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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate through a 15 percent book minimum tax, a new alternative minimum tax applied to the financial statement income (i.e., book incomeBook 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. ) 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 creditA 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. (for previous book tax liability, which can be used to reduce ordinary corporate income taxA 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. 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.

Table 1. Net Tax Hikes by Industry from the Inflation Reduction Act Book Minimum Tax, from 2023 to 2032

Industry	$ millions	% of income
Real estate and rental/leasing	$11,016	12.7%
Mining	$11,852	4.6%
All other industries	$44,184	3.8%
Construction	$1,772	3.2%
Transportation and warehousing	$10,861	1.8%
Finance, insurance and management	$39,378	1.3%
Wholesale trade	$1,372	1.0%
Manufacturing	$65,944	1.0%
Accommodation and food services	$1,291	0.5%
Retail trade	$3,467	0.3%
Information	$5,582	0.2%
Professional, scientific and technical services	$59	0.1%
Administrative services	$8	0%
Miscellaneous services	$13	0%
Notes: 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 main industry breakout in Table 1 follows the NAICS major industries, used in the CorpTax model. The 30-industry breakout in Table 2 follows the Fama-French classification, which sorts primarily on the type of end product. Source: Compustat financial data, Tax Foundation Corporate Tax Model, author calculations.

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 gapThe tax gap is the difference between taxes legally owed and taxes collected. The gross tax gap in the U.S. accounts for at least 1 billion in lost revenue each year, according to the latest estimate by the IRS (2011 to 2013), suggesting a voluntary taxpayer compliance rate of 83.6 percent. The net tax gap is calculated by subtracting late tax collections from the gross tax gap: from 2011 to 2013, the average net gap was around 1 billion. s 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 incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross 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 InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. 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.

Table 3. Net Tax Hikes by Industry from the Inflation Reduction Act Book Minimum Tax from 2023 to 2032, Detailed Industries

Industry	$ millions	% of income
Steel Works, etc.	$2,763	19.4%
Automobiles and Trucks	$8,882	4.6%
Recreation	$1,886	3.9%
Utilities	$42,176	3.6%
Aircraft, Ships, and Railroad Equipment	$8,759	3.6%
Petroleum and Natural Gas	$29,609	2.2%
Everything Else	$3,448	2.1%
Precious Metals, Non-Metallic, and Industrial Metal Mining	$450	1.8%
Construction and Construction Materials	$1,772	1.8%
Transportation	$9,233	1.7%
Banking, Insurance, Real Estate, Trading	$49,502	1.6%
Chemicals	$3,642	1.6%
Fabricated Products and Machinery	$4,255	1.4%
Wholesale	$1,372	1.0%
Healthcare, Medical Equipment, Pharmaceutical Products	$8,246	0.7%
Communication	$4,348	0.6%
Tobacco Products	$2,292	0.5%
Textiles	$29	0.4%
Business Equipment	$6,995	0.4%
Restaurants, Hotels, Motels	$645	0.3%
Retail	$3,467	0.3%
Food Products	1$,153	0.3%
Beer & Liquor	$362	0.2%
Apparel	$207	0.2%
Personal and Business Services	$1,308	0.1%
Printing and Publishing	$0	0%
Consumer Goods	$0	0%
Business Supplies and Shipping Containers	$0	0%
Electrical Equipment	$0	0%
Coal	$0	0%
Total	$196,800	1.2%
Note: 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 main industry breakout in Table 1 follows the NAICS major industries, used in the CorpTax model. The 30-industry breakout in Table 2 follows the Fama-French classification, which sorts primarily on the type of end product. Source: Compustat financial data, Tax Foundation Corporate Tax Model, author calculations.

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