As a unique May Tax Day approaches, we thought we would spend a little time talking about some of the tax changes in the Biden Administration’s American Jobs Act. While a lot of attention is focused on the proposed increase of the U.S. corporate tax rate from the current 21 percent to somewhere between 25-28 percent, the single largest tax change in the bill is actually how it would modify how multinational companies pay taxes on foreign income.

You probably remember the last big tax bill Congress enacted in 2017. Though taxpayers were initially promised deficit-neutral tax reform, by the end, it was an enormous deficit-financed tax cut. However, it did include some new provisions aimed at discouraging multinational companies from avoiding U.S. taxation by stashing money in low-tax countries like Bermuda, a practice known as profit shifting. Before the 2017 tax law, these companies did not have to pay any tax on this foreign income so long as they did not technically bring it back to the U.S. (never mind that much of it was probably sitting in U.S. banks). The new law created the Global Intangible Low-Taxed Income system, with the deliciously apropos acronym “GILTI,” as a way to finally tax these earnings.

In March, the Joint Committee on Taxation (JCT), Congress’ non-partisan tax analysis arm, released an analysis of U.S. international tax policy since the enactment of 2017 tax law. It found that while the changes increased business investments in things like plants and equipment, it did little to discourage the use of offshore tax havens. In fact, according to the JCT, the average tax rate for U.S. multinational companies did not increase, it fell from 16 percent in 2017 to 7.8 percent in 2018, after the law took effect. Bermuda alone accounted for almost 10 percent of all profits reported by international companies with total revenues in excess of $850 million. Bermuda taxed these earnings at a rate of 0.4 percent.

The White House, in the form of the American Jobs Act, has proposed creating a floor for U.S. taxation on foreign earnings or a global minimum tax. The proposal would increase the rate set by the GILTI from 10.5 percent to 21 percent. So, if a company like Apple records billions in profits in Ireland because earnings are only taxed at 11 percent, the U.S. would impose an additional 10 percent to bring it up to 21 percent. The U.S. is also working with the 140-country member Organization for Economic Cooperation and Development (OECD) to adopt a global minimum standard. Back in 2016, we issued a report which said:

“Congress should end the present deferral of tax on pre-reform foreign income of CFCs through a deemed repatriation and provide a permanent regime that eliminates future deferrals. To assure the competitiveness of U.S. based companies, the new rules should provide a special deduction or other mechanism that results in a 20 percent effective tax rate on this income (before foreign tax credits).”

President Biden is considering other tax reforms as well, such as the repeal of special tax treatment for fossil fuel companies, something we have also written about extensively. U.S. oil and gas companies collectively have hundreds of billions of dollars of deferred taxes on their balance sheets, much of which will never be paid. More recent efforts to evade taxes through Master Limited Partnerships allow entities to avoid corporate taxes altogether.

Last December, TCS analyzed five years of financial statements from the 20 largest U.S. oil and gas drilling companies and found startling statistics, including ExxonMobil reporting $4.4 billion in pre-tax domestic earnings from 2017 to 2019, more than any other producer, yet reported total federal taxes of negative $8 billion. That is, largely due to the 2017 Tax Act, ExxonMobil gained the ability to reduce its tax bills later by $8 billion.

But it is not just fossil fuels tax subsidies that need to go. Congress should eliminate special interest biofuels incentives such as the $3 billion/year biodiesel tax credit. New energy tax reform proposals must also avoid bringing corn ethanol tax credits back from the dead and/or subsidizing false climate solutions like bioenergy sources that have failed to reduce greenhouse gas emissions despite decades of subsidies.

Instead, Congress should consider a carbon tax. A carbon tax is an excise – or consumption – tax imposed on specified sources of carbon emissions, including carbon-emitting products. A well-designed tax would generate revenue that could reduce other taxes or the deficit, fund specific programs, or a combination of the two.

Of course, no tax policy is perfect (read: pandemic). Common sense tax policy, however, balances tradeoffs with better compliance and accountability.

While taxes are due Monday (yes, three days away!), tax policy reforms will take longer to negotiate to ensure they’re done right. At the end of it, tax policy should be fair, equitable, fund government, and ensure corporate and special interests are not benefiting at taxpayer expense.