Monday Musings: April 5, 2021

Apr 05, 2021

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Public Trust Credit Team
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Biden Administration unveils $2.3 trillion infrastructure proposal

Last Wednesday, the White House detailed its infrastructure proposal; here are the main takeaways and what we feel they mean for high-grade credit:
  • $620 billion for transportation including $174 billion for investment in electric vehicles (EVs). Construction to update America’s infrastructure such as bridges and roads is the bread & butter of the bill with the most bipartisan support. Government contracts tend to be well-paying and with much of the work going to companies such as Caterpillar, Deere, and others, this should be a boost for the industrials names in which we invest. The investment in EVs has less obvious effects; it could harm oil & gas companies if adoption is strong through it will likely just provide a small boost to EV manufacturing that covers most global car manufacturers at this point.
  • $300 billion to manufacturing primarily targeting domestic manufacturing. Much of the manufacturing spending targets green initiatives. However, spending earmarked for semiconductor manufacturing has a chance to have a high impact on the U.S. Intel has already made plans to open a new foundry in Arizona, suggesting that the bill is working. Right now, Taiwan is the world’s destination for semiconductor manufacturing, so if the U.S. can capture some of that market share, it would be additive to jobs for companies that specialize in the manufacturing components.
  • Approximately $250 billion for research. The Biden Administration unveiled large spending on research surrounding semiconductor manufacturing and advanced computing.
  • Approximately $215 billion for affordable housing. Likely be the most challenging as the domestic housing market has shown no signs of declining since the Great Financial Crisis, investment in housing might boost housing starts, potentially providing a boon for domestic construction and industrial companies.
  • The rest of the spending is spread across areas like home- and community-based care for the elderly and disabled as well as education investments. The effects of this spending on credit and the economy are less clear.

How the Biden Administration’s infrastructure investment plans could impact corporate taxation

To pay for his infrastructure plan, President Biden is calling for $2 trillion in corporate tax increases over the next 15 years, proposing a raise in the corporate tax rate from 21% to 28%. The proposed tax increase, which would take effect as soon as January 2022 given legislative approval, would essentially reverse the 2017 Federal tax cuts for large, publicly traded companies (though the 28% tax rate is still lower than the 35% rate before the 2017 tax cuts). According to analysts in a recently published article in the Wall Street Journal, the corporate tax hike could reduce earnings for S&P 500 companies by at least an estimated 10%. However, the additional cost to companies will not be equally distributed as those with a higher proportion of domestic earnings will be more directly impacted by the rate increase while multinational corporations will be more affected by changes to the minimum tax on foreign income. 
 
The Biden Administration plans to raise the minimum tax on foreign income from 10.5% to 21%. The proposed increase in the corporate tax rate is likely to have a more significant impact on the same companies that experienced the greatest benefits from the 2017 corporate tax cut, most notably utilities, regional banking and insurance groups, and large domestic retailers. Because of the changes to international taxation, we may see a return to companies opting against repatriation of their earnings, leading companies to keep more of their cash abroad and inaccessible. To combat this, the Biden Administration has begun a global campaign with Janet Yellen calling for a 21% global minimum tax rate in an effort to equalize tax schemes across the globe.  
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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