UNC study: Truist, Duke Energy would have owed millions in corporate minimum tax – Winston-Salem Journal

UNC researchers released their estimates of the federal corporate adjusted minimum tax in a 10-page report Sept. 21 that relied on companies’ financial regulatory filings.

Amazon was second out of 78 corporations likely subject to the tax at $2.77 billion, trailing only Berkshire Hathaway at $8.33 billion.

The local list also included: Duke Energy Corp. (eighth at $802 million); FedEx Corp. (15th at $480 million); Lincoln National Group (36th at $184 million); Truist Financial Corp. (tied for 51st at $95 million); and PNC Financial Services Group Inc. (tied for 67th at $32 million).

President Joe Biden signed into law Aug. 16 what is known as the federal Inflation Reduction Act.

One of the key — and controversial — components of the law is the minimum tax on adjusted book income.

The researchers defined the tax as “intended to collect revenue from corporations who, as a result of tax preferences put in place by Congress, had historically paid a level of tax deemed unacceptable by some.”

Zagros Madjd-Sadjadi, an economics professor at Winston-Salem State University, said the CAMT matters to North Carolinians because “overall, corporate taxes, especially when they are uniform across all companies, are not paid by corporations, but rather by people, many of whom are working class.”

How they pay “comes in the form of some combination of lower returns for investors, reduced wages for the corporation’s workers, or higher prices for the corporation’s consumers.”

According to the PriceWaterhouseCooper national accounting firm, the 15% minimum tax on adjusted financial statement income affects corporations with average annual income over a three-tax year period in excess of $1 billion.

As the bill was being negotiated in Congress, the Joint Committee on Taxation estimated that 150 firms would be subject to the tax, and it would raise $222 billion in revenue over 10 years.

The UNC researchers determined that 78 corporations would be affected in the law’s final form.

“We take into account all major adjustments to financial statement income included in the law, using what we consider the best available public data,” researchers Jeffrey Hoopes and Christian Kindt wrote.

“Our estimates suggest that the tax would have raised approximately $31.8 billion had the minimum tax applied to 2021.”

The researchers cautioned that “all estimates are subject to change, as we have a better understanding of the tax law, get better data, receive feedback, and as we are able to refine our estimation strategies.”

The insertion of the corporate adjusted minimum tax has spurred considerable mixed reactions among the corporations potentially subject to it, as well as from economists.

Truist did not respond when asked for comment on the UNC researchers’ report.

Duke Energy said in a statement that U.S. Treasury guidance governing the corporate minimum tax has not been proposed yet.

“Congress delegated a significant number of items to Treasury to set rules on for the new minimum tax regime (about a dozen), which are yet to come,” the utility said.

“However, the $800 million number cited in the study below is highly inaccurate.”

Another look

Duke Energy cited another analysis on the CAMT from TaxNotes.com, released Aug. 22, in which the utility is cited as being expected to pay an additional $69 million for fiscal 2023 based on an average annual profit of $5.11 billion for fiscal years 2019 through 2021.

Duke Energy said that while it believes the Tax Notes calculations “are not completely accurate, but are a lot closer to what we would expect for our company.”

TaxNotes.com chose to review the potential CAMT for the S&P 500, of which it determined it was applicable for 460 and 90 met all of the measuring criteria.

The TaxNotes.com calculations listed Truist with an additional $316 million tax for fiscal 2023 when calculating the CAMT based on an average profit of $5.83 billion for fiscal years 2019 through 2021.

TaxNotes.com also calculated an $8.17 billion CAMT in fiscal 2023 for Berkshire Hathaway based on an average $93.13 billion profit for fiscal years 2019 through 2021.

The estimated CAMT for Amazon was $919 million, while FedEx, Lincoln and PNC were not listed.

Other corporations with Triad ties listed by TaxNotes.com were: Bank of America Corp. ($233 million); Johnson Controls International Inc. ($110 million); and Qorvo Inc. ($8 million).

“Estimates here consider the benefits that individual companies derive from accelerated tax depreciation,” TaxNotes.com said.

TaxNotes.com also listed a series of caveats to its calculations, saying “the results in the table are highly uncertain and should perhaps be considered indicators of possible CAMT liability rather than estimates.”

“Among their many shortcomings are: the inability to predict future levels of profit and tax; the inability to align complicated aggregation rules (to be clarified by Treasury regulation) in the statute with those used for financial reporting; the limited ability to estimate business tax credits from financial reporting data; our highly uncertain estimates of tax depreciation adjustment in the calculation of adjusted financial statement income; changes in law between 2023 and the periods from which the data are drawn; and the exclusion of large businesses not included in the S&P 500.”

Mixed responses

The Tax Foundation, whose research is generally critical of tax increases, said past efforts similar to the CAMT have “either ended up as a heavy burden on investment, or as an ineffective revenue raiser.”

“If politicians want to deal with the problem of targeted, non-neutral tax breaks as a way to raise revenue, they should adjust those policies directly, rather than use a complex policy, like the alternative minimum tax that also punishes productive activity in the process.”

Madjd-Sadjadi said, “I see several issues with the CAMT proposal.”

“First, it may cause some companies to decide to spin off units to keep under the minimum thresholds that will trigger the tax. In so doing, simply by altering the operating structure, some firms may be able to reduce taxes without any other operational benefit.”

The result, Madjd-Sadjadi said, is the strategy may lead to a reduction in economies of scale.

“The tax benefits from such diversification can lead to an overall lowering of economic efficiency,” he said.

Another potential ripple effect, Madjd-Sadjadi said, is paying the CAMT on an annual basis “will likely mean lower returns to investors and pension funds, which could cause strain on retirement savings, thus weakening the ability of workers to have a financial security in retirement.”

Citing Duke Energy as an example, he said the CAMT “could mean higher energy bills, as after-tax rate of return will fall.”

“This could lead to negotiations between Duke Energy and the government to recoup this on the backs of ratepayers.”

Tony Plath, a retired finance professor at UNC-Charlotte, shares the perspective that the CAMT cost “is almost certainly going to be passed along to consumers (in the form of higher prices), employees (in the form of lower wages), and shareholders (in the form of lower equity prices).”

“But having said that, a 15% tax on billion-dollar earners certainly doesn’t seem unreasonable to me.

“But since the current statutory tax rate on North Carolina corporate income is only 2.5%, so an increase to 15% percent (after a reduction of 2.5%) certainly amounts to a major tax increase on corporate income for corporations operating in North Carolina.”

Bowman Gray IV, a local independent stock broker, projects that targeted corporations “will work to find a way to massage their adjusted financial statement income to reduce their exposure to potential future liabilities.”

“I do not think this will disrupt their day-to-day business or their profitability.”

Citing Berkshire Hathaway, Gray said the company realized a $37 billion gain after the 2017 federal tax cuts, “so its potential $8.1 billion liability seems to be only a partial claw back of that windfall.”