to produce talented workers, cutting-edge research and state-of-the-art infrastructure, not on whether we have lower tax rates than Bermuda or Switzerland.”
Business groups object to the tax proposals as a whole, arguing that they would hurt investment and U.S. companies’ ability to compete for global business.
“While we share Secretary Yellen’s goal of a competitive international stage, imposing noncompetitive taxes on American companies would have the complete opposite effect,” a coalition of business groups said this week.
Ms. Yellen said the revenue generated from the tax changes would pay for investments that, by 2024, would add an extra 1.6% to the level of U.S. gross domestic product.
A separate analysis by the Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania’s Wharton School, found the Biden plan’s corporate tax proposals would decrease firms’ incentives to invest, undercutting the economic boost from federal spending on infrastructure, research and development and other investments. Under the plan, GDP would be 0.9% lower in 2031 and 0.8% lower in 2050, according to the group’s estimate released Wednesday.
The administration also wants to impose a 21% minimum tax on U.S. companies’ foreign income and get other countries to do the same. To prod other nations to adopt such taxes, the new plan includes tough limits on deductions for foreign-headquartered companies from countries that don’t adopt them.
Finance ministers from the Group of 20 leading economies, meeting virtually on Wednesday, said they hope to agree on a minimum tax rate for corporate profits by the middle of this year as part of a wider overhaul of the way international businesses are taxed.
Italian Finance Minister Daniele Franco said after the meeting that Ms. Yellen had stressed the need for a minimum rate and that her proposal was consistent with the G-20’s ambitions.
“What we see this year is an acceleration in the process, and the G-20 is expecting to reach an agreement in July,” said Mr. Franco, who chaired the meeting.
All of that is separate from the proposed 15% minimum tax on U.S. companies’ financial-statement income.
The 15% minimum tax on financial-statement income is a powerful political talking point, but the latest changes diminish its role in the Biden plan to more of a backstop than a key feature. Tax lawyers and accountants have argued that such a tax could be difficult to administer and implement and would cede some U.S. tax rules to accounting regulators.
There are a variety of reasons why large companies such as Amazon.com Inc. and Nike Inc. can report significant profits and tax rates significantly below the U.S. statutory tax rate of 21%. And it is difficult to tell which companies would get affected by this tax on financial-statement income or by other pieces of the Biden agenda. Amazon CEO Jeff Bezos endorsed a corporate tax-rate increase this week, but that is different from the minimum tax proposal.
Some companies’ low tax bills stem from the differences between the definition of income for financial statements and the definition for taxes. Companies can, for example, immediately deduct many capital investments for tax purposes but must depreciate them over time for investors. That can lead to lower tax payments in the short run and create a gap between tax income and book income. Tax and financial accounting rules also differ for deductions for stock-based compensation.
Companies can also report tax bills below the statutory tax rate because of intentional tax breaks authorized by Congress. Those include the tax credits for research, housing and renewable energy that the Biden Treasury Department explicitly carved out of the new tax on Wednesday. That change would focus the tax on companies engaged in profit-shifting and not on activities that the government wants to encourage, Treasury officials said.
“Lawmakers want to address the concern of low effective tax rates, but don’t want to scale back the popular provisions that cause them,” said Kyle Pomerleau, resident fellow at the conservative-leaning American Enterprise Institute. “This proposal seems like a way that they can say they are addressing the issue without really changing much.”
The tax on financial-statement income would also let companies claim foreign tax credits. They could also get credit if they paid taxes above the 15% threshold in prior years.
The report also offered more details on the administration’s plans to replace tax subsidies for fossil-fuel companies with new incentives for renewable-energy investments.
The Biden proposal would extend the production-and-investment tax credits for clean-energy generation and storage for 10 years, the report said, and make those credits “direct pay,” essentially allowing businesses to collect them as cash. It would also create a new tax incentive for long-distance transmission lines and further expand tax incentives for electricity storage projects, which the Treasury said would help ensure the electricity supply is reliable and less harmful to the climate.
The plan would also extend a manufacturing tax credit for clean energy, known as the Section 48C program, and would include a “blender’s tax credit” for sustainable aviation fuel, facilitating a shift away from carbon in a key U.S. transportation sector, the report said.
The administration also plans to restore a tax on polluters to pay for cleanup costs at Superfund sites, polluted areas that the Treasury Department said also disproportionately affect communities of color.
The Treasury’s Office of Tax Analysis estimates that eliminating subsidies for fossil-fuel companies would increase government tax receipts by $35 billion over the coming decade, the report said, with the main impact on oil-and-gas company profits. The report also cited 2018 research suggesting that removing the subsidies would have little impact on gasoline or energy prices for consumers or on energy security.
Treasury officials said the plan would raise more revenue in the short run because the clean-energy tax provisions wouldn’t continue as long as the corporate tax revenue increases.