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Companies Prepare for Potential Rise in Taxes After U.S. Election

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09/17/2020 | 02:37pm EDT

By Mark Maurer and Kristin Broughton

Finance executives at major U.S. companies expect corporate tax rates to rise following the presidential election in November -- no matter who wins.

Seventy percent of executives anticipate higher tax rates after the poll, reflecting expectations that the government will have to fund recent stimulus spending, tax deferrals and other federal coronavirus-related relief, according to a survey by PricewaterhouseCoopers released Tuesday.

Democratic candidate Joe Biden has proposed to raise the U.S. corporate tax rate to 28%, up from the current level of 21%. President Trump hasn't suggested any major changes. The 2017 tax overhaul signed by Mr. Trump cut the rate to 21% from 35%.

Executives are more likely to ramp up planning for tax-policy changes if Mr. Biden wins the election, the survey among 580 professionals such as finance, operating and human-resources chiefs found. If President Trump is re-elected, executives are likely to spend more on their companies' supply chains to protect against fallout from U.S.-China trade tensions, PwC said.

Mr. Biden's proposal, which would undo several changes in the 2017 tax law, includes a new surtax for companies that make products overseas and sell them back into the U.S. Mr. Biden said he would also raise the minimum taxes on U.S. companies' foreign income and offer a 10% tax credit for certain investments in domestic production.

Finance and tax executives are modeling how these and other tax-policy changes could affect cash flows and investment decisions for their businesses.

Altria Group Inc., the Richmond, Va.-based Marlboro cigarette maker, has been running scenarios to assess how, for example, higher state-excise taxes -- levies imposed on companies for selling certain goods -- could affect revenue growth, Chief Financial Officer Sal Mancuso said.

The uncertainty caused by the pandemic has added complexity to the tax planning exercise Altria usually conducts before a presidential election. "It's challenging and we will run multiple scenarios looking at different outcomes going forward," Mr. Mancuso said.

Kansas City Southern, a Kansas City, Mo.-based railroad operator, has evaluated the differences between the candidates' tax plans, finance chief Michael Upchurch said at an investor conference last week.

The company expects that its effective tax rate -- a measure of taxes incurred under generally accepted accounting principles as a portion of pretax income -- could increase by up to three percentage points under a Democratic administration, from 27% during the three months ended June 30. "Taxes [are] clearly something on our mind, or at least my mind," Mr. Upchurch said.

Although campaign proposals are often lacking in detail, CFOs are eager to analyze how tax rates at various percentage levels would affect their finances, said Rohit Kumar, co-leader of PwC's national tax office.

Some companies are using modeling to determine how the candidates' plans would affect the after-tax return of a particular acquisition, said John Gimigliano, principal-in-charge of KPMG's U.S. tax legislative and regulatory services business. The process helps businesses decide whether to pursue a certain transaction and figure out how much to bid, he said.

Businesses that benefited from the 2017 tax cuts are now preparing for the the opposite.

Consumer-finance company Discover Financial Services clearly gained from those cuts, Chief Executive Roger Hochschild said at an investor conference this week. Its effective tax rate for the 2019 calendar year was 22.9%, compared with 40.7% in 2017.

A higher corporate tax rate wouldn't change how Discover makes decisions, but it would pinch profits, Mr. Hochschild said. "It's really just we pay more in taxes," he said.

Passing of the different tax agendas hinges on which party or parties have the majority in the chambers of Congress. To enact Mr. Biden's tax plan, the Democratic Party would have to win a majority in the Senate while maintaining its hold on the House of Representatives. To make major tax changes, Mr. Trump would need Republicans to gain the House and retain the Senate.

All 435 House seats and 35 of the 100 Senate seats are up for a vote in November.

Nina Trentmann contributed to this article.

Write to Mark Maurer at mark.maurer@wsj.com and Kristin Broughton at kristin.broughton@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
ALTRIA GROUP, INC. -1.23% 38.7 Delayed Quote.-22.46%
DISCOVER FINANCIAL SERVICES -0.88% 63 Delayed Quote.-25.73%
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