President Joe Biden outlined more than $2 trillion in business tax increases on March 31 as part of a sweeping new infrastructure proposal.
The Made in America Tax Plan was unveiled in a fact sheet, and is intended to offset the cost of major new infrastructure spending. The tax plan still lacks many important details, and in some areas merely restates campaign tax proposals without offering new information. The Biden administration also declined to offer any information on proposed effective dates, except to pledge that the tax changes would pay for the package over 15 years. Still, the outline provides important insight on Biden’s top tax priorities and adds several important new proposals, particularly in the international area. The major tax increase proposals in the plan include:
- Raising the corporate rate to 28%
- Imposing a 15% minimum tax on financial statement income
- Repealing the deduction for foreign-derived intangible income (FDII)
- Raising the effective tax rate on global low-taxed intangible income (GILTI) to 21%, while applying it on a country-by-country basis and repealing the exemption for qualified business asset investment (QBAI) to make it more akin to a true global minimum tax
- Replacing the base erosion and anti-abuse tax (BEAT) with a new regime to deny related-party deductions
- Strengthening anti-inversion rules
- Denying deductions for offshoring jobs
- Repealing tax preferences for oil and gas
The plan does not include any of Biden’s proposals to raise taxes on individuals, such as the tax increases on capital gains, marginal rates, carried interest, and estate and gift taxes. These proposals are being reserved for future parts of Biden’s broader infrastructure and economic recovery plan, which the administration is rolling out in parts.
The current plan also includes a handful of tax cut proposals. Though details are scarce in many areas, the platform includes:
- Extending and enhancing the Section 30D tax credit for electric vehicles made in the United States
- Extending and expanding home and commercial energy-efficiency tax credits
- Creating a “targeted investment tax credit” for building out high-voltage capacity power lines
- Extending and phasing out over 10 years the alternative energy production and investment tax credits under Sections 45 and 48, while requiring labor standards to qualify
- Reforming, expanding and making refundable the Section 45Q credit for carbon capture
- Using “targeted tax credits” for affordable and energy-efficient housing units
- Creating a $20 billion tax credit for rehabilitating homes
- Resurrecting the Section 48C credit for advanced energy projects
- Expanding the Section 45F credit for employer-provided child care to provide a 50% credit of up to $1 million in costs of constructing a child-care facility
- Creating a tax credit for low- and middle-income families and small businesses to invest in “disaster resilience”
The release of the tax outline represents only the first stage in what could be a long and contentious legislative process. The Biden administration faces significant work to turn many of these ideas into concrete legislative proposals, some of which may have real administrative issues. More details could be revealed when Treasury releases a Green Book on the tax aspects of the president’s budget proposal.
Congress will also have significant influence over anything that is ultimately enacted. Many moderate Democrats in both the House and the Senate have already expressed resistance to some provisions and the overall size of the tax hikes. Some provisions could be discarded, moderated or evolve significantly as compromises are needed. The underlying spending proposals could also face opposition and be scaled back. No official cost estimates were offered on any of the individual tax proposals, but the fact sheet states the total tax increases exceed $2 trillion and are intended to offset the cost of the package over 15 years.
Democrats are still considering their options for the legislative process. They have discussed combining this plan with pieces to be unveiled later as part of a single sweeping reconciliation bill. This process would allow Democrats to avoid 60-vote procedural hurdles in the Senate, but it would impose significant limitations. Many of the nontax proposals, and even parts of the tax package, could run afoul of reconciliation rules. Democrats could also move legislation in smaller parts, perhaps even trying to advance aspects of the legislation with bipartisan appeal outside of the reconciliation process. So far, Republicans have heavily criticized the package for both its size and content. Significant changes in scope would be required for any bipartisan negotiations.
The following provides more information on some of the specific proposals.
Despite speculation that Biden could settle on a smaller corporate rate increase than proposed during the campaign, the Made in America Tax Plan reproposes the 28% rate. In fact, some of the strongest rhetoric in plan is aimed at making corporations pay “their fair share,” and the corporate rate hike is expected to cover as much as one-third of the total $2 trillion cost.
Biden also reiterated his plan to impose a 15% minimum tax on financial statement income. No further information was offered on this proposal, which raises administrative issues and could face challenges in Congress. The 28% corporate rates itself could still be subject to negotiation. Some moderate Democrats — including Joe Manchin, D-W.V. — have indicated a preference for a lower rate
Grant Thornton Insight:
The plan does not offer any information on effective dates, but Treasury Secretary Janet Yellen has said in past comments that corporate rate increases could be phased in over time. This may fit with the pledge that the bill’s cost is meant to be offset over 15 years. The plan also does not mention the Section 199A deduction for pass-through income, which Biden has proposed phasing out for high-income taxpayers. Biden could be saving that for the next package, with other individual tax increases.
The Made in America Tax Plan significantly expands the international tax proposals from Biden’s campaign platform. The GILTI reform includes the campaign proposal to increase the effective rate to 21% and apply it on a country-by-country basis. In addition, the administration is now proposing to fully repeal the exemption for QBAI.
The administration also pledged to pursue a broader agreement on global minimum tax through the Organisation for Economic Co-operation and Development (OECD) and to deny certain deductions on payments from corporations in countries that do not have a strong minimum tax. This provision appears to be a replacement for BEAT, which the plan calls “an ineffective provision in the 2017 tax law that tried to stop foreign corporations from stripping profits out of the U.S.” The plan also proposes for the first time to repeal the FDII deduction.
Grant Thornton Insight:
GILTI and FDII have come under increasing Democratic criticism for the QBAI mechanism. GILTI is intended to target excess returns on intangibles through its exemption for QBAI. Democrats claim this mechanism creates a perverse incentive for companies to locate tangible investment offshore in order to lower what is considered the return on intangibles. Similarly, FDII offers a deduction for income from intangibles held in the United States. Reducing tangible investment in the United States can result in a higher calculation of intangible income and a bigger deduction. The repeal of the QBAI exception altogether would remove any attempt at targeting intangibles and make GILTI operate more like a true global minimum tax. Parts of this proposal may also require broader agreement on OECD negotiations and could be difficult to implement in the near term. Senate Finance Committee Chair Ron Wyden, D-Ore., has echoed many of Biden’s criticisms of QBAI and is expected to release an international tax reform discussion draft as soon as next week.
The plan has several proposals aimed at inversions, onshoring and offshoring, though few details on the actual operation of these provisions were offered. The outline says Biden plans to “make it harder” for U.S. corporations to invert and aims to “prevent” U.S. corporations from “claiming tax havens as the residence.” It appears to endorse the concept of a management and control test for determining U.S. residency. The plan also proposes to deny deductions for expenses “that come from offshoring jobs” and to provide a tax credit “to support onshoring jobs.”
Grant Thornton Insight:
Significantly more information is needed on these proposals, which could raise administrative issues. The onshoring proposals provide even less detail than was offered on the campaign. Biden’s campaign platform offered a 10% advanceable credit for certain onshoring activity, though the definitions for qualifying activity needed more development. The campaign also proposed a 10% surtax on certain goods or services sold abroad; this appears to be replaced by the provision denying deductions for offshoring activity. There is no hint of how the administration would seek to define those activities, though the 10% surtax was proposed to apply to services if the jobs “could have been performed in the United States.”
Energy tax provisions
Most of the energy tax package is composed of tax cuts, but the plan does propose to amend the tax code to eliminate “billions of dollars in subsidies, loopholes, and special foreign tax credits for the fossil fuel industry.” No attempt was made to define which specific provisions would fall under this category, or whether Biden is targeting broader provisions that also benefit oil and gas, such as the last-in, first-out method of accounting. Similarly, the plan offers a long list of green incentives it would enhance and extend without offering much specific information on how exactly the provisions would be enhanced.
The administration appears to be targeting the Section 30D credit for plug-in electric vehicles for extension and enhancement but does not say how big a credit would be offered or for how long. The credit is currently beginning to phase out based on the number of vehicles sold by each manufacturer. The plan also targets the Section 45 and Section 48 credits for alternative energy for a 10-year extension and phasedown. It does not provide any information on credit rates or eligible property but does seem to indicate the credits will be refundable or “direct-pay.” It also proposes enacting labor standard for eligibility, though this could present reconciliation challenges. The Section 45Q credit for carbon capture would also be made “direct-pay” and expanded to industrial applications, direct air capture and retrofits of existing power plans.
The Made in America Tax Plan is more of a statement tax priorities than a fully fleshed-out legislative proposal at this point. The legislative process could be long and contentious, and the proposals may still evolve. Taxpayers should follow developments closely and adjust tax and business planning as the package takes shape, paying particular attention to proposed effective dates.
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
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