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U.S. Corporate Tax Policy Post-Election Won’t Likely Affect Ratings, Regardless Of Election Results

Democratic Presidential candidate Joe Biden has proposed significant changes to the U.S. corporate income tax regime, including an increase in the statutory rate that would erase half of the reduction under the Tax Cuts and Jobs Act of 2017 (TCJA), which brought the nominal rate to 21% from 35% (see table 1). President Donald Trump favors keeping the TCJA in place, including making permanent certain expiring provisions, and preventing others from becoming effective. While the White House hasn't released detailed proposals for corporate taxation, the president has included some related items in his list of core priorities for a second term.

S&P Global Ratings believes changes in line with Mr. Biden's proposal would result in somewhat higher effective tax rates and higher cash taxes paid for most U.S. companies, absent the effects of tax planning, and with variability among sectors. We note, too, that the increase, as proposed, wouldn't likely result in ratings changes, despite potential effects on cash flows.

Table 1

Current Tax Law Compared To Biden Corporate Tax Proposals
Current Tax Law Biden's Tax Proposals
Corporate Tax Rate
21% 28%
Corporate Alternative Minimum Tax
Not applicable 15% minimum tax on book income of companies reporting net income > $100 million
Increase Minimum Tax (GILTI) On Foreign Earnings
GILTI effective rate of 10.5% (13.125% after 2025), but certain exceptions apply. Doubling to 21% the GILTI foreign earnings minimum tax rate imposed on all U.S. companies' overseas earnings
Offshoring Tax Penalty Surtax
Not applicable 10% offshoring tax penalty on U.S. companies' overseas production profits earned on sales back to the U.S., raising the tax rate on those profits to 30.8%
Made In America Tax Credit
Not applicable 10% advanceable tax credit for companies making investments that will create jobs for American workers and accelerate economic recovery
Source: S&P Global Ratings.

In addition to clawing back half of the recent reduction in the statutory corporate rate, Mr. Biden would reinstate the corporate alternative minimum tax (AMT) that the TCJA eliminated (albeit with a different calculation based on book income), in an effort to ensure that all U.S. corporations pay at least some U.S. federal tax when profitable.

Moreover, changes to the Global Intangible Low-Tax Income rules would increase the minimum tax U.S. multinationals pay on their foreign earnings, both through a doubling of the tax rate and a stricter view of the foreign income subject to the tax. The offshoring tax penalty seeks to discourage companies from moving manufacturing and service jobs overseas while selling the goods and providing the services back into the U.S., effectively raising the tax rate on overseas production profits to 30.8%. The Made in America tax credit would be available for revitalizing closed or closing facilities, retooling facilities to advance competitiveness and employment, reshoring job-creating production to the U.S., and expanding or broadening U.S. facilities to grow employment.

Ratings Effects

Our analysis shows there would be mixed consequences on our adjusted ratios for companies if the Biden proposals were enacted. Our adjusted debt metric would increase because of reduced accessible cash given the higher cash outflows related to the higher taxes. However, adjusted leverage would benefit via lower post-retirement adjustments due to our tax-effecting those obligations at the higher corporate tax rate, as per our methodology (see "Corporate Methodology: Ratios And Adjustments," published on April 1, 2019). Our funds from operations (FFO) metric, defined as EBITDA minus cash interest paid minus cash tax paid, would be hit by higher cash taxes paid.

Despite the potential effects on cash flow, we don't foresee ratings changes that would be directly attributable to the passage of the Biden proposals into law. Ratings actions would more likely be due to financial policy changes than the tax effects themselves. Companies would likely offset lower cash flows by strategic, structural, or financial policy changes (e.g., shareholder returns). However, highly leveraged borrowers could come under pressure absent their ability to use tax planning, net operating losses (NOLs), or tax credits to offset the tax increases.

Effective Tax Rates

S&P Global Ratings' analysis of reported effective tax rates before and after the TCJA provides a view of those companies and sectors that benefited most from the change, as well as those that might be hurt most by the Biden proposals should they come to fruition.

The data on effective tax rates show that most companies benefited from the TCJA rate reduction and other changes. A review of our rated universe of approximately 1,200 public U.S. nonfinancial corporates indicates that the average pre-TCJA effective tax rate was 22%, and that it fell to 13% after the law took effect.

Borrowers we rate in the technology and healthcare sectors, which generally already enjoyed effective tax rates significantly lower than the pre-TCJA statutory rate, continue to report rates significantly less than the current 21% rate (see chart 1). For other sectors--such as transportation and restaurants and retail, which don't benefit as much from international tax provisions--report paying within 5% of the statutory rates both pre- and post-TCJA; however, they still benefited from the law.

Chart 1

image

2021 And Beyond

Our analysis indicates that most companies would see an increase in their effective tax rates as a result of the Biden proposal's enactment. The severity of the increase would depend on each company's situation, including its ratio of foreign to global earnings, and its ability to use tax planning to minimize the increases. For companies with mostly domestic earnings, we expect the rate increase would claw back as much as half of the benefits gained from the TCJA rate reduction. Companies and sectors with large overseas earnings would likely see even bigger increases in their effective tax rates, as more comprehensive taxation of foreign earnings would compound the effects of the domestic rate increase.

Of the 20 companies with the highest global earnings (based on a four-year average), 13 are in the healthcare and technology sectors (see chart 2).

Chart 2

image

Note: The five companies with percentages over 100% have reported negative average domestic earnings over the four-year period (2016-2019).

The Alternative Minimum Tax

The Biden proposal seeks to reinstate the corporate AMT at a rate of 15% of book income for companies with net income greater than $100 million. This provision addressed the much-cited fact that there are many large companies that pay little or no U.S. tax, despite reporting ever-increasing profits. While many details haven't yet been provided, the AMT proposal seeks to compute the AMT tax based on 15% of reported global earnings before tax and compare it to the regular U.S. tax return calculation, with companies paying the higher amount.

For select companies that have net income above $100 million, we compared the potential 15% AMT to the reported 2019 current federal taxes (as a proxy for actual U.S taxes paid; see table 2). The data doesn't reflect net operating loss carryovers and foreign tax credits that may be allowed as offsets to the 15% tax calculation or the potentially higher global intangible low-taxed income (GILTI) tax rates for companies with multinational operations under the Biden tax proposals. We noted nine of the 20 companies with the highest AMT were within the technology and healthcare sectors.

Table 2

Alternative Minimum Tax Based On Year-End 2019
$ Bil.
Company Name Rating Sector Net Income FY 2019 Global Earnings Before Tax (A) Current Federal Taxes (B) Taxes@15% on Global EBT (C ) = A*15% Alternative Minimum Tax (D)=(C)-(B)

Alphabet Inc.

AA+ High Technology 34.3 39.6 2.4 5.9 3.5

Apple Inc.

AA+ High Technology 55.3 65.7 6.4 9.9 3.5

Exxon Mobil Corp.*

AA Oil 14.3 20.1 (0.1) 3.0 3.0

Verizon Communications Inc.

BBB+ Telecommunications 19.3 22.7 0.5 3.4 2.9

Pfizer Inc.

AA- Healthcare 16.3 17.7 (1.8) 2.7 2.7

Intel Corp.

A+ High Technology 21.0 24.1 1.4 3.6 2.2

AT&T Inc.*

BBB Telecommunications 13.9 18.5 0.6 2.8 2.2

The Walt Disney Co.*

A- Media, Entertainment & Leisure 11.1 13.9 0.0 2.1 2.1

Amazon.com Inc.

AA- Restaurants/Retailing 11.6 14.0 0.2 2.1 1.9

Microsoft Corp.

AAA High Technology 39.2 43.7 4.7 6.6 1.8

Philip Morris International Inc.

A Consumer Products 7.2 10.0 0.0 1.5 1.5

iHeartMedia Inc.

B Media, Entertainment & Leisure 11.3 9.7 (0.0) 1.4 1.4

ConocoPhillips

A Oil 7.2 9.5 0.0 1.4 1.4

Merck & Co. Inc.

AA- Healthcare 9.8 11.5 0.5 1.7 1.2

IBM

A High Technology 9.4 10.2 0.3 1.5 1.2

AbbVie Inc.

BBB+ Healthcare 7.9 8.4 0.1 1.3 1.2

The Coca-Cola Co.

A+ Consumer Products 8.9 10.8 0.5 1.6 1.1

General Motors Co.

BBB Auto/Trucks 6.7 7.4 0.0 1.1 1.1

Oracle Corp.

A High Technology 11.1 12.3 1.0 1.8 0.9

PepsiCo Inc.*

A+ Consumer Products 7.3 9.3 0.7 1.4 0.7
*In the absence of federal and state tax break-up, we consider the total. Source for Data points: S&P Capital IQ. Source for Calculations: S&P Global Ratings

The Long Road To Enactment

Chances for enactment of the Biden proposals depend not only on his being elected president but almost certainly on the Democratic Party retaking control of the Senate and keeping control of the House of Representatives. Additionally, while Mr. Biden has indicated he would like to make his changes effective from "day one," the timing of any changes would still be an open question. Given the stresses brought on by the COVID-19 pandemic, the economic recovery may prove to be a greater priority than corporate tax reform, and some Senate Democrats have pushed back against the immediacy of stand-alone tax legislation, citing priority of fiscal stimulus and pandemic-relief bills.

Appendix

Table 3

Effective Tax Rate For Select Companies By Sector
Company Name Rating Sector Pre-TCJA Post-TCJA

Lockheed Martin Corp.

A- Aerospace/Defense 23.0% 14.0%

Raytheon Technologies Corp.

A- Aerospace/Defense 23.8% 27.8%

General Dynamics Corp.

A Aerospace/Defense 26.7% 17.1%

Northrop Grumman Corp.

BBB Aerospace/Defense 23.8% 11.8%

L3Harris Technologies Inc.

BBB Aerospace/Defense 30.9% 8.0%

General Motors Co.

BBB Auto/Trucks 22.8% 10.3%

PACCAR Inc

A+ Auto/Trucks 53.8% 23.0%

Lear Corp.

BBB- Auto/Trucks 26.2% 15.0%

BorgWarner Inc.

BBB Auto/Trucks 32.5% 37.0%

LKQ Corp.

BB Auto/Trucks 32.6% 28.4%

Automatic Data Processing Inc.

AA Business And Consumer Services 33.2% 23.7%

Sysco Corp.

BBB- Business And Consumer Services 33.7% 16.5%

Cardinal Health Inc.

BBB Business And Consumer Services 37.1% 22.0%

Cintas Corp.

A- Business And Consumer Services 36.4% 19.9%

MSCI Inc.

BB+ Business And Consumer Services 32.4% 6.6%

Honeywell International Inc.

A Cap Goods/Machine&Equip 24.8% 17.6%

3M Co.

A+ Cap Goods/Machine&Equip 28.3% 19.8%

Deere & Co.

A Cap Goods/Machine&Equip 31.5% 20.7%

Illinois Tool Works Inc.

A+ Cap Goods/Machine&Equip 30.0% 23.3%

Emerson Electric Co.

A Cap Goods/Machine&Equip 30.1% 18.6%

LyondellBasell Industries N.V.

BBB Chemicals 26.5% 16.0%

Air Products and Chemicals Inc.

A Chemicals 27.8% 21.0%

Ecolab Inc.

A- Chemicals 24.4% 17.0%

Sherwin-Williams Co.

BBB- Chemicals 29.0% 22.2%

PPG Industries Inc.

BBB+ Chemicals 27.5% 23.6%

The Coca-Cola Co.

A+ Consumer Products 19.5% 16.7%

PepsiCo Inc.

A+ Consumer Products 25.4% 21.0%

NIKE Inc.

AA- Consumer Products 18.7% 16.1%

Procter & Gamble Co.

AA- Consumer Products 25.0% 34.7%

Constellation Brands Inc.

BBB Consumer Products 29.4% 16.5%

PulteGroup Inc.

BB+ Forest Prod/Bldg Mat/Packaging 35.5% 24.1%

Stanley Black & Decker Inc.

A Forest Prod/Bldg Mat/Packaging 21.3% 14.4%

Masco Corp.

BBB Forest Prod/Bldg Mat/Packaging 35.6% 25.2%

Vulcan Materials Co.

BBB+ Forest Prod/Bldg Mat/Packaging 22.8% 17.8%

Martin Marietta Materials Inc.

BBB+ Forest Prod/Bldg Mat/Packaging 29.9% 18.2%

Pfizer Inc.

AA- Healthcare 13.4% 7.8%

Johnson & Johnson

AAA Healthcare 16.5% 12.7%

Merck & Co. Inc.

AA- Healthcare 15.4% 14.7%

Eli Lilly & Co.

A+ Healthcare 18.9% 11.9%

AbbVie Inc.

BBB+ Healthcare 24.5% 6.5%

Apple Inc.

AA+ High Technology 25.6% 15.9%

Microsoft Corp.

AAA High Technology 19.9% 10.2%

Alphabet Inc.

AA+ High Technology 19.3% 13.3%

Intel Corp.

A+ High Technology 20.3% 12.5%

Cisco Systems Inc.

AA- High Technology 16.9% 20.2%

The Walt Disney Co.

A- Media, Entertainment & Leisure 34.2% 21.7%

Booking Holdings Inc.

A- Media, Entertainment & Leisure 21.3% 18.3%

Las Vegas Sands Corp.

BBB- Media, Entertainment & Leisure 10.6% 12.4%

Discovery Inc.

BBB- Media, Entertainment & Leisure 27.1% 3.5%

Netflix Inc.

BB Media, Entertainment & Leisure 28.3% 9.5%

Southern Copper Corp.

BBB+ Mining And Minerals 39.2% 38.8%

Americas Mining Corp.

BBB+ Mining And Minerals 38.2% 37.4%

Nucor Corp.

A- Mining And Minerals 30.7% 23.1%

Reliance Steel & Aluminum Co.

BBB Mining And Minerals 28.0% 24.0%

Steel Dynamics Inc.

BBB- Mining And Minerals 36.2% 22.6%

Exxon Mobil Corp.

AA Oil -5.1% 26.3%

ConocoPhillips

A Oil 35.6% 23.8%

Phillips 66

BBB+ Oil 25.0% 19.2%

Chevron Corp.

AA Oil 80.1% 48.6%

Marathon Petroleum Corp.

BBB Oil 33.4% 24.8%

Amazon.com Inc.

AA- Restaurants/Retailing 37.5% 17.0%

Home Depot Inc.

A Restaurants/Retailing 36.4% 23.6%

Walmart Inc.

AA Restaurants/Retailing 30.3% 37.4%

CVS Health Corp.

BBB Restaurants/Retailing 38.4% 26.3%

McDonald's Corp.

BBB+ Restaurants/Retailing 31.7% 24.9%

Verizon Communications Inc.

BBB+ Telecommunications 35.2% 13.0%

AT&T Inc.

BBB Telecommunications 32.7% 18.9%

Comcast Corp.

A- Telecommunications 37.0% 21.6%

T-Mobile US Inc.

BB Telecommunications 37.3% 24.7%

GCI LLC

B- Telecommunications 37.7% 26.3%

Union Pacific Corp.

A- Transportation 37.4% 23.6%

Burlington Northern Santa Fe LLC

A+ Transportation 37.3% 24.4%

Delta Air Lines Inc.

BB Transportation 34.0% 23.1%

United Parcel Service Inc.

A- Transportation 33.2% 21.4%

CSX Corp.

BBB+ Transportation 37.5% 22.8%

Southern Co.

A- Utilities & Infra 27.7% 27.5%

NextEra Energy Inc.

A- Utilities & Infra 31.5% 11.7%

Duke Energy Corp.

A- Utilities & Infra 31.0% 12.7%

Exelon Corp.

BBB+ Utilities & Infra 38.6% 20.4%

Florida Power & Light Co.

A Utilities & Infra 37.8% 15.9%
Notes: In order to eliminate the effect of repatriation liabilities, deferred taxes and fiscal year differences in 2017 & 2018, we have compared 2016 & 2019 in the Appendix above. The selected companies represent those with highest net income in each sector in 2019 excluding certain outliers. Source: S&P Capital IQ.

Related Criteria

This report does not constitute a rating action.

Primary Credit Analysts:Shripad J Joshi, CPA, CA, New York + 1 (212) 438 4069;
shripad.joshi@spglobal.com
Leonard A Grimando, New York (1) 212-438-3487;
leonard.grimando@spglobal.com
Research Contributor:Rohina Verdes, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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