Democrats have faced a flurry of complaints that their proposed new minimum corporate tax, which they have now agreed to cut, would disproportionately hit manufacturers.
At the same time, their plan to target the “carried interest” loophole that is being abandoned had angered powerful lobbyists on Wall Street.
But the buyout tax, which Democrats have been considering for months, has been relatively uncontroversial — at least for a tax hike. It’s probably because it’s so small.
“It’s not like the companies approved of this, but neither did they lie on the train tracks trying to stop it,” said Todd Metcalf, a former top Senate tax adviser now in the cabinet. of PwC consulting.
“It is the lowest fruit.”
The swap will not only help secure Sinema’s support. It will also allow Democrats to say they are raising taxes on the wealthy while scratching their longstanding urge to do something about corporate stock buybacks. Democrats were furious when, in the wake of Republican tax cuts in 2017, many companies used their savings to buy back stock, enriching shareholders.
The change will also mitigate Republican charges. Democrats are hurting manufacturers at a time when supply chains remain blocked.
The excise tax appears to be more than enough to cover the $14 billion lost with the deferred interest proposal and by reducing the 15% minimum corporate levy, or “book income” tax. Democrats say that would generate $74 billion in revenue, which would keep the package’s overall savings around $300 billion.
The savings, however, are lower than the $124 billion budget forecast that forecasters estimated last year when House Democrats considered the proposal. One reason for the difference is that the tax would have started in January of this year, so Democrats have now lost a year of revenue.
The tax change might be a bit awkward for Sen. Joe Manchin (DW.Va.), who has repeatedly argued in recent days that the Democrats’ bill only fills in the gaps, without imposing new taxes.
“It will take a very, very creative messenger to say that this excise tax is closing a loophole,” Metcalf said. “This is clearly a new tax.”
It’s the latest change forced by the enigmatic Sinema (D-Arizona), who has repeatedly forced Democrats to rewrite their tax plans — while saying little publicly about what she wants and why. Senate Democrats aim to pass the legislation next week, with the House planning to follow quickly.
‘I hate stock buybacks,’ Senate Majority Leader chuck schumer (DN.Y.) said Friday. “I think they’re one of the most selfish things corporate America does. Instead of investing in workers, training, research and equipment, they just don’t do anything to improve their business. and artificially increase the stock price by simply reducing the number of shares.
One of the reasons Wall Street shrugs off the redemption tax is that it’s so small. Few would expect it to deter many companies from buying their own shares. Many companies see their daily stock prices fluctuate by well over 1% every day.
And some say the tax doesn’t look so bad compared to others that Democrats had pushed.
“It’s not exactly popular in the business community, but stopping it has never been the top priority,” James Lucier of Capital Alpha Partners said in a research note.
“We don’t think that’s a good thing for investors, but given the income-boosting options on the table to help pay for the Inflation Reduction Act (IRA), it’s probably the less bad.”
The biggest threat to Wall Street could come later: This would be the government’s first tax on buyouts and once it’s on the books, Democrats could come back later and increase it.
Neil Bradley, director of policy at the United States Chamber of Commerce, said: “Unfortunately, the new excise tax on share buybacks will only distort the efficient movement of capital to where it can be used in the better and will diminish the value of Americans. Retirement savings.”
The problem Democrats face with their big business minimum tax is that the tax code gives capital-intensive industries generous deductions for the purchase of plant and equipment, which can drive a business well below the 15% floor.
This led to a torrent of complaints from manufacturers, echoed by Republicans, that they were being hammered by what they called a disguised repeal of popular depreciation allowances.
Democrats say they have agreed to spare accelerated depreciation from minimum tax calculations, although the reported cost of doing so – $55 billion, according to Schumer – is less than many expected, and some are eager to see the fine print of the plan. Prior to the changes, the minimum tax was expected to affect about 150 businesses and generate $313 billion in revenue.
“We are pleased to hear that the accelerated depreciation provisions are being removed, but we remain skeptical and will carefully review the revised legislation,” said Jay Timmons, director of the National Association of Manufacturers.
As for the carried interest provisions, Schumer said he had no choice but to scrap them in order to win Sinema’s support.
Lawmakers have been trying to reduce or eliminate the break for more than a decade — and somehow, no matter which party is in charge, the break still manages to stick.
“The interest shown is the biggest survival story since Shackleton’s expedition,” tweeted Jon Lieber, former senior aide to the Senate Republican leader. Mitch McConnell (R- Ky.).