WASHINGTON - The House is expected to approve the Inflation Reduction Act on Friday that includes a minimum tax rate of 15% on highly profitable companies - a levy that could hit Amazon, Verizon and others. The tax would help pay for large investments across climate and health care.
But the minimum tax conflicts with a hallmark of corporate taxes in America: deductions and credits ratified by Congress.
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Tax credits and deductions are purposefully designed as tools to incentivize certain behaviors. But because they reduce companies' tax bills, they stand to chip away at the effectiveness of a minimum tax. Companies can still use carve-outs for research and development, investment expenses and others to lower their tax bills. Democrats' marquee climate proposal comes in the form of tax breaks - which are also exempted from the corporate minimum tax rate.
Because of these exemptions, it would remain possible for profitable corporations to achieve a tax rate below 15%, Daniel Bunn, executive vice president at the Tax Foundation, said in an email.
The minimum tax proposal would raise $220 billion over 10 years, according to the Joint Committee on Taxation, a nonpartisan congressional body that analyzes tax bills. The minimum tax rate would apply to companies that reported to shareholders an annual average of $1 billion in annual profit over three years.
More than 250 companies in the S&P 500 averaged more than $1 billion in pretax income over the last three years, according to a Washington Post analysis of Calcbench data. Of those, 84 paid less than 15% in income tax globally. The list includes tech companies such as Amazon and Intel, banks like Bank of America and U.S. Bancorp, telecom giants Verizon and AT&T, and other household names like General Motors and UPS.
The rate is calculated according to global income, meaning a company could, in theory, "have a domestic effective tax rate below 15% as long as their foreign profits were taxed higher," Kyle Pomerleau, a senior fellow at the American Enterprise Institute, said in an email.
President Joe Biden frequently notes that 55 profitable corporations paid no federal income tax in 2020, according to an analysis by the Institute on Taxation and Economic Policy, a liberal think tank.
The talking point sidesteps that companies often pay different amounts in taxes year-to-year. But it points to a truism that Democrats aims to fix: Over the long run, many companies pay less than the current standard corporate tax rate of 21%.
Some corporations avoid federal income taxes by redirecting revenue to countries where they operate with lower tax rates. Until the end of 2019, Google's parent company, Alphabet, licensed its own intellectual property from Bermuda - an offshore tax haven. Alphabet reported its global effective tax rate in 2018 and 2019 was lowered by billions because "substantially all" of its foreign income was earned by its Irish subsidiary, according to a securities filing.
Corporations also lower their taxes through deductions and credits. Amazon shaved $3 billion off its tax bills from 2019 to 2021 through its use of stock-based compensation and another $2.2 billion for other tax credits including one for research and development, according to securities filings. The company reported federal tax expenses of $4.1 billion for those years on $69.4 billion in pretax U.S. profit - an effective federal rate of less than 6%. (Amazon founder Jeff Bezos owns The Washington Post.)
To gain the support of Sen. Kyrsten Sinema, D-Ariz., Democrats amended their minimum rate proposal to exclude deductions for certain investments and exempt firms owned by private equity. Those last-minute changes will further help some ultra-profitable corporations to pay less than the minimum rate.
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