After talks stalled with key Republicans, the White House has turned to a group of bipartisan senators — including senators from the Northeast — to continue negotiations on a robust infrastructure package. If their goal is to create jobs and strengthen the Northeast’s recovery, they ought to urge President Biden to reevaluate a harmful tax hike in his infrastructure proposal — a policy you’ve probably never heard of: The Global Intangible Low Tax Income.
The Northeast is home to hundreds of companies that sell their products abroad. Toothpaste manufacturers in New York, electronics companies in Connecticut, defense contractors in Massachusetts — these types of businesses power our local economies in the states largely because of their global success. Workers for these businesses take pride in knowing they are the force behind products and services that the world depends on.
But the recession sparked by the coronavirus pandemic has hit these workers hard, making their futures less certain. Now, just as they’re trying to recover, President Biden is actively pursuing a tax change that would stifle the success of US companies, reduce wages, and result in fewer good-paying jobs across the Northeast.
Biden’s proposal calls for doubling the GILTI. This law is a complex, broken tax that US multinational companies pay on what they sell abroad. Republicans’ intent when creating GILTI was to prevent companies from shifting their intellectual property overseas, to avoid taxes, and to keep jobs anchored in the United States.
While the broader Tax Cuts and Jobs Act of 2017 succeeded in stopping these practices — known as inversions — by making the United States more competitive, GILTI further complicated the tax code for companies with a global business model, setting many of their effective tax rates well above the current corporate rate of 21 percent. Biden has proposed doubling down on Trump’s GILTI tax as a way to raise revenue and keep more jobs at home, but, if successful, he would be raising tax rates only on US brands that pay this tax — not on our foreign competitors.
What’s worse, the impacts of doubling the federal GILTI rate would be amplified by many state tax codes across the country, which automatically follow this law. This would amount to automatic tax increases in dozens of states — including for companies in Maine, Massachusetts, New York, Rhode Island, Vermont, and more throughout the Northeast.
In other words, the Biden proposal would make doing business in Texas or Nevada more attractive than in Delaware or New Hampshire, and more attractive to be headquartered in Ireland than anywhere stateside.
There are ways to finance infrastructure without dinging American competitiveness or harming US workers. User fees, such as a gas tax, while objectionable to some in Washington, are a proven way to help fund large-scale projects while allowing those who would benefit most from these plans to have a stake in the action. Alternatives like a carbon tax could also help the president meet environmental and revenue goals, all without hindering the ability of Northeastern businesses to sell abroad, expand their operations, and invest in their workers.
When it comes down to it, many of these Democratic senators voted against the GILTI tax when it was passed as part of the 2017 tax reforms — and there’s no good reason to embrace doubling it now.
Scott A. Hodge is president of the Tax Foundation, a nonprofit research organization in Washington, D.C. Daniel Bunn is vice president of global projects at the Tax Foundation.