Details Emerge on Democrats’ Corporate Tax Rate Increase Proposals

Specifics for the “Build Back Better“ (BBB) reconciliation legislation have finally begun to emerge amid contentious intra-party debates within the Democratic caucus. The massive bill encompasses large portions of the Biden domestic political agenda, and debate is ongoing in Congress on the final scope of the bill and how its initiatives will be paid for.

While the final bill has yet to take definite shape, two points have become abundantly clear: Democrats want to move fast on legislation before they risk losing one or both houses of Congress in the 2022 election cycle, and that to pay for their policies Congress will pursue an increase to corporate income tax rates.

The Corporate Rate Increase

The first concrete details on the corporate rate increase emerged on September 15 when The House Ways and Means Committee approved tax increase and tax relief proposals to be sent to The House of Representatives for debate. The goals of these proposals, in addition to offsetting the cost of spending and tax benefits of the bill, were outlined in a release by the committee. Chief among these proposals was the increase the corporate tax rate from 21% to 26.5%, as well as clarification for any normalization provisions associated with the increase. 

The successful endorsement of the tax proposals by the Committee signals the beginning of opportunities for companies to evaluate and model the impact of the proposed corporate tax rate increase on existing excess deferred taxes and the creation of any new deficient deferred taxes, with specific attention paid to distinction between protected vs unprotected.

Normalization Method of Accounting

For companies subject to the normalization method of accounting, the deferred tax deficit resulting from the change in the corporate tax rate necessitates clarification on associated normalization rules. Rulings thus far have indicated that the reversal of the deficit will be governed by the average rate assumption method (ARAM), and that any method that reduces the deficit more slowly will be a normalization violation. It is worth noting that the definition of ARAM in the bill may need to be modified, as the existing definition was written to account for an excess tax reserve and not a deficit.

As was previously the case, if a company’s books and underlying records do not contain the vintage level-of-detail necessary to apply ARAM, the company may instead use the alternative method (AM) as its normalization method. Under the AM, the company would be allowed to compute the deferred tax deficit reversal period based on the weighted average life used to compute depreciation for regulatory purposes, reducing the deficit ratably over the property’s remaining regulatory life. 

Interactions of Deficiencies and Excess

The potential bill includes language which grants the Treasury authority to issue regulatory guidance for the deferred tax deficiency relative to any existing excess deferred taxes resulting from provisions of the Tax Reform Act of 1986 and Tax Cuts and Jobs Act (TCJA) of 2017. Because The House Ways and Means Committee declined to provide specific guidance for this aspect of normalization, it remains unclear whether companies could net new deficiencies against existing excess or if they must be tracked in separate calculations.

An astute observer may notice that the new bill’s language surrounding the deferred tax deficit closely resembles the language in the 2017 TCJA legislation regarding the deferred tax excess. This analogous language may potentially suggest that the amounts may be netted against one another, but it will be up to individual regulators to set reporting requirements. Additionally, the ability to model and track the resulting deferred taxes by layer provides flexibility for utilities to make strategic tax and ratemaking decisions with regard to the refund or collection of excess and deficient deferred tax positions.

What’s Next

At the time of this writing, the BBB is being debated on the floor of the House of Representatives. Speaker of the House Nancy Pelosi has scheduled a vote on the bill for Thursday, September 30, though some familiar with the ongoing debates have reported on background that she has suggested delaying the vote on the BBB so that Congress can focus on the Bipartisan Infrastructure Plan.

Though September 30 has been dramatized as a drop-dead date for the Democratic agenda, it is unlikely that the bill will be abandoned entirely if the vote is either postponed or not passed on this date. President Biden has recently downplayed the importance of such a deadline, signaling that his administration will continue to pursue this legislation if the deadline is not met. Likewise, Congressional Democrats have expressed similar sentiments. “It won’t be the end of the world Thursday if we vote it down,” said Rep. Hank Johnson (D-Ga.), a progressive caucus member. He said the House will wait for the Senate to act on Biden’s plan, “and then we’ll vote again.”

How Lucasys Can Help

With corporate income tax rate changes on the horizon, forward-thinking utilities will equip themselves with the tools they need to explore every scenario they are likely to face before they occur. Utilities should be prepared to model tax rate increases and the corresponding impacts on revenues and customer rates.

Lucasys Tax is the easiest and most flexible solution for modeling and tracking excess and deficient deferred taxes. Change between netting excess and deficient deferred taxes together and tracking them separately with the click of a button. Simulating scenarios for your tax department has never been easier of faster.

Master uncertainty by leveraging industry-leading modeling tools with Lucasys. Whether looking for new software or trying to get the most value out of existing solutions, Lucasys can provide insights into the latest tax issues of the utility industry. To learn more about how Lucasys can help visit https://www.lucasys.com/tax-depreciation-solutions.