Two conflicting goals of Joe Biden's tax plan
A robust corporate minimum tax? Or widely available business tax credits?
Many of the Biden campaign’s tax proposals involve giving tax credits to businesses. Consider the following policies Biden has proposed:
Establishing a “manufacturing communities tax credit” for companies that engage in “revitalizing, renovating, and modernizing existing – or recently closed down – facilities.”
Making permanent the solar investment tax credit, which is set to partially expire.
Providing tax credits for businesses that “upgrade equipment and processes, invest in expanded or new factories, and deploy low-carbon technologies.”
Establishing a “child care construction tax credit” for businesses that build workplace child care facilities.
Expanding the low-income housing tax credit by $10 billion.
Expanding the new markets tax credit to $5 billion a year and make the credit permanent.
Establishing a “Made in America Tax Credit” for companies that invest in U.S. facilities and U.S. jobs. (This one was announced just last week!)
Now, it’s no mystery why the Biden campaign likes the idea of using business tax credits to further their policy goals. As a matter of optics, it’s often easier to get people on board with a “tax cut” than with “new spending.” And as a matter of policy, tax programs are harder to get rid of than spending programs, because revenue provisions aren’t subject to the appropriations process.
But there can be downsides to enacting policy through business tax credits. And in the case of the Biden tax plan, there’s one significant downside that hasn’t been discussed much. It appears that Biden’s proposed business tax credits wouldn’t actually be available to all companies.
The Biden campaign has called for a new minimum tax on large corporations, to ensure that every corporation making over $100 million pays taxes of at least 15% of book income. It’s likely that many major U.S. corporations would be subject to Biden’s minimum tax, though it’s hard to say exactly how many.
Here’s the issue: The Biden campaign has given no indication that corporations will be allowed to use any business tax credits against the 15% minimum tax (except for the foreign tax credit). If so, corporations subject to the Biden minimum tax would be unable to claim all of the new business tax credits that the Biden campaign has proposed. And if there are fewer companies eligible to claim these tax credits, then the credits could be less effective at achieving their policy goals.
Let’s illustrate this with a simple example. Imagine that ProductionCo is a multinational enterprise that’s currently paying 10% of its book income in taxes. The Biden campaign wants ProductionCo to invest more in U.S. factories; that’s why they’ve called for a new Made in America Tax Credit. But, under the Biden tax plan, ProductionCo would be subject to a 15% minimum tax, which it would not be able to reduce using tax credits. Because ProductionCo won’t be able to benefit from the Made in America Tax Credit, it won’t have an increased incentive to invest in U.S. factories.
Now, the real story is a bit more complicated. There are two reasons why a corporation subject to the Biden minimum tax, like ProductionCo, might still be responsive to a Made in America Tax Credit.
First, unused business tax credits can generally be carried forward for up to twenty years. So ProductionCo might still have an incentive to invest in U.S. factories if 1) it did not expect to face the Biden minimum tax in a future tax year and 2) it were willing to patiently carry forward the Made in America tax credits until that year. That said, it would be quite difficult for companies to predict whether they would be subject to the Biden minimum tax in future years. Moreover, future tax credits are typically worth less to companies than present tax credits — so Biden’s minimum tax would still blunt the effectiveness of his proposed business tax credits by reducing their value.
Second, there are well-established tax strategies that allow companies to monetize (read: “sell”) tax credits that they would otherwise be unable to use. Many of these strategies involve forming an investment partnership with another taxpayer that is able to make use of the credits. So, in the example above, ProductionCo might still have an increased incentive to build U.S. factories if it could effectively sell the tax credits to some other business. Of course, these tax strategies aren’t costless: they require lawyers, contracts, and a counter-party. ProductionCo might decide that it’s not worth the hassle, and so might other companies subject to the Biden minimum tax.
In sum, it’s difficult to tell how just much Biden’s minimum tax would undermine the effectiveness of Biden’s proposed tax credits. We don’t how many corporations would be subject to the minimum tax, and we don’t know how much the minimum tax would weaken the incentive effects of the tax credits.
But stepping back, I think this discussion illustrates a larger tension within the Biden tax plan. It seems to me that the plan embodies two conflicting tax policy goals:
Goal #1: Enact policy through business tax credits
Goal #2: Ensure that no large corporation pays less than a 15% tax rate
If a Biden administration enacts large tax credits to incentivize business behavior, this will mean lower tax rates for many corporations. On the other hand, if a Biden administration enacts a robust corporate minimum tax, this will hinder the effectiveness of its proposed tax credits.
In the event that Biden prevails in this November’s election, it will be interesting to see how his administration navigates this tension.