The Biden administration’s Made in America tax plan proposes raising the Global Intangible Low Tax Income (GILTI) tax rate on U.S. multinational corporations from 10.5% to 21%. A recent study conducted by Arizona State University’s (ASU) Siedman Research Institute and Ernst & Young’s Quantitative Economics and Statistics Team (QUEST) estimates that the tax hikes on 266 multinational corporations with 100 or more employees in Arizona would cause 1,508 to 27,728 direct job losses one year after the increase takes effect.
“The GILTI tax is basically a tax on earnings in foreign countries for U.S.-domiciled corporations that exploit copyright, trademarks, intellectual property or other intangibles for profit. In other words, not physical capital,” says Tim James, director of research and consulting at the Seidman Research Institute.
“Google is a good example,” James continues. “You could argue that it has products, but it’s more of a service that’s based on intellectual property that’s been developed over a 20-to-30-year period. The company leverages its search engine to sell advertising and make a profit on the enterprise.” In contrast, a U.S.-based bottle cap manufacturer that opens a factory in Germany would not be subject to the GILTI tax.
According to the Made in America plan, three reforms to the GILTI tax, first established by the 2017 Tax Cuts and Jobs Act, would create a more level playing field between domestic and foreign activity on the behalf of U.S. companies. Along with the rate increase, the reforms would eliminate the exemption for the first 10% return on foreign assets and change the calculation of the GILTI minimum tax to a per-country basis, meaning multinational companies could no longer use tax havens to shield income from U.S. taxes.
Per the administration’s fact sheet, “Transitioning to a per-country GILTI minimum tax is estimated by scorekeepers at both the Treasury Department and the Joint Committee on Taxation to raise more than $500 billion in revenue over a decade — beyond the current estimated corporate tax revenues generated from the poorly designed GILTI regime.”
Effect of tax hikes on Arizona
James and his co-authors were approached to calculate the potential job loss that could arise from the tax increase. The researchers identified 266 public companies in the state of Arizona with at least 100 employees that had foreign earnings that could be subject to the GILTI tax. Since the proposed change relates to an existing tax, James says that organizations that are liable to the GILTI tax already pay it.
“Stage two was to figure out what the impact of a rise in the tax rates on the exploitation of intellectual property will be. At that point I said to the team, ‘Hold on, is anybody here an accountant? Does anybody know anything about tax accountancy? They said no,’” James recalls.
To get an accurate estimate, two members of Ernst & Young’s QUEST team were brought on board to calculate what they thought the impact of raising the tax rate would have on employment at the 266 corporations.
“That’s where two base numbers come from. There could be a reduction of 1,508 jobs within the state as a low figure, and the high figure was 27,728,” James continues. Arizona’s growing manufacturing sector could see anywhere from 460 to 8,486 direct job losses.
Using an economic forecasting and analysis model called REMI, the authors were able to identify indirect and induced job losses too. For example, indirect job losses happen when a corporation shrinks and buys fewer materials from suppliers, which causes the suppliers to lay off employees in response. Similarly, induced job losses consider the fact that if you have more unemployed people within the state, they have less money to spend, so sectors would have less demand for their products, which results in job losses.
The impact of direct, indirect and induced annual job losses is estimated at 2,326 employees in the low scenario and 42,569 employees for the high scenario in the first year of the full effect of the GILTI tax increase.
One limit to the research, James points out, is that it does not consider the potential positive impact of the additional taxation revenue raised by GILTI.
“If the federal government, which would be collecting this tax, decided to spend the revenue on job generation, it may completely swamp the reduction in jobs that will take place as a result of imposing the taxes in the first place,” James explains. “We’re just assuming that the taxes get taken from these 266 corporations and their job footprint is reduced as a result of that. But we haven’t said what the federal government may do with the money.”
The study concludes that the proposed GILTI changes could dampen Arizona’s economic growth compared with the status quo and may result in a total annual loss of 0.06% to 1.14% of jobs in Arizona across all industries.