Tax aspects of President Biden’s American Job’s Plan
INSIGHT ARTICLE |
Authored by RSM US LLP
On March 31, 2021, President Biden introduced The American Jobs Plan (the Jobs Plan). This $2 trillion jobs and infrastructure plan was a cornerstone of President Biden’s campaign and is a top priority of his administration. With a focus on climate change, the Jobs Plan has a number of initiatives that set forth the administration’s initiatives related to green initiatives, infrastructure and job creation. The Jobs Plan focuses on the following broad areas:
- Fix highways, rebuild bridges, upgrade ports, airports and transit systems
- Deliver clean drinking water, a renewed electric grid and high-speed broadband
- Build, preserve, and retrofit homes and commercial buildings, modernize schools and childcare facilities, and upgrade veteran hospitals and federal buildings
- Create jobs and raise wages and benefits for essential home care workers
- Revitalize manufacturing, secure U.S. supply chains, invest in R&D and job training
- Strengthen workers’ rights to organize
To pay for the Jobs Plan, President Biden proposed numerous tax changes. At a high level, the Jobs Plan proposes to:
- Raise the corporate tax rate to 28%
- Increase the global minimum tax paid to 21%
- Impose a corporate minimum tax on book income
- Eliminate tax benefits for the oil and gas fossil fuels sector
- Increase corporate tax enforcement
Washington National Tax has summarized the key provisions of the Jobs Plan as well as the tax provisions in the accompanying Made in America Tax Plan.
Fix highways, rebuild bridges, and upgrade ports, airports, and transit systems
President Biden is proposing that Congress make investment in roads, bridges, rails, ports, airports and transit systems. Many of these projects are funded by excise taxes collected into the Highway Trust Fund and the Airport and Airways Trust fund. Transportation Secretary Pete Buttigieg stated that neither a gas tax nor a mileage tax would be part of the Jobs Plan.
Green energy tax incentives
President Biden’s proposal includes provisions related to new clean energy technologies. He is proposing a new production tax credit along with investment in 15 decarbonized hydrogen demonstration projects in distressed communities. He is also focused on retrofitting carbon capture and sequestration at industrial facilities for steel, cement and chemical production. President Biden is also proposing a direct payment (rather than a tax credit against income) for the section 45Q carbon capture and sequestration tax credit to spur investment in this technology.
Eliminate tax benefits for fossil fuels and reinstate Superfund environmental excise taxes
President Biden is proposing eliminating tax benefits for the oil and gas fossil fuels sector. Additionally, he is proposing to restore payments from polluters into the Superfund Trust Fund.
The Made in America Tax Plan (the Tax Plan) was issued alongside the American Jobs Plan. The tax proposals are designed to increase the corporate tax rate to 28% and close certain tax loopholes created by the Tax Cuts and Jobs Act of 2017. A summary of the provisions follows.
Beyond the increase in the corporate tax rate from 21% to 28%, the Tax Plan is generally focused on a series of international tax proposals that would have a significant impact on multinational businesses and substantially modify key provisions of the Tax Cuts and Jobs Act of 2017 (the TCJA). In 2017, the TCJA imposed a 21% tax on so-called global intangible low-taxed income (GILTI) which the TCJA generally defined as income earned overseas by controlled foreign corporations of U.S. taxpayers (other than Subpart F income) that exceeds a threshold amount. However, the TCJA also allowed corporate taxpayers to deduct 50% of their GILTI income, resulting in an effective tax rate on GILTI of only 10.5%. The Biden administration believes that these provisions encourage offshoring of jobs and profit shifting. In an attempt to remedy this and further discourage these practices, the Tax Plan will eliminate the 50% deduction for corporations under GILTI, ensuring that corporations pay a higher global minimum tax rate of 21% instead of 10.5%. In addition, the new global minimum tax rate will be calculated on a country-by-country basis in order to limit the ability for corporations to offset losses incurred in one country against income earned in another. The Tax Plan proposal may also eliminate the current law exemption from GILTI for income equal to 10% of the foreign corporation’s business assets. This could significantly increase the effective tax rate on foreign income and could result in U.S. tax even where the taxpayer has no net foreign income.
The Tax Plan also proposes to make corporate inversions (where companies would change jurisdictional headquarters via merging or acquiring a foreign entity in order to reduce U.S. taxes) more difficult and less appealing for companies. In addition to this, the Tax Plan will deny any deductions for offshoring jobs. To incentivize investment in U.S. jobs, the Tax Plan will provide a credit to support onshoring of jobs.
In addition, the Tax Plan would entirely eliminate foreign-derived intangible income (FDII) tax incentives created under TCJA, which provides a deduction to businesses that sell domestic goods and services to foreign consumers. The revenue generated from the repeal of FDII would be used to expand R&D incentives but the plan description released by the White House does not list any specific incentives it would expand. Some possibilities may include: repeal of the TCJA provisions requiring capitalization and amortization of section 174 research and experimentation expenditures beginning in 2022; or increasing the section 41 research credit rate under the regular and Alternative Simplified Credit (ASC) methods.
The Biden administration also plans to supports a global minimum tax rate that will be implemented on a multilateral level globally in order to prevent other countries from engaging in a ’race to the bottom‘ by exempting corporate profits from local tax. In this regard, we expect the Biden administration to support the efforts by the Organization for Economic Development and Cooperation (OECD) to develop a framework for a global minimum tax that other countries can use as a basis for internal legislation designed to prevent corporate tax evasion on a global basis.
The White House description of the Tax Plan also includes a discussion of a proposed corporate minimum tax on the book income of ’large corporations.’ This provision, as described, would impose a 15% minimum tax on the income corporations use to report their profits to investors. This description appears to be similar (or the same as) a Biden campaign proposal, but with certain terms undefined. The campaign proposal called for the imposition of a 15% minimum tax on global book income in excess of $100 million. In the coming days we expect additional clarification on details of this provision.
Fossil fuels and polluting industries
As a part of the President’s goal to put the country on a path to net-zero emissions by 2050, the Tax Plan aims to eliminate special subsidies, tax loopholes and special foreign tax credits benefitting the fossil fuel industry. It will also focus on holding polluting industries accountable to help fairly cover the cost of cleanups.
The tax provisions outlined above are designed to close tax loopholes that allow corporations to avoid or evade U.S. taxes. By changing corporate tax provisions in areas too easily abused, the Biden administration hopes to bring fairness to the tax system. The Tax Plan will also ramp up tax law enforcement against corporations and ensure that the Internal Revenue Service has the resources it needs to effectively enforce the tax laws. The changes in corporate tax law and increased IRS resources will be part of a soon to be announced broader enforcement initiative targeting tax evasion among corporations and high-income individuals.
President Biden’s American Jobs Plan is an opening proposal by the administration with respect to infrastructure and job creation. While there is much interest with both the Democrats and Republicans to improve the country’s infrastructure, the parties vary widely on how much to spend and what the priorities should be. It will be up to Congress to negotiate and ultimately pass the infrastructure legislation. Much discussion over the next few months will relate to whether the legislation will have bipartisan support, or whether it will be enacted through the budget reconciliation process (which requires only a majority vote from both chambers of Congress).
Further, it is expected that the American Jobs Plan will be followed by a second round of economic proposals next month that will likely include other social programs prioritized by the Democrats, including changes and expansions to health care and insurance coverage, child care, community college tuition proposals and others.
This article was written by Debbie Gordon, Alina Solodchikova, Ramon Camacho and originally appeared on 2021-04-07.
2020 RSM US LLP. All rights reserved.
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