Who Gets Hit by the Inflation Reduction Act Book Minimum Tax?

The Inflation Reduction Act attempts to raise hundreds of billions of dollars from corporations without raising the corporate tax rate through a 15 percent book minimum tax, a new alternative minimum tax applied to the financial statement income (i.e., book income) that companies report to their investors.

Economists have focused on 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, and apparently unintended penalties for various company- and industry-specific expenses. Furthermore, it would have distortionary impacts on investment, and may prove ineffective as a stable revenue raiser. As such, it is important to understand how the book minimum tax would impact different industries.

Using Compustat financial statement data on public companies and incorporating intermediate results from Tax Foundation’s Corporate Tax Model, we are able to identify the different industry effects of the book minimum tax as designed in the Inflation Reduction Act passed by the Senate on August 7th and by the House on August 12th.

While the book tax itself raises corporate tax liabilities by about $249 billion from 2023 to 2032, 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 about $197 billion from 2023 to 2032, 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 14 industries, both in dollar terms and as a share of the total pretax income of firms required to calculate the tax.

As a share of its income, the real estate & rental/leasing industry faces the heaviest burden of the book minimum tax, facing a net tax hike of 12.7 percent of its pretax book income, followed by mining, which faces a 4.6 percent tax hike. In dollar terms, the industries that would account for the largest book minimum tax liabilities are manufacturing, at $65.9 billion, followed by finance, insurance, and management at $39.4 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 and special items that show up in one income definition but not the other.

The average effective tax rate under the corporate income tax rises from 18.7 percent under current law to 19.3 percent under the Inflation Reduction Act in 2023. Manufacturing faces the highest effective tax rate, rising from 23.4 percent under current law to 23.8 percent from the minimum book tax. Mining closely follows with an effective tax rate of 23.6 percent, up from 22.6 percent under current law. Utilities and agriculture face the largest jump in the average effective tax rate, rising from 14.7 percent under current law to 23.3 percent if the minimum book tax comes into effect.

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.