Most contractors won’t pay more in taxes under President Joe Biden’s $2.3 trillion infrastructure proposal, while the infusion of cash to fund more public construction projects would provide a significant upside for their businesses, according to a certified public accountant who leads Ernst & Young's global construction and engineering practice.
Accountant Erin Roberts said that because the majority of construction firms in the U.S. are set up as “pass-through” entities and are not subject to corporate taxes, a proposed increase in the corporate tax rate to pay for the infrastructure package would have limited impact on them, while the trillions of dollars flowing to civil projects presents outsized opportunities to increase revenue in the coming years.
“For the construction industry in general, because of the large number of pass-through firms in the sector, they’re not likely to pay a lot more income tax with this bill,” Roberts told Construction Dive. “On the other hand, given the amount of money we’re talking about here, this could be incredibly stimulative to the sector.”
According to the U.S. Census Bureau, just 16% of nonresidential construction businesses in the U.S. are registered as C corporations, and thus subject to corporate tax rates. The lion’s share of the remaining 84% is comprised of S corporations, sole proprietorships and partnerships that are treated as pass-through entities, where their owners pay taxes on their profits at the individual rate.
In announcing the American Jobs Plan last month, the White House put out a blueprint to pay for it by raising the corporate tax rate from 21% to 28%, and Biden alluded to increasing taxes on individuals making more than $400,000 a year during a speech in Pittsburgh. This proposed bump in individual tax rates could impact owners of construction companies that are pass-through entities.
Business groups including the Associated General Contractors of America and Associated Builders and Contractors bemoaned the proposed tax increases in the plan.
"Unfortunately, much of the Biden plan ignores ABC’s infrastructure policy recommendations, while proposing tax increases on job-creating construction firms that are still recovering from the effects of the COVID-19 pandemic," said Michael Bellaman, CEO of ABC, in a statement after the plan's introduction.
But while the administration subsequently issued clear proposals for increasing the corporate tax rate to 28%, including a detailed plan released by the Treasury Department April 7, it has sent mixed signals on its commitment to raising taxes on individuals making more than $400,000 since then and has not yet released specifics on any changes to individual tax rates.
From Roberts’ perspective, backing away from raising individual rates now — a benefit to most construction company owners — could serve as a negotiating tactic in Washington to get the corporate tax passed.
“Raising individual rates wasn't a core part of the pay-for plan that they proposed” on April 7, Roberts said. “Biden himself has said, ‘Look, I'm willing to compromise. I'd like to get a bipartisan deal.’ And so there will be some horse trading over the next few months.”
To be sure, others say that doesn't mean an individual tax rate increase is off the table. In an email to Construction Dive, Matthew Turkstra, director of congressional relations for tax, fiscal affairs and accounting at AGC wrote that individual rate hikes could still be forthcoming.
"We are expecting that the second tranche of the infrastructure proposal on human infrastructure will include significant increases in S corporation taxes, including raising the individual rate," Turkstra wrote, referring to other measures in the American Jobs Plan to train millions of workers, as well as initiatives to support in-home care for older and disabled Americans so their family members can keep working.
Gains outweigh drawbacks
Still, compared to the amount of potential new revenue that the proposal would bring into construction companies’ coffers, Roberts sees raising the corporate rate as a small price to pay for contractors.
“Based on our analysis, for traditional infrastructure categories such as transit and roads and bridges, the American Jobs Plan looks to propose a nearly 30% increase in annual public spending over historical levels,” Roberts said. “So if you’re in the road and bridge market, that’s coming to you. I think that’s where it can be very accretive.”
That’s particularly true when you consider the current share of construction spending within the public sector. For example, the annualized rate for all construction spending in February was $1.52 trillion, according to the Census Bureau. But public construction accounted for just $351 billion of that number.
While Roberts notes that the American Jobs Plan proposes to spend the money over eight years, he says even parsed out, that’s a significant amount of new cash going into sectors that many feel have been neglected for decades.
“When you put $2.3 trillion of investment into an annual spend of $350 billion, that sector will be directly affected,” Roberts said. “Now, all of the sudden, those numbers start to sound really large.”
Given the possibility of minor tax impacts on the majority of contractors and the potentially outsized gains in revenue from stimulus spending, Roberts said the construction clients he works with have an increasingly positive view of the proposal.
“I would characterize my conversations around the industry with a general optimism and hopefulness around this package,” Roberts said. “When you look at the opportunities, the prevailing idea is that this could be very good for construction.”