President Joe Biden has proposed an increase in the United States’ Global Intangible Low-Tax Income (GILTI) tax, which applies to a category of foreign income for U.S. multinational businesses. 

The proposed American Jobs Plan Act raise the GILTI tax “from 10.5 percent to 21 percent, calculate GILTI on a per-country basis, and eliminate the exemption of the first 10 percent return on foreign qualified business asset investment (QBAI).”

A study produced by the Seidman Institute at Arizona State University’s W. P. Carey School of Business and Ernst & Young’s Quantitative Economic and Statistics Team (QUEST) concludes that an international tax increase on U.S. multinational companies operating in Arizona could create substantial economic uncertainty—and place up to 47,000 Arizona jobs at risk over the next five years.

The GILTI tax “is specifically targeted at the income earned by foreign affiliates of those companies from intangible assets including intellectual property such as patents, trademarks, and copyrights,” according to the study.

More than 260 businesses operating within the state of Arizona could face negative consequences as a result of the proposed tax hike.

Job losses and economic impact

The study released by the Seidman Institute and QUEST calculates both low- and high-impact scenarios for the proposal’s effect on Arizona’s economy.

The worst case scenario for the Arizona economy is that it loses 42,569 jobs in year one, which will increase to 46,872 in year two, and taper down to 46,452 in year three. Additionally, the state’s GDP would be negatively affected by $5,056,200,000 in the first year, grow to $5,883,000,000 in the second year, and swell up to $6,387,000,000 in year three.

While this does not mean that the state’s GDP would lose that much in GDP growth annually, each year the total negative impact of the tax increase on GDP would increase. The same goes for job losses. Each year’s numbers are cumulative.

The best case scenario for the Arizona economy is that it loses 2,326 jobs in year one, increasing to 2,555 in year two, and going down slightly to 2,532 in year three. The state’s GDP would be negatively impacted by $276,700,000 in the first year of its implementation, grow to $321,400,000 in year two, and grow once again to $348,900,000 in year three.

Once again, each year’s numbers are already cumulative.

Dr. Timothy James, director of research and consulting at the Seidman Research Institute, told Â鶹´«Ă˝Ół»­ that if the GILTI tax increase is implemented, it will negatively impact Arizona’s economy. A higher tax on foreign income exploited for intellectual property — which is the category of income that the GILTI tax applies to — will affect companies’ investment decisions.

Industries and businesses that are more dependent on intellectual property would be disproportionately affected by the policy. It won’t be the “Fords and GMs of the world” that are impacted, but tech- and software-related companies, said Dr. James. That’s because more of their foreign income is likely to be taxable under the GILTI tax.

Arizona’s post-COVID recovery

As Arizona recovers from the COVID-induced pandemic, leaders across the state are intent on keeping the momentum going. Among the top strategic objectives of Gov. Doug Ducey’s administration and pro-business leaders across the state has been the maintenance and acceleration of Arizona’s economic competitiveness.

“The Biden administration should be looking for ways to accelerate and sustain the post-pandemic economic recovery,” Arizona Â鶹´«Ă˝Ół»­ of Commerce & Industry President and CEO Danny Seiden said. “A new tax increase that creates a drag on overall GDP growth is not only the wrong policy move, but it couldn’t come at a worse time. Congress should reject this proposal.”

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Tax hikes proposed by the Biden administration place tens of thousands of Arizona jobs at risk, according to a new analysis conducted by the Seidman Research Institute at Arizona State University and Ernst & Young.

Looking for revenue to help pay for trillions of dollars in new spending, President Biden and congressional leaders have backed a $3.5 trillion package, which includes a slew of tax hikes – the bulk of which are aimed at employers and upper-income Americans. One provision in particular – a planned doubling of the Global Intangible Low-Tax Income (GILTI) rate – would hammer companies based in the U.S. but with operations overseas.

ASU Seidman and Ernst & Young found that 266 Arizona companies would be impacted by the GILTI increase. Specifically, according to the report, adoption of President Biden’s plan would:

• Eliminate up to 27,700 Arizona jobs in the first year following adoption, including as many as 42,500 total jobs if indirect losses are taken into account.
• Kill up to 46,800 Arizona jobs within the first five years.
• Reduce total economic growth in the state by as much as $5.1 billion in the first year and $6.4 billion over the course of a decade. 

“At a time when too many Arizona employers are just now recovering from the pandemic, this multi-trillion-dollar series of tax hikes is one more blow we don’t need,” Arizona Â鶹´«Ă˝Ół»­ of Commerce & Industry President and CEO Danny Seiden said. “The tens of thousands of job losses forecast by this troubling report mean further economic downturn and reduced opportunity for Arizona workers and families.”

GILTI was intended to target foreign income derived from intangible assets like software services, trademark royalties, intellectual property and more. Unfortunately, its impacts have proven far broader, placing a surtax on essentially any U.S. company that reaches customers abroad. The Biden administration has proposed doubling the GILTI rate to 21%, up from 10.5%. Arizona employers warn the increase, especially when coupled with a raft of other proposed tax hikes, will kill jobs and reduce their competitiveness in a global marketplace.

“Our economic recovery remains fragile, and these tax increases are just one more headwind for Arizona businesses to face,” said Steve Trussell, executive director of the Arizona Rock Products Association. “Many of our members have operations around the world, and these proposed tax hikes put them at a real competitive disadvantage. Ultimately, it’s Arizonans who pay the price if these damaging tax policies are adopted.”

Certain industries would be hit hardest by the GILTI increase. For example: the ASU Seidman/Ernst & Young analysis found that the agriculture, cConstruction, mining and oil & gas sectors could lose more than 4,800 jobs in the first year. The manufacturing industry risks the loss of more than 8,400 jobs.

In recent days, the National Association of Manufacturers (NAM) that found nearly 94% of U.S. manufacturers believe higher taxes would harm their business; 90% said the hikes could hurt their ability to add workers, expand facilities, or invest in new equipment.

Issuance of the report from ASU Seidman and Ernst & Young comes as House Democrats race to finalize details of their budget reconciliation bill, which is likely to include a host of tax hikes. The package is expected to come to a vote before the end of September.

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