United States:
Biden Administration Unveils Tax Plan To Boost Investments In Infrastructure
08 April 2021
Davies Ward Phillips & Vineberg
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President Biden and his administration recently released the
American Jobs Plan, which provides additional detail on policies
that were discussed throughout President Biden’s campaign and
the early days of his administration. Through the American Jobs
Plan, which was released on March 31, 2021, the administration
proposes making significant investments in U.S. infrastructure
projects, which could total $2.3 trillion in spending over eight
years. As part of the American Jobs Plan, the administration
proposes to cover some of this spending by raising taxes on
corporations and rolling back or modifying some of the tax law
changes under the Tax Cuts and Jobs Act of 2017.
President Biden’s tax proposals in the American Jobs Plan,
if enacted, are expected to affect most taxpayers, but are
primarily targeted at U.S. corporations, U.S. multinational
enterprises that earn income abroad and individuals with high
income. Below, we provide a brief overview of the Biden
administration’s tax proposals and some observations on how
these changes may affect investments and business activities in the
United States.
Corporate, International and Business Tax Changes
Key International Proposals
- Changing the global intangible low-taxed income (GILTI) regime,
including by increasing the effective tax rate on GILTI to 21%,
calculating GILTI on a country-by-country basis and eliminating the
exemption of a 10% return on qualified business asset investment
(QBAI). - Imposing a 10% surtax on U.S. corporations that “offshore
manufacturing and service jobs to foreign nations in order to sell
goods or provide services back to the American market.” - Eliminating the foreign derived intangible income (FDII)
deduction available to U.S. corporations with respect to sales made
to foreign buyers of goods and services that are tied to intangible
assets (e.g., patents and trademarks) held in the United
States. - Repealing the base erosion and anti-abuse tax (BEAT) and
implementing an “under-taxed payments rule” to bring the
U.S. tax code more in line with Pillar Two of the OECD/G20 BEPS
Project.
Other Proposals Affecting Businesses
- Increasing the corporate income tax rate from 21% to 28%.
- Imposing a 15% alternative minimum tax on book income of
corporations with at least $100 million of book income. The current
proposal contemplates allowing net operating loss and foreign tax
credits to be applied when calculating the minimum tax due. - Imposing a “financial risk fee” on certain
liabilities held by certain financial institutions with more than
$50 billion of assets. The Biden administration has not published
the rate, but prior proposals from the Obama administration for
similar fees ranged from 7 to 15 basis points.
These changes will lead to higher effective tax rates on U.S.
corporations and thus may lower overall returns for investors in
U.S. corporations. In addition, these changes may cause U.S.-based
multinationals to reconsider their international business
structures, which could result in efforts to remove non-U.S.
business activities from the U.S. tax net through inversions into
more tax-friendly jurisdictions or base erosion transactions.
Moreover, Treasury Secretary Janet Yellen has recently called for
global coordination on the development of an international minimum
tax rate that would apply to multinational corporations in order to
avoid businesses being incentivized to shift profits to whichever
jurisdiction offers the lowest tax rate. The Biden administration
implicitly acknowledges this danger by saying that it intends to
discourage changes in residency by implementing “strong
anti-inversion regulations and penalties” and by providing
numerous “carrots” to encourage investment in the United
States.
Proposed Incentives to Encourage Investment in the United
States
The Biden administration has proposed the creation, expansion or
reinstatement of various deductions and credits designed to
encourage investment in U.S.-based manufacturing and in renewable
or “clean” energy technologies (while proposing to
eliminate certain tax preferences for fossil fuels). These include
the following:
- Introducing a 10% credit for investment in the United States
that creates U.S.-based manufacturing jobs. Qualified expenses for
this credit would include investments made to restore closed
facilities and the costs of bringing production back from overseas.
This credit would be payable in advance to eligible taxpayers. - Expanding and making permanent the new markets tax credit and
reinstating the energy investment tax credit and the electric
vehicle tax credit. - Providing tax credits for businesses to upgrade equipment and
processes, invest in factory construction and expansion, and deploy
low-carbon technologies in order to develop a low-carbon
manufacturing sector. - Expanding deductions for energy technology upgrades, smart
metering systems and other emissions-reducing investments in
commercial buildings. - Increasing incentives for the development and implementation of
carbon capture, use and storage technology.
Takeaway
Despite the increase in the “headline” corporate tax
rate, the new minimum tax on book income and the changes to
U.S.-international taxation, we expect the United States to remain
a favourable environment for foreign investors. Specifically, the
incentives proposed by the Biden administration should increase the
desirability of investments into U.S. infrastructure projects,
companies with a U.S. manufacturing presence and U.S.-based
companies active in the renewable and clean energy technology
sectors. The effect of the proposals may, however, turn into a
balancing act that could play in different ways depending on
developments in the U.S. and world economy.
Individual Income, Payroll and Estate Tax Changes
The Biden administration has already changed existing tax law by
expanding the child tax credit in the American Rescue Plan Act
of 2021. Additional Biden administration proposals, such as
the expansion or reinstatement of certain individual tax credits,
may continue this policy of benefiting middle- and lower-income
taxpayers, but most of the proposed changes are targeted at
increasing the effective tax rate of high-income taxpayers.
Key Individual Income and Payroll Proposals
- Reverting the top individual tax rate to 39.6% (from the
current 37%). - Imposing the 12.4% Social Security payroll tax on wages above
$400,000 per year. - Taxing capital gains and qualified dividends at the top
marginal ordinary income tax rate when the taxpayer’s income is
above $1 million. - Phasing out the qualified business income deduction for filers
with taxable incomes above $400,000. - Limiting the availability of itemized deductions for
individuals earning more than $400,000 per year. - Reinstating the first-time homebuyers’ tax credit and
expanding both the earned income tax credit and the child and
dependent care tax credit.
Key Estate Tax Proposals
- Eliminating the “step-up” in tax basis of an
individual’s assets upon death. - Decreasing the estate tax exemption back to $3.5 million ($7
million for married couples) and increasing the rate of the federal
estate tax to 45%.
Further to the administration’s policy proposals regarding
estate tax, a group of senators led by Chris Van Hollen (D-MD) has
introduced the Sensible Taxation and Equity Promotion (STEP)
Act. The STEP Act proposes to do the following:
- Tax built-in gain upon the transfer of appreciated assets by
gift (including transfers to trusts commonly used in estate
planning) during the transferor’s lifetime with only a $100,000
lifetime exemption. - Tax all non-grantor trusts on all of their appreciated assets
every 21 years and impose additional reporting requirements on
trusts with assets of more than $1 million or with gross income of
more than $20,000. - Tax at death the built-in gain on the decedent’s
appreciated assets with a $1 million exemption. Gains on a personal
residence of up to $500,000 for married couples and appreciation on
assets held in retirement accounts would be exempt. The income tax
paid by the estate on such gains would be deductible for estate tax
purposes.
Conclusion
The American Jobs Plan is an ambitious and noteworthy first step
for President Biden, who campaigned on the ideas of transformative
infrastructure investments and accompanying changes to the tax code
to pay for them. It remains uncertain, however, whether the Biden
administration will be able to garner the support necessary to
achieve its full legislative agenda, given the slim majority held
by Democrats in the Senate and the low likelihood of any Republican
support.
President Biden is looking to deliver a win on his campaign
promise of fixing the United States’ crumbling infrastructure
and will certainly be pushing for legislation. In light of the
proposed price tag, it seems certain that some amount of tax reform
is on the horizon if he wants to deliver on that promise.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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