A raft of corporate taxes are rising just as the US economy faces heightened risks of a recession, threatening to prolong financial woes for many businesses and consumers.
Starting this year, businesses will face a higher federal tax burden thanks to several key changes in the Health and Climate Protection Act that Democrats passed over the summer. Additionally, key provisions of the 2017 Republican tax reform are scheduled to expire this year.
Collectively, the tax hikes are expected to cost businesses about $115 billion this year — a big increase from previous years, according to the Joint Committee on Taxation.
“We are very concerned about the impact of tax increases in a recessionary environment,” Chris Netram, managing vice president of tax and economic policy at the National Association of Manufacturers (NAM), told FOX Business. “Some of the items already in place that Congress did not reverse late last year are causing our members a great deal of pain.”
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Among the increases coming into effect this year is a minimum tax of 15% for companies based on the profits they report publicly to shareholders in their financial statements. The minimum book tax would only affect companies with more than $1 billion in income. The levy — a key element of the anti-inflation bill — would affect about 200 of the country’s largest companies with profits above $1 billion, which pay less than the current 21% corporate tax rate, Democrats said.
This expense bill also included a 1% tax on share buybackswhich only apply to listed companies.
Experts expect that the two taxes will weigh on the 2023 result Goldman Sachs forecasts a 1.5% per share decline for S&P 500 companies. The earnings declines due to the low effective tax rate are expected to hit sectors like healthcare and IT.
UBS strategists led by Solita Marcelli, meanwhile, predicted that the new taxes would have a “very minimal 1% impact on S&P 500 earnings per share, although some companies will be hit harder than others.”
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These changes come on top of other corporate tax increases introduced last year to fund Republican tax cuts for 2017 and will remain in effect through 2026. These include the phasing out of a 100% bonus write-off, stricter limits on interest withholding and increases in international tax rates.
Another provision requires companies to amortize deductions for research and development expenses over five years, rather than taking them all at once. Nearly 180 finance chiefs urged lawmakers in November to reverse course and repeal the law before the end of the year, but Congress failed to reach an agreement before its final session in December.
Aerospace and defense firm Raytheon Technologies said in October that the change had already increased its tax bill by $1.5 billion.
Goldman Sachs expects changes in R&D, interest and bonus amortization to increase the effective corporate tax rate by 1.6 percentage points this year, which would amount to a “small” reduction in profits.
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“Corporate tax policies that go into effect in 2023 should have a small impact on overall S&P 500 returns, but the impact will vary by sector,” the bank said in a research note earlier this month.
Netram said NAM is lobbying lawmakers to reverse the changes, particularly around research and development, noting it has bipartisan and bicameral support.
“For this current congress, we’re starting in a really strong place,” he said. “There is broad support for stopping these tax increases from taking effect.”