Who Gets Hit by the Book Minimum Tax?

November 18, 2021

The current version of the reconciliation bill—the Build Back Better Act—attempts to walk a fine (politically imposed) line: raising hundreds of billions of dollars from higher corporate taxes without raising the corporate tax rate. The centerpiece of this effort is the book minimum tax, a new alternative minimum tax applied to the financial statement income (i.e., book income) that companies report to their investors.

Recent Tax Foundation analyses considered some of the problems created by the structure of the proposed minimum tax. But in addition to these problems, it will have disproportionate effects on specific industries, including its ineffectiveness as a stable revenue raiser, its distortionary impacts on investment, and apparently unintended penalties for various company- and industry-specific expenses ranging from spectrum leases to pension plans. As such, it is important to understand how the book minimum tax would impact different industries.

Utilizing Compustat financial statement data on public companies and incorporating intermediate results from Tax Foundation’s Multinational Tax Model, we are able to identify the different industry effects of the book minimum tax and refine our earlier estimate for the aggregate impact.

While the book tax itself raises hundreds of billions of dollars over the 10-year budget window, a substantial portion of that revenue is offset by the prior year minimum tax credit (for previous book tax liability, which can be used to reduce ordinary corporate income tax liability). On net, the book minimum tax increases firms’ tax liabilities by $219.4 billion over the budget window, although part of this revenue is offset by reduced revenue from the capital gains and dividend taxes paid by owners of these firms.

However, the burden of this tax is not spread evenly across industries. Table 1 presents the net tax raised from 30 industries, both in dollar terms and as a share of the total pretax income of firms required to calculate the tax.

Net Tax Hikes by Industry from the Build Back Better Book Minimum Tax over the Budget Window
Industry $ millions % of income
Coal 60 7.2
Automobiles and Trucks 10,817 5.1
Utilities 43,348 4.4
Everything Else 32,291 3.9
Construction and Construction Materials 2,865 3.4
Tobacco Products 12,017 2.5
Recreation 991 2.3
Printing and Publishing 353 2.3
Communication 30,581 2.3
Beer & Liquor 3,780 2.2
Wholesale 3,241 2
Transportation 11,019 1.7
Healthcare, Medical Equipment, Pharmaceutical Products 11,129 1
Textiles 44 0.9
Steel Works, etc. 91 0.8
Banking, Insurance, Real Estate, Trading 24,278 0.8
Business Equipment 12,368 0.7
Fabricated Products and Machinery 1,552 0.6
Petroleum and Natural Gas 9,250 0.6
Food Products 1,833 0.4
Aircraft, ships, and railroad equipment 1,161 0.4
Business Supplies and Shipping Containers 407 0.3
Retail 3,743 0.3
Apparel 74 0.1
Personal and Business Services 1914 0.1
Restaurants, Hotels, Motels 81 0
Chemicals 57 0
Consumer Goods 49 0
Electrical Equipment 0 0
Precious Metals, Non-Metallic, and Industrial Metal Mining 0 0
Total 219,394 1.3

Source: Author calculations.

Notes: Industry classifications follow the Fama-French 30-industry classification system. The first column displays the net tax hike in the industry, as book minimum tax liabilities less prior year minimum tax credits. The second column presents the net tax hike as a share of total pretax income of the affected firms. Consistent with the legal definition in the proposed minimum tax, a firm is considered affected by the tax if its adjusted financial statement income averaged over the previous three years exceeds $1 billion; once the firm becomes affected by the tax, it remains affected for all subsequent years. The book minimum tax computations are stacked on top of international tax changes in the Build Back Better Act.

As a share of its income, the coal industry faces the heaviest burden of the book minimum tax, facing a net tax hike of 7.2 percent of its pretax book income, followed by automobile and truck manufacturing, which faces a 5.1 percent tax hike. In dollar terms, the industries that would account for the largest book minimum tax liabilities are utilities, at $43.3 billion, followed by communication at $30.6 billion.

These industries are especially heavily impacted because they are at the intersection of the different book-tax gaps targeted by the book minimum tax: permanent discrepancies between the two measures from firms paying low taxes (the intended target); temporary timing differences between financial and taxable income; deliberate tax incentives created by Congress (e.g., bonus depreciation); and special items that show up in one income definition but not the other, such as amortizing investment in spectrum or mark-to-market accounting for pensions.

The book minimum tax affects industries very differently, some of which may be unintended, reflecting a tax proposal that has not been fully vetted. Before introducing a new tax on book income, and asking the IRS to administer it and taxpayers to comply with it, lawmakers should consider whether these disparate impacts by industry are consistent with their tax policy goals.

December 17th update: An updated version of the Build Back Better plan modifies the book minimum tax to exempt mark-to-market pension accounting adjustments. The analysis above refers to the House Build Back Better Act originally passed on November 19th.

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A corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

Book income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.