Biden’s minimum book tax could hurt private pensions: here’s how

President Biden approved a minimum income tax that affluent corporations report to investors to help fund its sweeping Build Back Better plan.

The proposed minimum tax on accounting income would impose a minimum of 15% on corporations based on the profits they publicly report in their financial statements to shareholders. The tax would only apply to businesses that have reported more than $ 1 billion in revenue for three consecutive years.


It would preserve “the value of business credits – including tax credits for R&D, clean energy and housing – and include certain flexibilities that allow businesses to carry losses, use foreign tax credits. and to claim a minimum tax credit against regular tax in the years to come, ”according to the Three Democrats – the Sense. Elizabeth Warren of Massachusetts, Angus King of Maine and Ron Wyden of Oregon – who proposed the tax.

President Joe Biden holds his face mask and waves as he exits Air Force One at the Capital Region International Airport on Tuesday, October 5, 2021, in Lansing, Michigan. (AP Photo / Evan Vucci / AP Newsroom)

The Congressional Budget Office determined last week that the tax would generate an estimated $ 319 billion over the next decade, which would go towards paying for social spending and Biden’s climate change plan.

But one new analysis by the Non-Partisan Tax Foundation shows how the measure could inadvertently harm private pensions.

By relying on measures of income reported in companies’ financial statements, the proposed minimum tax could “fall more heavily on companies that use mark-to-market accounting for their pension plans,” wrote the Tax Foundation economist Erika York in a recent blog post.

Pensions, which provide guaranteed retirement benefits to employees, are less common today due to the rise of defined contribution plans such as 401 (k) s. But many companies still have legacy plans that offer significant sums to employees and retirees; in many cases, pension plans are significantly underfunded.

President Biden speaks on the economy in the Eisenhower Executive Office Building in Washington, DC on Tuesday, November 23, 2021. (Oliver Contreras / Bloomberg via Getty Images)

Over the past decade, more than a dozen companies have chosen to use “mark-to-market” accounting for pensions and other defined benefit plans, a method that recognizes gains or losses. actuarial in the year they occur, rather than looking at changes over time. In short, it is a way to measure the assets of a business or individual based on current market conditions, providing a more accurate representation of assets and liabilities. The mark-to-market system can introduce great year-to-year volatility in financial statement revenue that exceeds $ 1 billion for some companies, largely due to fluctuations in the value of financial statements. pension plan investments and interest rates.


The problem is, the Democrats’ 15% minimum tax on large business accounting income would factor in mark-to-market pension accounting – even if businesses cannot use pension funds for their operations, has York writes. While it makes sense that changes in pension obligations are included when companies provide investors and markets with a direct snapshot of their financial health, “it does not make sense to incorporate changes in pension assets (or retirement costs) into the tax base, ”she said. wrote.

“This could create ‘ghost income’, where a company’s income under the accounting minimum tax could increase when its pension plan increases (or decrease when it decreases),” York said. “These effects could be exacerbated for companies that use mark-to-market accounting, as it can lead to particularly volatile changes in a company’s reported profits.”

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