On April 7, 2021, the U.S. Treasury Department released the Made in America Tax Plan, representing the proposed tax provisions to provide revenue to help pay for President Biden’s proposed American Jobs Act. The administration has also released a package of international tax proposals focused on seeking agreement with the Organization for Economic Cooperation & Development on an international minimum tax.
House Speaker Nancy Pelosi has announced a goal of achieving House passage by July 4, 2021. It is not yet clear what the legislation will look like in the House. There are discussions about splitting the bill into as many as three components, in part designed to get Republican support for at least the infrastructure component of the legislation. The Senate Democrats have one more chance this year to pass a budget reconciliation bill with only Democratic support, so the Senate is likely to put as many provisions as possible that would qualify under the budget reconciliation rules (i.e., be revenue-related) into one bill, focusing primarily on holding all of the Senate Democrats on board. The proposals that will not qualify under budget reconciliation will have to seek the support of some Senate Republicans.
The American Jobs Plan
The American Jobs Plan is focused on infrastructure improvements with an estimated cost over eight years of $2.3 trillion. It includes spending for the repair of bridges, highways and streets; the promotion of electric vehicles; the removal of lead in pipes carrying drinking water; expanding high-speed broadband; upgrading power infrastructure; spending for affordable housing, including housing for the aged and people with disabilities; spending for education and child-care facilities; and spending for workforce development.
This spending would be in addition to the administration’s 2022 fiscal year budget proposal, totaling approximately $1.5 trillion in spending. The budget includes a 40 percent increase in education spending, a 28 percent increase for the Commerce Department, a 23 percent increase for Health and Human Services, 16 percent increases for Agriculture and Interior, a 15 percent increase for Housing and Urban Development, a 14 percent increase for the Labor and Transportation Departments, and a 10 percent increase for Energy and the Treasury. It only includes a 1.6 percent increase for the Defense Department, and a 0.2 percent increase for Homeland Security.
The Made in America Tax Plan
The proposed Made in America Tax Plan would raise over $2 trillion within 15 years to pay for the American Jobs Plan. Some of the key provisions include:
1. Raising the corporate tax rate from 21 to 28 percent. Some commentators are suggesting that this could be compromised down to 25 percent.
2. Setting a global minimum tax rate for U.S. multinationals at 21 percent. The rate would be tied to book income, rather than taxable income. The administration is also trying to revive the OECD discussions around a worldwide minimum tax proposal to try to avoid a “race to the bottom” among nations in setting corporate tax rates.
3. Eliminating an incentive for U.S. multinationals to locate investments overseas.
4. Preventing U.S. corporations from inverting or being located in a tax haven.
5. Eliminating expense deductions related to offshoring of jobs and providing a tax credit for onshoring jobs.
6. Eliminating tax breaks for the fossil fuel industries, with polluters required to pay into the Superfund Trust Fund.
7. Providing tax incentives for carbon recapture and sequestration, long-distance transmission lines, sustainable aviation fuel, and increasing protections from droughts, wildfires and floods.
8. Extending the tax credits for clean-energy generation and storage and advanced energy projects.
9. Increasing IRS funding to expand corporate audit activity.
Sen. Ron Wyden, D-Oregon, chair of the Finance Committee, has offered his own proposals for revising the international tax system. In some respects, these mirror the administration’s, but in other respects have significant differences. His proposals include strengthening the global minimum tax; making significant revisions to the Global Intangible Low-Taxed Income tax, including shifting to a country-by-country calculation or at least low-income tax and high-income tax baskets, and equalizing the FDII and GILTI tax rates; and revising the Base Erosion and Anti-Abuse Tax (BEAT) to address income-stripping of foreign corporations and to still encourage U.S. investments in priorities such as renewable energy, low-income housing and job creation. Still, the overall spirit of the two proposals appears to be similar and it is likely that the differences can be reconciled.
The principles behind the Made in America Tax Plan are stated to be: collecting sufficient revenue to fund critical investments; a more fair tax system rewarding labor; promoting onshore and discouraging offshore investments; stopping the tax race to the bottom among nations of the world; having corporations pay their fair share; and building a strong and competitive economy.
Other tax proposals
The tax proposals in the Made in America Tax Plan are heavily focused on corporate tax and international tax issues. President Biden has also proposed increasing taxes on individuals earning over $400,000 through increased marginal tax rates, modifications to capital gains taxation, limiting the benefit of tax deductions and credits for higher-income taxpayers, and modifications to estate and gift taxation. These proposals are likely to work into the mix at some point during the year.
On the international front, while the U.S. works with the OECD to reach agreement on base-erosion, profit-shifting taxes and global minimum taxes, the U.S. is responding to countries seeking to increase taxes on U.S. digital companies by imposing corresponding tariffs on imports from those countries. Countries identified for this round of tariffs include Austria, India, Italy, Spain, Turkey and the United Kingdom.
Summary
There is pressure on the administration to move quickly on these proposals before attention shifts to the 2022 elections and the possibility of losing Democratic control of the House or Senate. It appears that bringing Republicans onboard in the Senate will be difficult, meaning that Democrats will be pressured to push as much of their agenda as possible into a budget reconciliation bill while seeking to appease both the more liberal and more conservative wings of the party, since they may not be able to lose any Democratic votes in the Senate.
The goal would be to pass the American Jobs Plan and Made in America Tax Plan in the House by the Fourth of July and to pass Congress by the August recess. We still do not have legislative language at this point, and what emerges from the House Ways & Means Committee and the Senate Finance Committee may have significant differences from what the administration has outlined in these proposals.
