In conjunction with his American Jobs Plan (the infrastructure plan) to build back infrastructure, revitalize manufacturing, and promote clean energy production, President Joe Biden has proposed an accompanying tax proposal, The Made In America Tax Plan (the Biden tax proposal), to pay for the infrastructure plan over an estimated 15-year period. The tax proposal includes significant changes to the U.S. corporate income tax regime, including raising the corporate statutory tax rate, as well as other changes affecting both domestic and multinational companies.

Rating Effects Are Expected To Be Limited

Our analysis shows there would be mixed consequences on our adjusted ratios for companies if the Biden tax proposal is enacted. Our adjusted debt metric would increase because of the reduction to accessible cash resulting from higher tax payments. However, adjusted leverage would benefit via lower post-retirement adjustments due to our accounting for the tax effects of those obligations at the higher corporate tax rate as per our methodology (see "Corporate Methodology: Ratios And Adjustments," published April 1, 2019). While EBITDA would not be affected, our funds from operations (FFO) metric, defined as EBITDA minus cash interest paid minus cash tax paid, would be hit by higher cash taxes paid.

While we don't foresee rating changes directly attributable to the Biden tax proposal, highly leveraged borrowers could be pressured without using tax planning, NOLs, or tax credits to offset the tax increases. Also, companies whose cash flow has been hard hit by the COVID-19 pandemic and that may have borrowed to sustain operations may also be pressured by higher future cash tax payments.

The Road To Enactment

Given the likelihood that the tax proposal won't receive any Republican support, and if the filibuster is not eliminated or modified, Senate Democrats will need to use the budget reconciliation process to get the bills passed into law, as they did with the recent $1.9 trillion COVID-19 relief legislation. A recent decision by the Senate parliamentarian seemingly allows for the use of the budget reconciliation process at least twice more before the 2022 mid-term elections.

With the current 50-50 split in the Senate and even if the reconciliation process is used, Senate Democrats will need all 50 of their votes, giving leverage to some who may demand significant changes to the current proposals in exchange for their votes. Senator Joe Manchin, for example, has indicated he opposes using the reconciliation process and would prefer a lower rate of 25%. Other differences to the Biden tax proposal will also arise as the bill is written and goes through the legislative process. Senate Democrats have already proposed their own version of a multinational tax framework that is similar, but not identical, to the Biden tax proposal.

While it's too early to try and determine effective dates, a change in the corporate tax rate won't likely be effective until 2022, and presumably the other tax provisions won't be effective until then as well.

Tax Rates Will Rise, But The New Minimum Tax Will Be Limited In Application

The Biden proposal raises the statutory corporate tax rate to 28%, erasing half of the reduction provided by the Tax Cuts and Jobs Act of 2017 (TCJA), which brought the nominal rate to 21% from 35%. In addition to reversing half of the TCJA's reduction in the statutory corporate rate, the Biden tax proposal would enact a 15% minimum tax on the book income of very large companies that report book profits of $2 billion or more to ensure that they pay at least some U.S. federal tax when profitable (see table 1). Among its other provisions, the Biden tax proposal includes various incentives to replace fossil fuel subsidies with clean energy production incentives.

Table 1

International Tax Proposals Will Be Significant For Multinationals

In addition to the general tax rate proposals discussed above, multinational corporations would be subject to significant international tax changes to end offshoring and profit-shifting incentives, and repeal export preferences. Changes to the TCJA's Global Intangible Low-Tax Income (GILTI) rules would increase the minimum tax U.S. multinationals pay on their foreign earnings by both doubling of the tax rate to 21% and a stricter view of the foreign income subject to the tax. The Biden proposal would also repeal and replace the TCJA's Base Erosion & Anti-Abuse Tax (BEAT) with Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD) and repeal the TCJA's foreign-derived intangible income (FDII) provisions, which in effect repeal a lower tax rate on export income (see table 1).

But multinationals can adapt to new international tax provisions. For example, Alphabet Inc.'s foreign to global earnings ratio fell from 58.5% in 2019 to 21.9% in 2020. The company disclosed that it simplified its corporate structure to now license intellectual property from the U.S. that was previously licensed from Bermuda. Microsoft Corp. also reported that in its fiscal 2019 year, in response to the TCJA and issued regulations, it transferred certain intangibles held by foreign subsidiaries to the U.S. and Ireland.

The Fate Of Significant TCJA Provisions Remains Uncertain

Not specified in the Biden proposal is the fate of some of the TCJA's key revenue-raising corporate tax provisions. It's uncertain whether these provisions will take effect as planned or be extended beyond the dates set in the TCJA, as they would raise additional tax revenue to pay for the infrastructure plan if left untouched. For example, for tax years beginning after Dec. 31, 2021, the interest expense limitation's calculation of adjusted taxable income will include deductions for depreciation and amortization, which will increase the limitation and raise the tax liability, where applicable. There has already been a legislative proposal to permanently extend the current treatment. Another TCJA revenue raiser set to take effect in 2022 and attracting legislative proposals is the required amortization of research and experimental expenditures. Additionally, 100% bonus depreciation is scheduled to begin phasing out in 2023-2027 if not addressed.

Effective Tax Rates Will Remain Lower Than Pre-TCJA Rates

Our analysis of reported effective tax rates before and after the TCJA provides a view of those companies and sectors that benefited most from the change, as well as those that might be hurt most by the Biden tax proposal should it come to fruition. The data on effective tax rates show that most companies benefited from the TCJA rate reduction and other changes. A review of our rated universe of approximately 1,100 public U.S. nonfinancial corporates indicated that the average pre-TCJA effective tax rate was 24%, and that it fell to 13% in 2020.

Borrowers we rate in the technology and health care sectors, which generally already enjoyed effective tax rates significantly lower than the pre-TCJA statutory rate, are among those continuing to report rates significantly less than the current 21% rate (see chart 1). Other sectors--such as transportation, consumer products, and restaurants and retail, which are not as affected by international tax provisions--still benefited from the TCJA. The 2020 sector averages included more companies with negative effective tax rates, primarily driven by losses due to COVID-19.

Chart 1

Foreign To Global Earnings A Key Factor In 2022 And Beyond

Our analysis indicates that most companies' effective tax rates would rise under the Biden tax proposal. The severity of the increase would depend on each company's situation, including its ratio of foreign to global earnings, and its ability to use tax planning to minimize the increases. For companies with mostly domestic earnings, we expect the rate increase would claw back as much as half of the benefits gained from the TCJA rate reduction. Companies and sectors with large overseas earnings would likely see even bigger increases in their effective tax rates, as more comprehensive taxation of foreign earnings would compound the effects of the domestic rate increase. Of the 20 companies with the highest global earnings and foreign to global earnings ratios (based on a three-year average), 12 are in the technology and health care sectors (see chart 2). Exxon Mobil Corp.'s extremely high average rate reflects large average U.S. losses over the three-year period, with a reported 2020 loss of $27.7 billion.

Chart 2

A look at the effective tax rate reconciliations reported by the above companies (see table 2) gives further insight into how foreign earnings drive effective tax rates down for many of these companies, primarily through foreign earnings and the GILTI and intangible income deduction. For example:

• International Business Machines Corp. (IBM) and Merck & Co. Inc.'s 2020 rate dropped 15.0% and 14.1%, respectively, for foreign earnings.
• Merck also disclosed a 4.1% increase resulting from the GILTI tax and the FDII deduction.
• IBM's effective rate was also affected by a 20% decrease for an intra-entity sale of its intellectual property.

Table 3

A New Corporate Minimum Tax Would Have Limited Reach

The Biden proposal for a 15% corporate minimum tax addresses the much-cited fact that there are large companies that pay little or no U.S. tax despite reporting ever-increasing profits. The proposal has changed significantly from the previous campaign proposal and would affect considerably fewer companies. While Biden's campaign proposal called for a $100 million net income threshold, the current proposal appears to apply a much higher threshold of $2 billion or more, according to the Treasury's report on the plan. The Treasury estimated that in a typical year, about 200 companies report net income of $2 billion or more, and that in recent years about 45 companies would have paid the minimum tax under the proposal, with an average minimum tax liability of about $300 million each year. The report also indicates that companies would be given credit for taxes paid above the minimum book tax threshold in prior years for general business tax credits (including research and development, clean energy, and housing tax credits), and for foreign tax credits, further reducing the impact of the proposal.

For select companies that have net incomes of $2 billion or more, we compared the potential 15% minimum tax to the reported 2020 current federal taxes (as a proxy for actual U.S taxes paid; see table 3). Our estimate doesn't reflect the credit for prior period taxes paid nor tax credits that will be allowed, or the potentially higher GILTI tax rates for companies with multinational operations under the Biden proposal. Thirteen of the 20 companies with the highest minimum tax were in the technology and health care sectors.

Table 4

Related Criteria

• Corporate Methodology: Ratios And Adjustments, April 1, 2019

Related Research

• U.S. Corporate Tax Policy Post-Election Won't Likely Affect Ratings, Regardless Of Election Results, Oct. 19, 2020