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The Biden Tax Proposal Would Increase The Amount Companies Pay, With Limited Effect On Ratings

In conjunction with his American Jobs Plan (the infrastructure plan) to build back infrastructure, revitalize manufacturing, and promote clean energy production, President Joe Biden has proposed an accompanying tax proposal, The Made In America Tax Plan (the Biden tax proposal), to pay for the infrastructure plan over an estimated 15-year period. The tax proposal includes significant changes to the U.S. corporate income tax regime, including raising the corporate statutory tax rate, as well as other changes affecting both domestic and multinational companies.

Rating Effects Are Expected To Be Limited

Our analysis shows there would be mixed consequences on our adjusted ratios for companies if the Biden tax proposal is enacted. Our adjusted debt metric would increase because of the reduction to accessible cash resulting from higher tax payments. However, adjusted leverage would benefit via lower post-retirement adjustments due to our accounting for the tax effects of those obligations at the higher corporate tax rate as per our methodology (see "Corporate Methodology: Ratios And Adjustments," published April 1, 2019). While EBITDA would not be affected, 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.

While we don't foresee rating changes directly attributable to the Biden tax proposal, highly leveraged borrowers could be pressured without using tax planning, NOLs, or tax credits to offset the tax increases. Also, companies whose cash flow has been hard hit by the COVID-19 pandemic and that may have borrowed to sustain operations may also be pressured by higher future cash tax payments.

The Road To Enactment

Given the likelihood that the tax proposal won't receive any Republican support, and if the filibuster is not eliminated or modified, Senate Democrats will need to use the budget reconciliation process to get the bills passed into law, as they did with the recent $1.9 trillion COVID-19 relief legislation. A recent decision by the Senate parliamentarian seemingly allows for the use of the budget reconciliation process at least twice more before the 2022 mid-term elections.

With the current 50-50 split in the Senate and even if the reconciliation process is used, Senate Democrats will need all 50 of their votes, giving leverage to some who may demand significant changes to the current proposals in exchange for their votes. Senator Joe Manchin, for example, has indicated he opposes using the reconciliation process and would prefer a lower rate of 25%. Other differences to the Biden tax proposal will also arise as the bill is written and goes through the legislative process. Senate Democrats have already proposed their own version of a multinational tax framework that is similar, but not identical, to the Biden tax proposal.

While it's too early to try and determine effective dates, a change in the corporate tax rate won't likely be effective until 2022, and presumably the other tax provisions won't be effective until then as well.

Tax Rates Will Rise, But The New Minimum Tax Will Be Limited In Application

The Biden proposal raises the statutory corporate tax rate to 28%, erasing half of the reduction provided by the Tax Cuts and Jobs Act of 2017 (TCJA), which brought the nominal rate to 21% from 35%. In addition to reversing half of the TCJA's reduction in the statutory corporate rate, the Biden tax proposal would enact a 15% minimum tax on the book income of very large companies that report book profits of $2 billion or more to ensure that they pay at least some U.S. federal tax when profitable (see table 1). Among its other provisions, the Biden tax proposal includes various incentives to replace fossil fuel subsidies with clean energy production incentives.

Table 1


International Tax Proposals Will Be Significant For Multinationals

In addition to the general tax rate proposals discussed above, multinational corporations would be subject to significant international tax changes to end offshoring and profit-shifting incentives, and repeal export preferences. Changes to the TCJA's Global Intangible Low-Tax Income (GILTI) rules would increase the minimum tax U.S. multinationals pay on their foreign earnings by both doubling of the tax rate to 21% and a stricter view of the foreign income subject to the tax. The Biden proposal would also repeal and replace the TCJA's Base Erosion & Anti-Abuse Tax (BEAT) with Stopping Harmful Inversions and Ending Low-tax Developments (SHIELD) and repeal the TCJA's foreign-derived intangible income (FDII) provisions, which in effect repeal a lower tax rate on export income (see table 1).

But multinationals can adapt to new international tax provisions. For example, Alphabet Inc.'s foreign to global earnings ratio fell from 58.5% in 2019 to 21.9% in 2020. The company disclosed that it simplified its corporate structure to now license intellectual property from the U.S. that was previously licensed from Bermuda. Microsoft Corp. also reported that in its fiscal 2019 year, in response to the TCJA and issued regulations, it transferred certain intangibles held by foreign subsidiaries to the U.S. and Ireland.

The Fate Of Significant TCJA Provisions Remains Uncertain

Not specified in the Biden proposal is the fate of some of the TCJA's key revenue-raising corporate tax provisions. It's uncertain whether these provisions will take effect as planned or be extended beyond the dates set in the TCJA, as they would raise additional tax revenue to pay for the infrastructure plan if left untouched. For example, for tax years beginning after Dec. 31, 2021, the interest expense limitation's calculation of adjusted taxable income will include deductions for depreciation and amortization, which will increase the limitation and raise the tax liability, where applicable. There has already been a legislative proposal to permanently extend the current treatment. Another TCJA revenue raiser set to take effect in 2022 and attracting legislative proposals is the required amortization of research and experimental expenditures. Additionally, 100% bonus depreciation is scheduled to begin phasing out in 2023-2027 if not addressed.

Effective Tax Rates Will Remain Lower Than Pre-TCJA Rates

Our 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 tax proposal should it 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 1,100 public U.S. nonfinancial corporates indicated that the average pre-TCJA effective tax rate was 24%, and that it fell to 13% in 2020.

Borrowers we rate in the technology and health care sectors, which generally already enjoyed effective tax rates significantly lower than the pre-TCJA statutory rate, are among those continuing to report rates significantly less than the current 21% rate (see chart 1). Other sectors--such as transportation, consumer products, and restaurants and retail, which are not as affected by international tax provisions--still benefited from the TCJA. The 2020 sector averages included more companies with negative effective tax rates, primarily driven by losses due to COVID-19.

Chart 1


Foreign To Global Earnings A Key Factor In 2022 And Beyond

Our analysis indicates that most companies' effective tax rates would rise under the Biden tax proposal. 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 and foreign to global earnings ratios (based on a three-year average), 12 are in the technology and health care sectors (see chart 2). Exxon Mobil Corp.'s extremely high average rate reflects large average U.S. losses over the three-year period, with a reported 2020 loss of $27.7 billion.

Chart 2


A look at the effective tax rate reconciliations reported by the above companies (see table 2) gives further insight into how foreign earnings drive effective tax rates down for many of these companies, primarily through foreign earnings and the GILTI and intangible income deduction. For example:

  • International Business Machines Corp. (IBM) and Merck & Co. Inc.'s 2020 rate dropped 15.0% and 14.1%, respectively, for foreign earnings.
  • Merck also disclosed a 4.1% increase resulting from the GILTI tax and the FDII deduction.
  • IBM's effective rate was also affected by a 20% decrease for an intra-entity sale of its intellectual property.

Table 3

2020 Statutory Tax Rate To Effective Tax Rate Reconciliation
Top 20 companies with highest global earnings and foreign earnings to global earnings ratio
Company name Rating Sector Global pretax income/(loss) (mil. $) Statutory tax rate 2020 (%) State taxes (net) (%) Taxes on foreign earnings (%) GILTI and intangible income deduction (%) Tax settlements and resolutions (%) Stock comp expense (%) R&D credit and other domestic incentives (%) Others (%) Effective tax rate 2020 (%)

Exxon Mobil Corp.

AA- Oil (28,883) 21.0 2.1 (5.6) 0.0 0.0 0.0 0.0 2.0 19.5

Pfizer Inc.

A+ Health care 7,498 21.0 0.0 (9.6) 0.0 (1.4) 0.0 (1.3) (2.3) 6.4

International Business Machines

A- High technology 4,637 21.0 0.0 (15.0) 0.0 0.0 0.0 (4.0) (21.0) (19.0)

Micron Technology Inc.

BBB- High technology 2,983 21.0 (0.8) (8.0) (2.2) 0.0 0.0 (2.1) 1.5 9.4

Merck & Co. Inc.

AA- Health care 8,791 21.0 0.8 (14.1) 4.1 (0.2) 0.0 (1.3) 9.1 19.4

The Coca-Cola Co.

A+ Consumer products 9,749 21.0 1.1 0.9 0.0 0.0 (0.8) 0.0 (1.9) 20.3

Johnson & Johnson

AAA Health care 16,497 21.0 0.0 (9.9) 2.7 0.0 (1.5) 0.0 (1.5) 10.8

McDonald's Corp.

BBB+ Restaurants/retailing 6,141 21.0 1.8 2.5 (2.2) 0.0 0.0 0.0 (0.1) 23.0

Caterpillar Inc.

A Capital goods/machine and equipment 3,995 21.0 0.8 7.1 0.0 0.0 (1.2) (1.3) (1.2) 25.2

Oracle Corp.

A High technology 12,063 21.0 1.4 (4.1) 0.0 0.2 (1.4) (1.3) 0.1 16.0

Apple Inc.

AA+ High technology 67,091 21.0 0.6 (3.8) 0.0 0.0 (1.4) (1.1) (1.0) 14.4

Microsoft Corp.

AAA High technology 53,036 21.0 1.3 (3.7) (1.1) 0.0 (2.2) (1.1) 2.3 16.5

PepsiCo Inc.

A+ Consumer Products 9,069 21.0 1.2 (0.8) 0.0 0.0 0.0 0.0 (0.5) 20.9

Cisco Systems Inc.

AA- High technology 13,970 21.0 3.5 (1.5) (2.6) 0.0 (0.1) 0.0 (0.6) 19.7

Honeywell International Inc.

A Capital goods/machine and equipment 6,012 21.0 1.3 (0.8) 0.0 (0.6) (1.2) 0.0 (0.6) 19.1

Amgen Inc.

A- Health care 8,133 21.0 (2.9) (4.7) (0.7) 0.1 0.0 (1.4) (0.7) 10.7

3M Co.

A+ Capital goods/machine and equipment 6,711 21.0 1.2 (1.2) (1.0) 0.0 (0.5) (1.0) 1.1 19.6

Alphabet Inc.

AA+ High technology 48,082 21.0 1.1 (0.3) (3.0) 0.0 (1.7) (2.3) 1.4 16.2

Procter & Gamble Co.

AA- Consumer products 15,834 21.0 1.4 (0.1) (1.0) 0.1 (1.6) 0.0 (2.6) 17.2

Intel Corp.

A+ High technology 25,078 21.0 0.0 (3.7) (1.9) 0.0 0.0 (2.1) 3.4 16.7
GILTI--Global intangible low-taxed income. R&D--Research and development.

A New Corporate Minimum Tax Would Have Limited Reach

The Biden proposal for a 15% corporate minimum tax addresses the much-cited fact that there are large companies that pay little or no U.S. tax despite reporting ever-increasing profits. The proposal has changed significantly from the previous campaign proposal and would affect considerably fewer companies. While Biden's campaign proposal called for a $100 million net income threshold, the current proposal appears to apply a much higher threshold of $2 billion or more, according to the Treasury's report on the plan. The Treasury estimated that in a typical year, about 200 companies report net income of $2 billion or more, and that in recent years about 45 companies would have paid the minimum tax under the proposal, with an average minimum tax liability of about $300 million each year. The report also indicates that companies would be given credit for taxes paid above the minimum book tax threshold in prior years for general business tax credits (including research and development, clean energy, and housing tax credits), and for foreign tax credits, further reducing the impact of the proposal.

For select companies that have net incomes of $2 billion or more, we compared the potential 15% minimum tax to the reported 2020 current federal taxes (as a proxy for actual U.S taxes paid; see table 3). Our estimate doesn't reflect the credit for prior period taxes paid nor tax credits that will be allowed, or the potentially higher GILTI tax rates for companies with multinational operations under the Biden proposal. Thirteen of the 20 companies with the highest minimum tax were in the technology and health care sectors.

Table 4

Minimum Tax Based On Year-End 2020 (Bil. $)
Companies with the highest net income and minimum tax higher than $0.5 billion
Company name Rating Sector Net income FY 2020 Global pretax income FY 2020 (A) Current federal taxes FY 2020 (B) Minimum tax at 15% on global pretax income (C ) = A*15% Additional tax liability (D)=(C)-(B)
Microsoft Corp. AAA High technology 44.3 53.0 3.5 8.0 4.4
Apple Inc. AA+ High technology 57.4 67.1 6.3 10.1 3.8
Intel Corp. A+ High technology 20.9 25.1 1.1 3.8 2.6 Inc.

AA- Restaurants/retailing 21.3 24.2 1.8 3.6 1.8
The Coca-Cola Co. A+ Consumer products 7.7 9.7 0.3 1.5 1.2

General Motors Co.

BBB Auto/trucks 6.4 8.1 0.1 1.2 1.1
Procter & Gamble Co. AA- Consumer products 13.0 15.8 1.3 2.4 1.1

Cisco Systems Inc.

AA- High technology 11.2 14.0 1.1 2.1 1.0

Verizon Communications Inc.

BBB+ Telecommunications 17.8 24.0 2.8 3.6 0.8
Johnson & Johnson* AAA Health care 14.7 16.5 1.8 2.5 0.7


A- High technology 5.2 5.7 0.2 0.9 0.6
Pfizer Inc.* A+ Health care 9.6 7.5 0.5 1.1 0.6

PepsiCo Inc.

A+ Consumer products 7.1 9.1 0.7 1.4 0.6

Bio-Rad Laboratories Inc.

BBB Health care 3.8 4.9 0.1 0.7 0.6

Enterprise Products Partners L.P.

BBB+ Utilities 3.8 3.8 (0.0) 0.6 0.6

Thermo Fisher Scientific Inc.

BBB+ Health care 6.4 7.2 0.5 1.1 0.6

Texas Instruments Inc.

A+ High technology 5.6 6.0 0.4 0.9 0.5

Eli Lilly and Co.

A+ Health care 6.2 7.2 0.6 1.1 0.5

AbbVie Inc.*

BBB+ Health care 4.6 3.4 (1.2) 0.5 0.5

Adobe Inc.

A High technology 5.3 4.2 0.1 0.6 0.5
Note: In our rated universe, 88 companies report a net income of $2 billion or above. We did not include in the above calculations prior taxes and available credits. *In the absence of federal and state tax break-up, total is considered in the table.

Appendix: ETRs For Select Companies By Sector
Top five companies per sector based on highest earnings before tax or pretax losses (where applicable)
Company name Rating Sector Pre-TCJA ETR (2016) ETR 2019 ETR 2020

Lockheed Martin Corp.

A- Aerospace/defense 23.0 14.0 16.4

General Dynamics Corp.

A Aerospace/defense 26.7 17.1 15.3

Northrop Grumman Corp.

BBB+ Aerospace/defense 23.8 11.8 14.5

L3Harris Technologies Inc.

BBB Aerospace/defense 30.9 8.0 17.7

Huntington Ingalls Industries Inc.

BBB- Aerospace/defense 26.9 19.6 14.1
General Motors Co. BBB Auto/trucks 22.8 10.3 21.9


A+ Auto/trucks N.M. 23.0 21.7

Tesla Inc.

BB Auto/trucks (3.6) (16.5) 25.3

BorgWarner Inc.

BBB Auto/trucks 32.5 37.0 41.2

LKQ Corp.

BB+ Auto/trucks 32.6 28.4 28.0

Automatic Data Processing Inc.

AA- Business and consumer services 33.2 23.7 22.5

McKesson Corp.

BBB+ Business and consumer services 27.9 N.M. 1.6

Cintas Corp.

A- Business and consumer services 36.4 19.9 17.2

Verisk Analytics Inc.

BBB Business and consumer services 30.9 20.8 20.6


BB+ Business and consumer services 32.4 6.6 12.3
3M Co. A+ Capital goods/machinery and equipment 28.3 19.8 19.7

Honeywell International Inc.

A Capital goods/machinery and equipment 24.8 17.6 19.1

General Electric Co.

BBB+ Capital goods/machinery and equipment (16.1) N.M. (9.1)

Caterpillar Inc.

A Capital goods/machinery and equipment N.M. 22.3 25.1

Deere & Co.

A Capital goods/machinery and equipment 31.5 20.7 28.2

Sherwin-Williams Co.

BBB Chemicals 29.0 22.2 19.4

Air Products and Chemicals Inc.

A Chemicals 27.8 21.0 19.7

The Dow Chemical Co.

BBB- Chemicals 0.2 (41.8) 37.3

LyondellBasell Industries N.V.

BBB- Chemicals 26.5 16.0 (3.1)

PPG Industries Inc.

BBB+ Chemicals 27.5 23.6 21.4
Procter & Gamble Co. AA- Consumer products 25.0 34.7 17.2

Philip Morris International Inc.

A Consumer products 27.6 22.9 21.7
The Coca-Cola Co. A+ Consumer products 19.5 16.7 20.3
PepsiCo Inc. A+ Consumer products 25.4 21.0 20.9

Altria Group Inc.

BBB Consumer products 34.8 N.M. 35.4

Stanley Black & Decker Inc.

A Forest products/building materials/packaging 21.3 14.4 3.2

Masco Corp.

BBB Forest products/building materials/packaging 35.6 25.2 23.8

Weyerhaeuser Co.

BBB Forest products/building materials/packaging 17.7 N.M. 18.8

Martin Marietta Materials Inc.

BBB+ Forest products/building materials/packaging 29.9 18.2 18.9

Vulcan Materials Co.

BBB+ Forest products/building materials/packaging 22.8 17.8 20.9

Johnson & Johnson

AAA Health care 16.5 12.7 10.8

Merck & Co. Inc.

AA- Health care 15.4 14.7 19.4

Amgen Inc.

A- Health care 15.7 14.2 10.7

Pfizer Inc.

A+ Health care 13.4 5.4 6.4

Eli Lilly and Co.

A+ Health care 18.9 11.9 14.3

Apple Inc.

AA+ High technology 25.6 15.9 14.4

Microsoft Corp.

AAA High technology 19.9 10.2 16.5

Alphabet Inc.

AA+ High technology 19.3 13.3 16.2

Intel Corp.

A+ High technology 20.3 12.5 16.7

Cisco Systems Inc.

AA- High technology 16.9 20.2 19.7

Netflix Inc.

BB+ Media, entertainment, and leisure 28.3 9.5 13.7

ViacomCBS Inc.

BBB Media, entertainment, and leisure 28.8 (0.9) 17.2

Activision Blizzard Inc.

A- Media, entertainment, and leisure 12.7 8.0 16.0

Moody's Corp.

BBB+ Media, entertainment, and leisure N.M. 21.0 20.3

Discovery Inc.

BBB- Media, entertainment, and leisure 27.1 3.5 21.6

Newmont Corp.

BBB Mining and minerals N.M. 22.0 21.1

Nucor Corp.

A- Mining and minerals 30.7 23.1 (0.1)

Steel Dynamics Inc.

BBB- Mining and minerals 36.2 22.6 19.1

Novelis Inc.

BB- Mining and minerals N.M. 31.8 29.8

GrafTech International Ltd.

BB- Mining and minerals 6.5 11.7 14.8

Exxon Mobil Corp.

AA- Oil (5.1) 26.3 19.5

Occidental Petroleum Corp.

BB- Oil 39.8 N.M. 13.8

Baker Hughes Co.

A- Oil N.M. N.M. (3.7)

Marathon Petroleum Corp.

BBB Oil 33.4 24.2 17.9

Schlumberger Ltd.

A Oil 14.6 3.0 7.2 Inc.

AA- Restaurants/retailing 37.5 17.0 11.8

Walmart Inc.

AA Restaurants/retailing 30.3 37.4 24.4

Home Depot Inc.

A Restaurants/retailing 36.4 23.6 23.6
CVS Health Corp. BBB Restaurants/retailing 38.4 26.3 26.3

McDonald's Corp.

BBB+ Restaurants/retailing 31.7 24.9 23.0

Verizon Communications Inc.

BBB+ Telecommunications 35.2 13.0 23.4

Comcast Corp.

A- Telecommunications 37.0 21.6 23.9

Charter Communications Inc.

BB+ Telecommunications N.M. 18.1 14.6

T-Mobile US Inc.

BB Telecommunications 37.3 24.7 22.3

DISH Network Corp.

B Telecommunications 35.8 23.2 27.1

Union Pacific Corp.

A- Transportation 37.4 23.6 23.4

Burlington Northern Santa Fe LLC

A+ Transportation 37.3 24.4 24.0

CSX Corp.

BBB+ Transportation 37.5 22.8 23.8

Norfolk Southern Corp.

BBB+ Transportation 35.4 22.0 20.4

United Parcel Service Inc.

A- Transportation 33.2 21.4 27.2

Enterprise Products Partners L.P.

BBB+ Utilities and infra 0.9 1.0 (3.3)

Southern Co.

A- Utilities and infra 27.7 27.5 11.3

Florida Power & Light Co.

A Utilities and infra 37.8 15.9 18.7
Sempra Energy BBB+ Utilities and infra 20.4 13.6 9.9

NextEra Energy Inc.

A- Utilities and infra 31.5 11.7 1.8
Note: The selected companies represent those with highest net income in each sector in 2020 excluding certain outliers. To eliminate the effect of repatriation liabilities, deferred taxes, and fiscal year differences in 2017 and 2018, we compared 2016 with 2019 and 2020. ETR--Effective tax rate (calculated as income tax expense/earnings before tax). TCJA--Tax Cuts and Jobs Act. N.M.--Not meaningful.

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Related Research

This report does not constitute a rating action.

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

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