Dive Brief:

• Tax increases in the Biden administration’s $2.3 trillion infrastructure proposal are unlikely to impact U.S. companies’ credit profiles even if they’re fully enacted, says a Moody’s Investor Services analysis.
• As long as interest rates remain low, companies have little incentive to shift credit strategies based on tax policy, it said.
• Companies, the analysis says, “do not seem to fear taxes.”

Dive Insight:

Biden’s American Jobs Plan calls for raising the corporate tax rate to 28% from 21% and creating a 15% minimum tax for companies with net income of more than $2 billion that pay little or no U.S. income tax. 

The plan would also make tax changes for companies with assets in foreign countries. These include an increase in the global intangible low-taxed income (GILTI) tax and elimination of the tax rate on foreign-derived intangible income (FDII). 

Although these tax changes would reduce cash flow, companies aren’t expected to shift their credit strategies in response, just as they didn’t during the Trump administration after passage of the 2017 Tax Cuts and Jobs Act, the analysis said. The 2017 law slashed the corporate rate to 21% from 35%, among other things. 

“Low interest rates and the ongoing reach for yield by investors will continue to broadly outweigh pressure to reduce leverage as a result of tax policy,” Moody's said. 

Even though the 2017 law increased their cash flow, companies took on more debt and directed the tax savings to shareholders, mainly through share repurchases, not to reduce leverage or fund growth. 

Instead, companies turned to more debt to fund growth or lower borrowing costs.

“Corporate debt issuance has been surging,” the analysis says.  

The debt splurge remained high in 2020 as companies dealt with the pandemic and will likely remain high even if taxes go up.

“Low interest rates and the ongoing reach for yield by investors will continue to broadly outweigh pressure to reduce leverage as a result of tax policy,” the analysis says. 

Even Biden’s proposed 15% minimum tax on book income is expected to have little impact. To the extent any type of company is impacted, it would be among those whose debt trades at investment grade rates. But even among these companies, not even a third are expected to face a notable hit.    

Similarly, the impact of the foreign tax changes will likely be minimal. Companies most impacted would be those that are purposefully parking intangible assets in low income tax jurisdictions where they don’t have significant operations.

In sum, companies can expect reduced cash flow under the Biden changes but their credit strategies will likely remain in place. “Financial policy,” the analysis says, has “much greater influence … on U.S. corporate liquidity.”