Biden’s new corporate tax hike won’t be ‘material’ for most US companies, Wall Street analysts say – CNBC | Vette Leader

Senate Majority Leader Chuck Schumer (D-NY) speaks during a press conference on the Inflation Reduction Act outside the US Capitol August 4, 2022 in Washington, DC.

Drew Angerer | Getty Images

Business groups have lobbied strongly against the 15% minimum tax rate for large companies, just passed by Congress as part of the Anti-Inflation Act, saying it is a “horrible policy” that would reduce economic growth and make America “poorer.”

However, Wall Street analysts say the legislation will not dramatically affect company earnings or their future investments.

Companies making more than $1 billion a year must now pay a minimum tax rate of 15%, as well as 1% on share buybacks. These tax reforms, aimed primarily at the largest US corporations such as Google parent Alphabet, JPMorgan Chase and Facebook parent Meta, will reduce the federal deficit by an estimated $300 billion over the next decade.

While the new taxes are “generally not positive for stocks,” the 15% minimum tax will not be “material” for companies, Wells Fargo analysts wrote in an Aug. 9 research note, calling the new taxes ” modest”.

Just over 170 companies in the S&P 500 paid less than 15% in taxes last year, according to a new analysis by Credit Suisse. Of those companies, fewer than half would likely see a tax hike for 2023 because legislation allows companies to use adjusted earnings, which can be massaged in a variety of ways, the analysis said.

“In general, the overall impact could be somewhat minimal and difficult to really understand at this time,” said Ron Graziano, Credit Suisse’s accounting strategist

Senate Democrats passed the bill 51-50 on Aug. 7 without a single Republican yes, and Vice President Kamala Harris cast the casting vote. The House approved it 220-207 Friday; President Joe Biden is expected to sign it Tuesday.

“This legislation will finally get the largest corporations to pay their fair share of taxes and — as our nation’s leading economists have confirmed — it will ease inflationary pressures in our economy,” said Legislator Rep. John Yarmuth, D -Ky after it passed the house.

House Minority Leader Kevin McCarthy, R-Calif., meanwhile, took to Twitter on Friday to accuse Democrats of rushing through a “700-page bill that will increase your taxes and double the size of the IRS.”

“In 87 days, Democrats will only have themselves to blame…” McCarthy said, referring to the upcoming midterms in November.

Catherine Schultz, vice president for tax and fiscal policy at the Business Roundtable, called the 15% minimum corporate tax rate “a terrible policy”.

“What it really does is pick winners and losers within the tax system,” Schultz said, adding that companies with the highest equity compensation will experience significant impact.

“Companies don’t stagnate, they are dynamic and they make different investment decisions every day,” said Schultz. The minimum tax “could have an impact on how companies determine how they will make certain investments going forward.”

“Companies may be reluctant to take certain risks in their investments when it appears that doing so could increase their bottom line tax burden,” Schultz said.

The National Association of Manufacturers “remains staunchly opposed to the IRA,” President and CEO Jay Timmons said in a statement. “It increases taxes on manufacturers in America and undermines our competitiveness as we face harsh economic headwinds like supply chain disruptions and the highest rate of inflation in decades,” he said.

Akash Chougule, a lobbyist at Americans for Prosperity, founded by the Koch family, said “Americans are worse off” while some are “filling their pockets” and lawmakers are calling for a victory. “At the end of the day, this is the same old story — hundreds of billions of dollars in tax hikes and corporate welfare sold as the solution to our most pressing crisis,” he said.

Neil Bradley, the US Chamber of Commerce’s executive vice president and chief policy offer, said the minimum tax would make America “poorer” and reduce “future economic growth.” He added that the 1% excise tax on share buybacks will “distort the efficient movement of capital” and “depreciate the value of Americans’ retirement savings.”

A volunteer holds a placard during a news conference on the climate crisis and anti-inflation bill at the US Capitol in Washington, DC August 12, 2022.

Kevin Lamarque | Reuters

S&P 500 companies bought back a record $881.7 billion of their own stock last year as historically low interest rates pushed up corporate earnings and valuations. However, the practice will only benefit investors if the company reduces its outstanding shares, boosting earnings per share. However, the buybacks often serve to increase executive salaries.

Analysts at Washington-based Cowen Research Group disputed the industry’s claims and predicted the 1% consumption tax would not change buyback behavior.

Credit Suisse agrees that the tax is not high enough to influence capital allocation decisions “especially for companies with strong balance sheets and attractive valuations.”

Graziano said time will tell in terms of the overall impact of the law.

“All taxation is complicated. This is a new type of tax based on adjusted financial income. This is the first time this has been done,” he said. “The way they are introduced could be very different than planned. This is nothing new, it happens all the time with all tax regulations.”

David French, senior vice president of government relations at the National Retail Federation, said that while raising taxes in a flagging economy is “worrying,” a minimum tax is fairer and “preferable to an increase in the tax rate.”

“Retailers are generally unaffected by the new business minimum tax proposal, as most retail businesses are already paying effective rates at much higher than 15 percent,” French said in a statement to CNBC.

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