Corporate minimum tax in Build Back Better faces opposition

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The inclusion of tax-exempt income in a proposed federal alternative minimum corporate tax bill in the Build Back Better bill may have been an “oversight,” say municipal market lobbyists.

And even if the AMT eventually becomes law, its impact on municipal demand could be mitigated in an environment that has already seen many institutional buyers turn to the taxable market, the buyers said.

The minimum corporate tax as proposed in Build It Better would be 15% of book income for companies with revenue in financial statements over $ 1 billion. It would apply to about 200 companies. Estimated at around $ 320 billion, the provision is one of the bill’s main sources of revenue. The effective date is 2023.

The AMT is estimated to apply to holders of institutional municipal bonds, mainly banks and insurance companies, who hold almost 25% of municipal bonds. The fear is that this will dampen the institutional demand for tax exemptions.

“We think it was an oversight,” said Emily Brock, the federal liaison for the GFOA, who, along with 27 issuer groups, sent a letter to Congress urging it to withdraw tax-exempt income from AMT. “They have taken a giant leap across all asset classes.”

The House has said it will cover the $ 1.75 trillion bill as early as this week, although the Congressional Budget Office is not ready to release a full score until Friday. If passed by the House, the bill will likely undergo significant changes when it gets to the Senate, and powerful business groups like the US Chamber of Commerce and the Business Roundtable, which are lobbying against the AMT, hope to see changes in the Senate version.

Most institutional buyers have already switched to taxable, Nick Venditti said, which would lessen the impact of the proposed tax on the municipal market.

Even if the provision becomes law, there may be some flexibility for tax-exempt income before it goes into effect in 2023, market participants said.

The proposal directs the Treasury to issue regulations and guidance on several unresolved issues. Some hope it can crack a window. Morgan Stanley, in an Oct. 28 brief, noted that Treasury guidelines “in theory” could clarify “that municipal interests are not counted as taxable income.”

In an Oct. 31 brief on the Build Back Better bill, PWC also noted that the provision grants the Treasury “broad power” to resolve a number of issues. “Because the CPMT will be effective for tax years beginning after December 31, 2022, the Treasury will likely issue guidance regarding many of these matters before the provision becomes applicable to affected taxpayers,” PWC said, adding that the comprehensive proposal “would add significantly to the complexity of corporate tax compliance and administration.”

It may be overkill to place hopes on the Treasury’s action, said a public finance lawyer.

“There may be aspects of the provision that the Treasury needs to provide guidance on, but if it would have the power, and exercise the power, to exclude types of income such as tax-exempt income. tax, which falls under statutory law, seems like a stretch to me, “the lawyer said, adding” but stranger things have happened. “

Even if the tax becomes law, some buyers say it won’t have much of an impact on the market.

Since the Tax Cuts and Jobs Act of 2017, “most institutional buyers have already moved from the tax-exempt market to the taxable market,” said Nicholos Venditti, senior portfolio manager at Allspring Global Investments, which recently acquired Wells Fargo Asset Management. “I would expect institutional buyers to continue to favor taxable paper over tax-exempt paper. I don’t really have any concerns from this point of view.

The Business AMT replaced a proposal to raise the highest corporate tax rate, and the latest Build Back Better version also abandoned a plan to increase the highest personal tax rate. These decisions may have more of an impact on the market than AMT, Venditti said.

“Ultimately, one of the justifications the market used to prop up municipal bond prices at these high levels is that investors were just throwing their tax rates higher,” he said. . “Well, if tax rates don’t go up, then maybe some of the justifications that municipal bond prices are so high disappear.”

The proposal is also being followed by the infrastructure investment community, said Tom Osborne, executive director of infrastructure at IFM Investors.

“The tax provisions are very, very closely watched,” Osborne said. “This could increase the amount of taxes that infrastructure investors have to pay as lease and concession holders or as owners of private sector infrastructure. Higher taxes could affect the returns investors would have for owning these assets. “

In addition to business groups, the American Institute of CPAs is urging Congress to drop the proposal. The provision “would dramatically increase the complexity of the IRS code,” the group said in an Oct. 28 letter to congressional leaders.

The group has asked Congress to at least change the provision to include only income currently taxable. The group did not hear any specific comments in response to the letter, a spokesperson said.


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