As a candidate, President Joe Biden proposed raising the federal tax rate on corporations from 21% to 28%, so that "wealthy Americans and big corporations pay their fair share."
But after pushback in Congress, Biden decided on a different approach to making it harder for companies to avoid taxation: enacting a minimum tax rate on the income reported to investors, rather than on a company's tax return.
Critics of Biden's initial proposal to raise the corporate tax to 28% argued that it would hurt companies' competitiveness and put a damper on job creation. One important obstacle was that Democratic Sen. Joe Manchin of West Virginia, whose vote would be necessary for passage, said he opposed any new rate higher than 25%.
So when Democratic leaders assembled the final version of the Build Back Better Act — the safety-net legislation that included many of Biden's priorities — they decided on a different mechanism.
The measure, which has passed the House and is now awaiting action in the Senate, includes some significant corporate tax provisions.
The central one is a 15% minimum tax for large corporations. Notably, it is based on a company's "book income" rather than the income reported to the IRS. The law also has some more targeted provisions that impact how multinational companies' taxes are calculated.
"Book income" is what a company reports to investors and is governed by rules known as generally accepted accounting principles. By contrast, filings to the IRS are based on the U.S. tax code.
Because these two sets of rules are structured differently, a company's book income is often different from what it reports as taxable income. Under the new proposal, if the tax calculated on the book income ended up higher than the tax calculated under the tax code, the company would be obligated to pay the higher amount.
Having two different sets of rules "helps explain why some large profitable companies pay very little in federal corporate income taxes," the Urban Institute-Brookings Institution Tax Policy Center has written.
The minimum tax calculation would be required only for corporations with a three-year average book income above $1 billion. In 2019, the Tax Policy Center calculated, about 455 U.S. corporations reported pretax income above $1 billion.
However, some of these firms may not need to pay the minimum tax if they were already paying more under the regular income tax system.
Tax Policy Center analyses suggest that the different approaches to taxing corporations could help some sectors and hurt others. For instance, the tax code favors research and capital investments, so using a book rate tax could remove some deductions and credits from the calculation, hurting capital-intensive sectors such as utilities, transportation and manufacturing.
By contrast, companies that invest less in equipment and research would not be hit as hard.
The Senate Finance Committee "has suggested some tweaks around the edges" to what was passed in the House, "but nothing major," said John Buhl, senior communications manager for the Tax Policy Center.
Senate passage of the Build Back Better bill is far from certain, and the mechanism is different from the one Biden proposed on the campaign trail. But the bill remains in play, and the end result — higher taxes on some of the most profitable companies — would be roughly the same.
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