Who Gets Hit by the Inflation Reduction Act Book Minimum Tax?

August 3, 2022 4:44 pm Published by Comments Off on Who Gets Hit by the Inflation Reduction Act Book Minimum Tax?

The current version of the proposed reconciliation bill—the Inflation Reduction Act—attempts to raise hundreds of billions of dollars from corporations without raising the corporate tax rate through a 15 percent book minimum tax, a new alternative minimum tax applied to the financial statement income (i.e., book income) that companies report to their investors.

Economists have focused on some of the problems created by the structure of the proposed minimum tax. But in addition to these problems, it will have disproportionate effects on specific industries, and apparently unintended penalties for various company- and industry-specific expenses such as spectrum leases. Furthermore, it would have distortionary impacts on investment, and may prove ineffective as a stable revenue raiser. As such, it is important to understand how the Inflation Reduction Act book minimum tax would impact different industries.

Using Compustat financial statement data on public companies and incorporating intermediate results from Tax Foundation’s Corporate Tax Model, we are able to identify the different industry effects of the book minimum tax.

While the Inflation Reduction Act book tax itself raises corporate tax liabilities by about $331 billion from 2023 to 2032, a substantial portion of that revenue is offset by the prior year minimum tax credit (for previous book tax liability, which can be used to reduce ordinary corporate income tax liability). On net, the Inflation Reduction Act book minimum tax increases firms’ tax liabilities by $266 billion from 2023 to 2032, although part of this revenue is offset by reduced revenue from the capital gains and dividend taxes paid by owners of these firms.

However, the burden of this tax is not spread evenly across industries. Table 1 presents the net tax raised from 14 industries, both in dollar terms and as a share of the total pretax income of firms required to calculate the tax.

Table 1. Net Tax Hikes by Industry from the Inflation Reduction Act Book Minimum Tax, from 2023 to 2032
Industry$ millions% of income
Real estate and rental/leasing$14,66611.5%
Mining$17,7916.3%
All other industries$48,9534.2%
Transportation and warehousing$32,2934.1%
Construction$1,8303.0%
Finance, insurance and management$46,8571.5%
Wholesale trade$2,3711.5%
Professional, scientific and technical services$1,1081.4%
Accommodation and food services$3,7391.4%
Manufacturing$73,1861.0%
Retail trade$8,9720.8%
Administrative services$5870.6%
Information$13,4670.5%
Miscellaneous services$1550.1%

Notes: The first column displays the net tax hike in the industry, as book minimum tax liabilities less prior year minimum tax credits. The second column presents the net tax hike as a share of total pretax income of the affected firms. Consistent with the legal definition in the proposed minimum tax, a firm is considered affected by the tax if its adjusted financial statement income averaged over the previous three years exceeds $1 billion; once the firm becomes affected by the tax, it remains affected for all subsequent years. The main industry breakout in Table 1 follows the NAICS major industries, used in the CorpTax model. The 30-industry breakout in Table 2 follows the Fama-French classification, which sorts primarily on the type of end product. 

Source: Compustat financial data, Tax Foundation Corporate Tax Model, author calculations.

As a share of its income, the real estate & rental/leasing industry faces the heaviest burden of the Inflation Reduction Act book minimum tax, facing a net tax hike of 11.5 percent of its pretax book income, followed by mining, which faces a 6.3 percent tax hike. In dollar terms, the industries that would account for the largest book minimum tax liabilities are manufacturing, at $73.2 billion, followed by finance, insurance, and management at $46.9 billion.

These industries are especially heavily impacted because they are at the intersection of the different book-tax gaps targeted by the book minimum tax: permanent discrepancies between the two measures from firms paying low taxes (the intended target); temporary timing differences between financial and taxable income; deliberate tax incentives created by Congress (e.g., bonus depreciation); and special items that show up in one income definition but not the other, such as amortizing investment in spectrum.

The Inflation Reduction Act book minimum tax affects industries very differently, some of which may be unintended, reflecting a tax proposal that has not been fully vetted. Before introducing a new tax on book income, and asking the IRS to administer it and taxpayers to comply with it, lawmakers should consider whether these disparate impacts by industry are consistent with their tax policy goals.

Table 2. Net Tax Hikes by Industry from the Inflation Reduction Act Book Minimum Tax from 2023 to 2032, Detailed Industries
Industry$ millions% of income
Coal$32916.8%
Steel Works, etc.$2,77412.4%
Recreation$3,8586.5%
Automobiles and Trucks$11,3635.0%
Printing and Publishing$8564.2%
Utilities$44,7943.8%
Everything Else$8,6373.8%
Aircraft, ships, and railroad equipment$9,2563.7%
Transportation$22,5963.2%
Petroleum and Natural Gas$40,6972.8%
Precious Metals, Non-Metallic, and Industrial Metal Mining$4871.9%
Banking, Insurance, Real Estate, Trading$59,6221.9%
Construction and Construction Materials$2,1221.8%
Wholesale$2,3711.5%
Chemicals$3,7031.5%
Fabricated Products and Machinery$4,4091.4%
Communication$11,1041.0%
Tobacco Products$3,8080.9%
Retail$8,9720.8%
Healthcare, Medical Equipment, Pharmaceutical Products$8,8920.7%
Restaurants, Hotels, Motels$1,1840.5%
Business Equipment$8,5660.4%
Textiles$290.4%
Food Products$1,1530.3%
Apparel$2710.3%
Personal and Business Services$3,6990.2%
Beer & Liquor$3620.2%
Business Supplies and Shipping Containers$620.0%
Consumer Goods$00.0%
Electrical Equipment$00.0%
Total$265,9761.5%

Note: The first column displays the net tax hike in the industry, as book minimum tax liabilities less prior year minimum tax credits. The second column presents the net tax hike as a share of total pretax income of the affected firms. Consistent with the legal definition in the proposed minimum tax, a firm is considered affected by the tax if its adjusted financial statement income averaged over the previous three years exceeds $1 billion; once the firm becomes affected by the tax, it remains affected for all subsequent years. The main industry breakout in Table 1 follows the NAICS major industries, used in the CorpTax model. The 30-industry breakout in Table 2 follows the Fama-French classification, which sorts primarily on the type of end product.

Source: Compustat financial data, Tax Foundation Corporate Tax Model, author calculations

Note: This analysis was originally published on November 18, 2021 regarding the House Build Back Better (BBB) plan, but has now been updated to reflect the most recent tax proposals in the Senate Inflation Reduction Act.

 


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