Republicans are working on developing a far smaller infrastructure package than the Biden administration’s American Jobs Plan, relying on user fees such as tolls instead of corporate tax increases.
The GOP package would cost between $600 billion to $800 billion, as opposed to the $2.3 trillion proposed by Democrats and the administration. Biden has called for raising the maximum corporate tax rate to 28 percent as a way to help pay for the infrastructure package.
The Tax Cuts and Jobs of 2017 reduced the top corporate rate from 35 percent to 21 percent, so Biden’s plan would effectively halve that. However, Republicans have vowed to oppose his plan, arguing that raising taxes during the pandemic would halt the economic recovery. Instead a group of Repubican senators is crafting their own package that would put the onus on individual users of infrastructure items like roads, tunnels and bridges.
"My own view is that the pay-for ought to come from people who are using it," said Sen. Mitt Romney, R-Utah, according to
“We can pay for it without raising taxes,” said Sen. Steve Daines, R-Montana, according to
While user fees are likely to help fund infrastructure improvements, as they traditionally have, Democrats are likely to be opposed to relying strictly on this approach.
“Republicans’ red line on corporate revenue is completely unreasonable,” said Senate Finance Committee chair Ron Wyden, D-Oregon, in a statement Thursday. “Corporations have never contributed less to federal revenues than they do now. Our analysis of CBO data shows corporate revenue is down nearly 40 percent from the 21st century average since Republicans’ tax giveaway. I’m not talking about comparing where we are today to where we were in the 1950s — I’m talking about comparing where we are today to where we were just five years ago. In 2018, the United States was dead last among OECD countries in how much corporate tax revenue it collected as a share of GDP. Republicans’ insistence that the most profitable companies in the world shouldn’t contribute a single penny to investments in roads, schools and our clean-energy future is simply not acceptable.”
Some experts are skeptical about Biden’s infrastructure plan. “I’m having trouble looking at it as an infrastructure plan because I don’t think you could come up with a broader definition of infrastructure,” said Jeremy Swan, managing principal of CohnReznick’s financial sponsors and financial services industry practice. “If you look at the key components of the plan, it’s transportation, disabled and elderly care, manufacturing, buildings, job creation, utilities, electric vehicles, education, and weave some of the power grid and telecom aspects into it. Maybe some of us are too old school, but I remember the days when infrastructure was roads, bridges, tunnels and maybe some buildings. This is potentially much broader than typical infrastructure, so it’s certainly going to be a challenge to get this through Congress as it stands because you have one side saying this is way too broad and this is not infrastructure, and the other side saying it’s not broad enough.”
He is also skeptical about how the corporate tax increases will pay for the spending. “The biggest aspect of it from a tax perspective is how are we paying for this. I think the numbers they threw around is the infrastructure spending is somewhere around 1 percent of GDP over the next seven or eight years,” said Swan. “That gets you to $2.3 or $2.4 trillion. The proposal — at least the initial plan, and I expect there to be significant changes — is we’re going to change the corporate tax rate. We’re going to look at what the large corporates are paying from a tax perspective and move the corporate tax rate from 21 to 28 percent. We’re going to put in a minimum tax rate for large corporates. We’re going to basically do away with some of the international tax components of the 2017 Tax Cuts and Jobs Act. You’re basically putting the onus on the corporates, but if you look at that, the estimates that I’ve seen say that probably from a government revenue perspective, that generates about half a percent of GDP a year. You’re looking at 14 to 15 years to effectively pay for the next seven or eight years of infrastructure spending. It could be as long as 16 years to recoup it. If you use 16 as a round number, that’s four administrations. That’s the Biden administration’s term one, and then three more administrations. Who’s to say that’s not reduced or changed? I’m not buying into what people are saying that it’s a self-funded plan because we’re spending, and we’re raising taxes. It’s not apples to apples.”
Corporations would be paying far more under the Biden plan proposals. “That’s a 33 percent increase on their tax rate,” said Jim Brandenburg, a tax partner at the professional services firm Sikich. “I think that may make it difficult for some of them to continue to expand, either hire new employees or invest in machinery and equipment, when they’ve got a higher tax bill to be concerned with, especially coming out of the pandemic. Some are doing better than others, but some are still trying to work through that, so having a tax increase on top of that may be difficult. For some of the companies, having the higher rate may make them a little less competitive with some of the countries around the world that have rates that are less than where we are headed to there.”
Last week, the Treasury Department released more details on what it’s calling the
“The corporate AMT, which the tax reform removed back in 2017, the corporate AMT was taken out starting in 2018,” said Brandenburg. “It looks like that’s going to be brought back in some manner. They’ve got a new 15 percent based on book income for large corporations that it looks like they’re looking to bring back.”
The proposed changes are largely on the corporate side, but there would be few changes for pass-through businesses such as S corporations and partnerships, he noted, at least under the initial plan unveiled late last month.
Corporations and their tax planners are bracing for the changes, even if it’s not clear yet exactly what those changes will turn out to be. “Overall what we’re seeing is an across the board expectation that there will be some significant tax reform on the corporate side, whether it’s attached to the infrastructure package, or separately passed, and when it’s effective is all to be determined,” said Albert Liguori, a managing director with Alvarez & Marsal Taxand in New York. “If you poll the public market folks, you’re going to find that everybody’s expecting something to happen, but there’s a ton of questions about exactly what’s going to happen.”
Tax planning is complicated, especially for large multinational corporations, which were able to leverage the many incentives provided by the Tax Cuts and Jobs Act a few years ago. Now they will probably need to dial back some of the changes they made in their strategy.
“When the 2017 act came in, it was such a big change that it raised existential questions about whether we are really willing to change the way we do things in order to take advantage of this, or are we just going to stay put and anticipate that the next administration is going to turn all these dials in different ways, because quite frankly that’s really what the 2017 act did,” said Liguori. “It put a bunch of dials in place and new dials that are all confusingly interdependent with one another so that you need advanced software to calculate all of this now. The market is somewhat already braced for change, and I think there’s an expectation that the overall corporate rate is going to go up and that there’s going to be a heavier layer of tax on non-U.S. earnings of a U.S. multinational.”
Companies may also need to plan around the administration’s proposal to levy a minimum tax on book income, although the Treasury estimates that only about 45 corporations would be affected. “In recent years, about 45 corporations would have paid a minimum book tax liability under the President’s proposal,” said the Treasury plan. “This minimum book tax is a targeted approach to ensure thahe most aggressive tax avoiders are forced to bear meaningful tax liabilities. The average company facing this tax would see an increased minimum tax liability of about $300 million each year.”
Only the largest corporations would probably be able to figure out what those minimum taxes would be. “I think the idea of a minimum tax on book income is way more challenging than anybody wants to admit,” said Liguori. “Not only is it challenging from the perspective of how it affects business decision making and whether it’s promoting the right behavior, but it’s also extremely mechanically difficult to figure out. Imagine if you’re going through your year and you’re trying to make business decisions and you have to now compute some other version of income tax that you didn’t previously have to calculate before. Only the organizations that have extremely advanced technology systems, like some of our clients do, are going to be able to make decisions based on where their best tax answer is because of the massive complexity of that. There’s much more to it mechanically. It’s really challenging to understand how it operates, and I think the administration and the Treasury Department are also seeing how complex this is going to have to be, and how onerous it’s going to be to put it on the lion’s share of companies. But the largest, perhaps they will have the resources to be able to accommodate that kind of complexity. At the end of the day, I think it’s going to be a limited number of companies that this is going to apply to, and that seems to be matching up with what the policy objectives are anyhow.”
