Big companies look to Senate to ease minimum tax
Some of the largest U.S. corporations are looking for new exemptions from the budget reconciliation bill’s minimum tax on income reported to shareholders, arguing it could depress economic activity, including financing pensions for millions of workers and investing in clean energy projects.
Since it became clear in late October that the 15 percent minimum tax could make its way into the bill after what seemed to be a quixotic attempt by progressive lawmakers and the Biden administration, groups representing businesses and tax professionals have hurried to lobby for tweaks.
Proponents of the tax are standing by its current structure and carve outs, which would allow businesses to continue to benefit from incentives like tax credits for research and development and low-income housing and clean energy investments. But pension plan contributions and “phantom income” associated with pension assets that shows up in annual 10-K filings couldn’t be deducted, nor could the cost of depreciating solar, wind, geothermal and other renewable energy properties.
With the likelihood the $2.2 trillion filibuster-proof package will see edits in the Senate, and a year before the tax would take effect starting on Jan. 1, 2023, pressure is likely to continue.
With differences in what the tax code and book tax would offer breaks for, “it’s hard to be strategic in your thought process about these types of things and where you should invest and where you shouldn’t invest, and what’s a preference and what’s not a preference,” said Edward Karl, vice president of taxation for the American Institute of CPAS,
which opposes the tax. “So that just highlights the challenge of having an [alternative minimum tax].”
The Joint Committee on Taxation estimates the minimum tax would generate $318.9 billion over a decade, making it the largest single revenue raiser included to help pay for the expansive spending package. It would only apply to corporations reporting income of more than $1 billion on annual financial reports to shareholders
As written, it offers some exemptions to ease the sting. General business credits, like those for R&D, housing and renewable energy, can offset up to about three-quarters of the total tax owed, including the extra minimum tax, and companies would get some credit for foreign taxes they pay. Net operating losses starting with the 2020 tax year, when COVID-19 ravaged the economy, can be carried forward to offset taxable income to some extent.
Still, some business groups say Democrats
should provide more exemptions or risk undermining some of their other goals.
The American Benefits Council, a trade group representing some of the largest U.S. companies, such as Apple and Exxon Mobil, is calling for Democrats to allow exemptions from the tax related to defined benefit pension plans.
Lynn Dudley, senior vice president of global retirement and compensation policy for the group, said in an interview that the tax should allow deductions for pension plan contributions and exempt any corporate earnings related to pension plans that could otherwise be counted as taxable income.
For example, when interest rates rise, companies’ pension plan liabilities are assumed to decrease because expected returns are greater, generating taxable income on paper. Similarly, pension plans’ investment gains can swing wildly from year to year, and firms that use “mark to market” accounting and have to measure asset values at the end of each fiscal year could be left with huge tax bills.
Such gains count as “phantom income” to the corporation, as Dudley’s group calls it, even though the money is walled off and can’t be used by the company for hiring, paying down debt or investing.
“Nobody wants to see volatility,” Dudley said. “Congress has worked beautifully together on trying to stabilize the pension system. They just didn’t see this one because it’s not something that would jump out at you when you look at the book tax.”
Dudley said the majority of big companies that the tax would apply to don’t have traditional pension plans, so she’s hopeful changes could be made without losing much revenue from the tax, which could make it more difficult for Democrats to get on board.
The tax as a whole would only apply to about 200 companies in total, according to an October statement from Senate Finance Chair Ron Wyden of Oregon and Sens. Angus King of Maine and Elizabeth Warren of Massachusetts, who proposed the tax.
If Sen. Joe Manchin III, D-W.VA., continues to oppose programs like universal paid leave and a bonus tax credit for union-made electric vehicles currently in the bill, Democrats could have some room to winnow revenue without shifting how much the bill is offset.
Dudley said that while the tax would only hit larger companies, it would still make it more difficult for those corporations to plan.
It could also could make traditional defined benefit pension plans less attractive relative to 401(k)-type plans in which workers control how much gets put into retirement savings, for instance. Fewer employers with traditional pensions would in turn mean lower insurance payments to the Pension Benefit Guaranty Corp., which exists to protect workers against plan defaults.
Another group, which includes Walmart, Jpmorgan Chase, Chevron and other big energy, power and banking companies, and others who invest in renewable energy projects, has said the tax doesn’t go far enough to cushion such investments.
The American Council on Renewable Energy said in a late October statement that while renewable energy credits are “appropriately protected” under the tax, there’s no protection for tax breaks that account for the decline in assets’ value over time.