WASHINGTON — At the heart of the new climate and tax package that Democrats appear to be about to pass is one of the most significant changes to America’s tax code in decades: a new minimum corporate tax that will allow the federal government to collect revenue. That could change the way the country’s most profitable companies invest in their businesses.
The proposal is one of the last remaining tax hikes in the package Democrats plan to pass along party lines in the coming days. After months of intertwined disagreements over raising taxes on the wealthy or reversing some of the Republican 2017 tax cuts to fund their agenda, they have settled on a long-standing policy goal of ensuring that large and profitable companies return to more than $0 pay federal taxes. ,
To do this, Democrats have revised a policy last used in the 1980s: They seek tax revenue from companies reporting profits to shareholders in their financial statements. while accumulating deductions to reduce their tax bills.
The resurgence of the minimum corporate tax, known as “book income,” which companies report in their financial statements, has caused confusion and fierce lobby opposition since it was announced last month.
Some initially linked the measure to the 15 percent global minimum tax that Treasury Secretary Janet L. Yellen is pushing as part of an international tax treaty. However, it is a separate proposal that has stalled in Congress in the United States and would relate to foreign earnings of US multinationals.
Republicans have also tried to use the tax hike as evidence that President Biden was willing to break his campaign promises and raise taxes on middle-class workers. And manufacturers warn that in times of rapid inflation, new costs will arise.
The new tax had already been lowered on Thursday evening, a sign of the political power of the lobbyists in Washington. At producers’ urging, Arizona Senator Kirsten Cinemas persuaded her Democratic peers to keep a valuable deduction known as bonus write-off related to the purchase of machines and equipment.
The new 15 percent minimum tax applies to companies that report annual income to shareholders in excess of $1 billion in their financial statements but reduce their effective tax rates for deductions, credits and other preferential tax treatments below the statutory 21 percent. It was initially projected to generate $313 billion in tax revenue over a decade, although the final total is expected to be $258 billion once the revised law is finalized.
The new tax could add complexity to tax legislation, which, if passed, could pose challenges to law enforcement.
“In terms of implementation and even the sheer range to be managed, there is no doubt that this arrangement is complex,” said Peter Richman, senior legal counsel at the Tax Law Center at New York University Law School. “It’s a big change and the sales numbers are big.”
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Because of this complexity, corporate tax has met with considerable scepticism. This is less efficient than simply removing deductions or raising the corporate tax rate, and could open the door for companies to find new ways to understate their income to lower their tax burden.
Similar versions of this view were held by Mr. Biden during his presidential campaign and by Senator Elizabeth Warren, a Massachusetts Democrat. They have been promoted as a way of restoring fairness to a tax system that has allowed large corporations to drastically reduce their tax bills through deductions and other accounting measures.
According to a preliminary estimate by the nonpartisan Joint Committee on Taxation, about 150 companies are expected to be taxed annually, most of them manufacturers. This sparked outrage from home builders and Republicans, who oppose any policies curbing the tax cuts introduced five years ago.
While many Democrats acknowledge that the corporate tax minimum was not their first choice for a tax hike, they have hailed it as a political winner. Oregon Sen. Ron Wyden, chair of the Senate Finance Committee, shared data from the Joint Committee on Taxation on Thursday, noting that in 2019 about 100 to 125 companies reported year-end earnings in excess of $1 billion, their effective However, tax rates were below 5 percent. Median income reported to shareholders in the financial statements was about $9 billion, but they only paid an average effective tax rate of 1.1 percent.
“Companies are paying their shareholders rock-bottom interest rates while reporting record earnings,” Mr. Widen said.
The Treasury Department last year objected to the idea of minimum taxation because of its complexity. If it goes into effect, the Treasury Department would be responsible for new regulations and guidance for the new legislation and for allowing the Internal Revenue Service to properly monitor it.
Columbia University tax law professor Michael J. Gretz acknowledged that calculating minimum taxes is complicated and that introducing a new tax base would bring new challenges from a tax administration perspective, but said he doesn’t like these limitations as a disqualification. He said the current system has created opportunities for tax breaks and allowed companies to suffer losses for tax purposes that don’t appear in their financial statements.
“If the problem that Congress is addressing is that companies are reporting high accounting profits and low taxes, then the only way to reconcile those two is to base taxes on accounting profits to some degree,” he said Mr Gretz, a former deputy deputy secretary for taxation policy at the Treasury Department, said.
A similar version of the tax was included in the 1986 tax overhaul and phased out three years later. Skeptics of a reconsideration of such a measure have warned it could create new problems and opportunities for companies to avoid the minimum tax.
“Evidence from a study of the results of the 1986 Tax Reform Act suggests that companies responded to such policies by changing the way financial accounting revenues are reported – companies are deferring more revenues to future years,” Michelle Hanlon, an accounting professor at the Sloan School of Management at the Massachusetts Institute of Technology, 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 expressed concerns that it would give the Financial Accounting Standards Board, an independent organization that sets accounting rules, more control over the US tax base.
“Possible politicization of the FASB will likely lead to substandard financial accounting standards and substandard financial accounting revenues,” Ms. Hanlon and Professor Jeffrey L. Hoops of the University of North Carolina said in a letter to members of Congress. Last year it was signed by more than 260 accounting scholars.
Trade groups strongly opposed the proposal and pressured Ms Cinema to block the tax entirely. The National Association of Manufacturers and the Arizona Chamber of Commerce and Industry on Wednesday released a poll of manufacturing workers, managers and attorneys in the state that found a majority opposed the new tax.
“This will make it harder to hire more workers, raise wages and invest in our communities,” said Chad Moutre, chief economist at the Manufacturing Association. “Arizona’s manufacturing voters are clearly saying this tax will hurt our economy.”
Ms Cinema has spoken out against raising tax rates and has objected to a proposal to reduce the special tax treatment hedge fund managers and private equity managers get for “carried interest”. Democrats rejected the proposal at his insistence.
When an earlier version of the corporate minimum tax was proposed last October, Ms Cinema made a recognized statement.
“This proposal represents a sensible move to ensure that highly profitable companies — which can sometimes avoid the current corporate tax rate — pay the appropriate minimum corporate tax rate on their profits, like ordinary Arizonans do.” And do small business in Arizona.” At the announcement Speaking on Thursday that she would support a revised version of the climate and tax bill, Ms Cinema said it would “protect advanced manufacturing”.
It was praised by business groups on Friday.
“Capital spending — investing in new buildings, factories, equipment, etc. — is one of the most economically disastrous ways to collect taxes,” Neil Bradley, the U.S. Chamber of Commerce’s chief policy officer, said in a statement. “While we look forward to reviewing the newly proposed bill, Senator Cinema deserves credit for recognizing it and campaigning for the changes.”
Emily Cochran contributed reporting.
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