Changes sought by manufacturers, renewable-energy companies seem doubtful to succeed as lawmakers wrap up Biden tax agenda
The proposed corporate minimum tax would impose a minimum 15% tax rate on many companies with at least $1 billion in profits.
Photo: Elizabeth Frantz for The Wall Street Journal
By Richard Rubin, Wall Street Journal, December 7, 2021
WASHINGTON—Congress is poised to create a new corporate minimum tax, and pension advocates, renewable-energy backers and manufacturers are pushing for changes before the plan is finished.
The tax is aimed at companies, such as Amazon.com Inc., that report large profits to shareholders but—legally—pay relatively little in taxes. It would impose a minimum 15% federal tax rate on many companies with at least $1 billion in profits, based on the income reported to investors.
Knowing the minimum tax probably can’t be defeated, companies and trade groups are trying to score last-minute wins to soften it as Congress includes it in the broader Biden agenda. Business groups point to unintended consequences of the proposal, which became a key piece of the Democratic plan after Sen. Kyrsten Sinema (D., Ariz.) blocked a straightforward corporate tax-rate increase.
“There are so many companies and industries coming in saying we need to have some changes,” said Catherine Schultz, vice president for tax and fiscal policy at the Business Roundtable, a trade group representing large-company chief executives. “And the only question is: Can they start to trim back a little bit without creating problems?”
For now, most corporate pleas look unlikely to succeed. Lawmakers are listening to requests but many companies want changes that would undermine the revenue raised by the plan, said a Senate Democratic aide. The minimum tax would take effect in 2023 and generate $319 billion over a decade toward Democrats’ social-spending and climate plan, according to the Joint Committee on Taxation. That is the equivalent of raising the corporate tax rate to about 24% from 21%, and Democrats don’t have many other agreed-upon options to replace that much money.
This 15% minimum tax is separate from a proposed 15% global minimum tax on U.S. companies’ foreign profits that is in the same bill. The minimum tax is sometimes called the book-income tax, because it starts with income reported on companies’ books, calculated according to generally accepted accounting principles. Large companies would pay the regular tax or this tax, whichever is greater. Companies would be most affected when they encounter situations treated differently under tax and financial accounting rules.
The mechanics can be complicated, and companies are figuring out whether and how they are affected. In many cases, the tax would claw back breaks Congress gave companies under the regular tax system. Lawmakers are trying to strike a balance between raising revenue and encouraging behaviors they want from companies.
“It’s hitting some things that are near and dear to Democrats’ hearts,” said Dustin Stamper, a managing director at accounting firm Grant Thornton LLP.
For many companies, the biggest problem will be accelerated depreciation for capital investments, often tied to high-paying manufacturing jobs. The large upfront tax deductions for accelerated depreciation are bigger than companies’ expenses for book-income purposes, so those deductions would be harder to claim under the minimum tax.
In both cases, the proposed minimum tax could make companies pay 15% currently, denying or delaying the benefit of investments that companies made in response to the 2017 tax law.
“That is making a policy choice about whether or not the U.S. should be a place where industrial investment expands or not,” said Chris Netram of the National Association of Manufacturers.
The list of affected companies isn’t clear, and it will vary annually; a Tax Foundation analysis found that the coal, automobile and utilities industries would face larger burdens.
Chevron Corp. has reported lobbying on the tax. Home-security company ADT Inc. has disclosed it to investors as a potential risk. Executives from pipeline and natural-gas companies ONEOK Inc. and Williams Cos. told analysts that they are monitoring the details.
Because companies could still use many tax credits, including breaks for low-income housing and renewable-energy production, some profitable companies would pay little or no U.S. taxes even if the plan takes effect.
Companies purchasing wireless spectrum or holding minority stakes in other companies could also be affected, said Erica York, an economist at the Tax Foundation, which favors simpler, lower-rate taxes.
“It’s probably not an exaggeration to say that almost every company has a unique problem with the book tax,” she said.
The proposal also raises an issue with pensions because some companies’ book income includes increases in the value of defined-benefit plans, even though companies can’t use the money and don’t pay taxes on that income. Under the minimum tax, it might be taxable, and that could discourage some companies from putting more than the required minimum amounts into their plans.
Because pension accounting fluctuates with interest rates, the proposal could introduce volatility lawmakers say they oppose in the retirement system, said Lynn Dudley, senior vice president at the American Benefits Council.
Sen. Rob Portman (R., Ohio) said logistics and delivery companies have approached lawmakers about the pension issue and he warned that investment and customer service could be affected. The Democratic aide said lawmakers are exploring it.
Beyond its broad effects on manufacturing, accelerated depreciation is also an issue for the renewable-energy industry that Democrats are trying to aid elsewhere in the bill.
The industry’s tax credits and direct payments are largely protected from the minimum tax. But the projects also often rely on upfront deductions for capital investments in their financing plans, and losing that benefit could make it harder to hit the Biden plan’s climate targets, said Gregory Wetstone, president and CEO of the American Council on Renewable Energy
Senate Finance Chairman Ron Wyden (D., Ore.), defended his committee’s work in expanding and restructuring incentives to encourage sustainable energy.
“I wouldn’t be working around the clock to overhaul our energy tax code if I thought imposing a minimum tax on big companies would undo all that work,” he said.
Not all companies are unhappy. Large retailers, which tend not to benefit much from depreciation or other breaks, pushed for this in lieu of a tax-rate increase. Some others view the plan as not ideal, but better than the alternative that many Democrats preferred.
“Most companies are delighted to have this instead of a corporate rate increase,” Mr. Stamper from Grant Thornton said.