WASHINGTON – After bankers feared how democratic control of Congress and the White House would affect their bottom line, infrastructure talks could help the industry avoid a dramatic rise in corporate taxes.
President Joe Biden had campaigned for a proposal to raise the corporate tax rate to 28%, threatening to reverse much of the tax reforms promoted by former President Donald Trump.
But the Biden government appears to be stepping back a little due to the intense negotiations on an infrastructure plan, suggesting it was open to a lower rate of 25%. That 3 percentage point difference could cushion the blow of any tax plan for banks, which are more sensitive to fluctuations in corporate tax rates than other industries.
“The problem here is that banks are hardest hit by interest rate changes because, as an industry, they generally pay very close to the legal interest rate,” said Ed Mills, policy analyst at Raymond James.
Banks were seen as one of the biggest beneficiaries of the Trump tax cuts, making record profits by lowering the corporate tax rate from 35% to 21%.
“I’m ready to compromise,” said President Joe Biden, who negotiated an infrastructure deal with Senator Shelley Moore Capito, RW.Va., before their talks supposedly ended Tuesday.
Industry widely expected to pay more taxes with unified democratic control. But with the narrow majorities of the House and Senate Democrats and Republicans voting against tax hikes, signs point to a lower-than-expected tax hike.
“I think the government is already pulling back on some of the more aggressive tax increases because they will have great difficulty getting support from Congress,” said Paul Merski, group executive vice president of congressional relations and strategy for the Independent Community Bankers of America. “I think there is probably next to no Republican support for any of these tax increases.”
For weeks, Biden negotiated an infrastructure plan with Senator Shelley Moore Capito, RW.Va., hoping to find a compromise with Republicans in Congress. But these talks are said to have failed on Tuesday without a deal. A bipartisan group of centrist lawmakers, including the member of the Senate Banking Committee, Kyrsten Sinema, D-Ariz., Is to work on an alternative proposal.
Biden had originally proposed investing more than $ 2 trillion in infrastructure projects across the country. Biden’s first proposal for the American Jobs Plan included a corporate tax rate of 28% to offset the new expenses.
Biden has since scaled back his original proposal but has stated that he plans to spend at least $ 1 trillion on an infrastructure package. As his planned infrastructure investments have declined, so have his expectations of the taxes companies will pay to fund the new package.
Biden said at an event in Louisiana on Sunday that he believes the corporate tax rate should be between “25% and 28%”.
“I am ready to hear ideas from both sides,” said Biden. “I’m meeting up with my Republican friends up in Congress. … I am willing to compromise. “
Mills said developments are particularly positive for banks as they tend to pay higher effective tax rates than other industries.
“Banks are at the top end of taxpayers compared to the legal rate,” he said. “At banks there are hardly any differences between the effective rate and the statutory rate.”
Biden’s comments suggesting he is open to lowering his originally proposed corporate tax rate comes as Senate Minority Leader Mitch McConnell, R-Ky.
The CEOs of some of the largest US banks also warned lawmakers last week that substantial tax hikes would harm their customers.
“Our small and medium-sized businesses, many of which we have, are concerned that tax increases will slow their ability to invest in people, invest in new equipment, and be competitive,” said Brian Moynihan, CEO of Bank of America, the House Financial Services Committee on May 27th.
Mills said Biden is likely trying to strike a balance between those who campaigned for the Trump administration’s tax cuts and progressives who don’t believe companies pay enough taxes.
“There isn’t political support for a 28% tax hike,” Mills said. “I think Biden’s focus remains on wanting to get a message across that he’s trying to get people to pay their fair share.”
Analysts predict that the corporate tax rate is unlikely to rise to more than 25% if Biden is able to get an infrastructure bill through Congress.
James Lucier, managing director at Capital Alpha Partners, said even some Democrats were concerned that higher corporate taxes would make the US less competitive.
“Despite their willingness to raise the corporate tax rate, there is still a limit to how far the Democrats will go in Congress,” said Lucier. “A rate of 28% would give the US the highest combined federal, state, and local or national total tax rate in the Organization for Economic Co-operation and Development, and the Democrats don’t want to go there. With a rate of 25%, the US is at the top of the field, but not the highest. “