Treasury Secretary Janet Yellen must take action to protect tax incentives from the impact of a new global tax rate regime set to take effect in 2023, tax-exempt bond advocates say and low-income housing in a letter sent Tuesday.
“In consultation with our investment communities, we have found that this agreement could have a much more dramatic impact than expected on community development investments,” said the letter, signed by 29 groups, including the Bond Dealers of America, the Council of Development Finance Agencies and housing associations. “We respectfully request that you work with the [Organisation for Economic Cooperation and Development] now to avoid an unintended and unprecedented consequence that would alter the landscape of US tax incentives.
Signed by 136 countries last October, the global minimum tax agreement of 15% aims to make it harder for large multinational companies to pay low tax rates. The so-called Pillar II agreement creates a “contextual tax” that allows other countries to raise a company’s tax rate to 15% if the rate falls below that of one of its jurisdictions.
In the United States, many companies use tax-exempt interest and various tax credits to bring their rates below 15% – a decision that would lose its advantage if the company were to meet the minimum threshold anyway.
U.S. businesses that would be affected by the new rule are claiming about 70% of incentive tax credits and 80% of tax-exempt interest reported by all businesses, according to a group of nonprofit and business organizations, including the securities industry and financial markets. Association, which sent a March 28 letter to Yellen urging her to change the rules.
This is not the first time that the tax exemption and other credits have been caught in the crosshairs of a new tax regime. More recently, a proposed national minimum tax of 15% on income from books as part of the Build Back Better bill would have affected tax-exempt interest.
In the past, Congress has chosen to exclude incentives from the calculation of a minimum tax, as seen with the alternative corporate minimum tax or proposed tax clarifications on base erosion and fight against abuse.
“Reversing this story now would have disastrous effects on these catalytic financing mechanisms now, as major investors in these projects could be forced to significantly alter their past, present and future investments, regardless of the Pillar implementation timeline. II,” the groups said. “At a time when costs are rising and low-income families and communities are hit hardest, we cannot afford to lose these essential tools.”
The letter outlines the potential impact on poor and low-income rural communities by dampening interest in the Low-Income Housing Tax Credit and New Market Tax Credit, and warns that the lack of investment in tax-exempt bonds would increase state and local governments. borrowing costs and would also be detrimental to the development of employment.
“Forced to make tough decisions about high-interest borrowing, governments will be forced to raise taxes, fees and other costs for citizens, dramatically slowing economic growth – particularly damaging in light current economic struggles in our country,” the groups warned. .
President Joe Biden appeared to acknowledge the potential conflict by offering a fix in his FY23 budget, though the mechanism lacks specifics.
“We appreciate the administration’s acknowledgment of this major issue in the fiscal year 2023 budget request and demonstration of willingness to work to protect these funding tools,” the letter said. “That said, recognizing the enormity of the problem, we respectfully ask that you work with the OECD now to avoid an unintended and unprecedented consequence that would alter the landscape of US tax incentives. We stand ready to work with you in any way to ensure the continued success of these vital programs.