WASHINGTON — Senior US Treasury Department officials have expressed reservations about the new minimum tax on large businesses proposed under President Joe Biden’s Build Back Better program, according to two people with direct knowledge of the internal discussions.
In recent weeks, officials from the Treasury Department’s Office of Tax Policy have raised internal concerns that the new 15% minimum tax could have unintended consequences – such as limiting energy investments. clean – and prove difficult to implement while making the tax code less effective, people said.
Due to demands by Sen. Kyrsten Sinema, D-Arizona, the White House was forced to drop its original proposal to raise the tax rate for all large corporations from 21% to 28%.
Instead, Ms Sinema and the White House agreed to a new, separate “minimum tax” for companies making more than $1 billion in annual profits.
Dozens of large corporations pay little or no federal income taxes because of the way they’ve structured their balance sheets, which Biden says is unfair and should stop.
The new minimum tax aims to ensure that all large businesses face a rate of at least 15%, but it works by eliminating tax breaks – such as new capital investment benefits – that Congress has put in place. place to achieve other policy goals.
The minimum tax is now one of the main new sources of revenue to pay for Mr. Biden’s $2 trillion social spending and climate agenda, which is expected to bring in about $320 billion in revenue over ten years.
It has come under increasing scrutiny in recent days from various business groups and even some Democratic lawmakers, who fear the plan could diminish the effectiveness of clean energy credits. in Build Back Better by limiting the amount renewable energy companies can cancel. the costs of new capital investments.
Unease over the plan also extends to senior officials in the Biden administration’s Treasury Office of Fiscal Policy.
Congress enacted a minimum corporate tax under President Ronald Reagan that was quickly scrapped, and the renewed idea is widely seen by many Washington tax policy experts as less efficient and effective than simply raising the tax rate. corporate taxation – an idea favored by nearly all Democrats but ruled by Ms Sinema’s opposition.
“You have to think there’s going to be a ton of unintended consequences, because you haven’t really spent a lot of time thinking about this and the last time you tried it, Congress said it didn’t. ‘didn’t work out,’ a person involved in insider relations said. discussions, describing the thinking of several senior Treasury officials.
The White House focused on embracing Mr. Biden’s broader spending agenda and was forced to adjust the plan.
Mr. Biden and other senior White House officials stressed that the tax package, including the minimum tax, would generate new revenue from the wealthy and big business to fund social investments aimed at helping poor Americans and of the working class.
The proposal has gained traction among some liberals in recent years amid reports that 55 large corporations are effectively able to reduce their tax liability to zero by aggressively using tax deductions.
Mr. Biden has repeatedly adopted it as a key campaign pledge.
In a statement, the Treasury Department also pushed back against the idea that it was not entirely in favor of the new minimum tax.
Treasury officials said all of their tax policies were scrutinized, with staff outlining the pros and cons of each idea.
“As is the case in the development of any tax policy, the Treasury extensively considered the considerations relevant to the adoption of a minimum corporate tax before advancing it as a major proposal in the budget of the administration’s fiscal year,” Treasury spokeswoman Alexandra LaManna said in a statement.
“The Build Back Better Act’s proposed minimum corporate tax, which is very similar, would prevent the top 0.00075% of U.S. corporations from paying little or no income tax and generate significant revenue so that we can invest in our economy.”
White House officials also said the plan is in line with their campaign promises and the president’s goals to ensure big business funds the social spending bill.
The administration pointed to a body of academic research that it says shows the impact of limiting businesses to immediately deduct capital expenditures will prove limited.
The House version of Build Back Better also gives the Treasury a year to enforce the new minimum tax, which will give tax authorities time to design the new measure.
Still, some independent tax experts say raising the corporate tax rate would be a more desirable political solution than that found by Ms Sinema and the White House.
Some climate groups say it would slow the rate of clean energy deployment that the legislation would otherwise achieve by limiting the amount companies can write off the value of major capital purchases.
The deduction caps will, for example, lead to a “15-20% increase in the cost of clean energy and an increase of 820 million tonnes of carbon dioxide compared to the base bill”, according to an analysis by the agency. American Clean Energy Association.
White House officials have disputed that claim, though the concerns have been publicly shared by some Democratic lawmakers, including Rep. Earl Blumenauer, D-Oregon, a climate hawk.
The American Benefits Council also said in a letter last month that the tax could also impact defined-benefit pension plans and have a “devastating impact” on retirees. Indeed, the increase in the value of retirement funds held by employers could be considered income subject to the new minimum tax.
“If you just raise the corporate tax rate, that’s better for efficiency, for fairness, for the amount of money that can be raised,” said Steve Rosenthal, senior fellow at Tax Policy. Center, a nonpartisan think tank. “I expect the Biden administration, like the rest of us, to think a minimum corporate tax is second best to a corporate rate hike.”
Prominent accountants have also raised concerns that the change will lead to companies altering what they report to their shareholders in a bid to evade the new tax. More than 260 accounting and tax scholars have written to congressional leaders warning them of the “politicization” of the accounting process, which could lead to less transparent information for financial markets.
“Financial statements serve a different purpose than income statements. That’s why we have two of them,” said Michelle Hutchens, assistant professor of accounting at the University of Illinois at Urbana-Champaign, who contributed to the writing the letter.
The minimum tax emerged during the 2020 presidential campaign as Democrats sought to hammer the GOP over the number of large corporations paying no federal income tax following the 2017 tax cuts.
Mr Biden’s campaign plan was initially much more aggressive, aiming to subject more than 1,000 businesses to the new tax. That idea was drastically reduced when the Treasury released its set of formal tax proposals this spring, with the number of affected businesses down to around two dozen. The deal between Ms Sinema and the White House applies to companies with annual profits exceeding $1 billion, more than double the amount originally sought by the Treasury.
“The people in Treasury whose job it is to say whether something is good tax policy know it’s not, but the people in the White House whose job it is to get Kyrsten Sinema voted don’t have given no other choice,” said a person in communication with several senior officials. economic officials in the Biden administration.
Ms Sinema insisted that traditional income and corporation tax rates were not included in the package, but endorsed a series of tax hikes that would apply to a much smaller group of people and American companies. She said before The Washington Post that it focuses on “creating an economic climate that offers people the opportunity to become financially independent”.
The new minimum tax may face logistical challenges, but it would help ensure corporations pay more after the GOP cut the corporate tax rate from 35% to 21%.
Reuven S Avi-Yonah, a business and international tax expert at the University of Michigan Law School, dismissed some of the concerns about the minimum tax as being overblown.
“Traditionally, people have said it’s better to have lower rates and a broader base – the corporate minimum tax does just that,” Avi-Yonah said. “It’s the best that can be done in this kind of second-best scenario.”
The Made in America Tax Plan (file image)