The two runoff elections in January to choose Georgia’s senators could have a direct effect on the bank balances of companies nationwide. That’s because Georgia’s voters will determine which party controls the Senate, which in turn will heavily influence whether President-elect Joe Biden’s business tax proposals become law.
The stakes are high. Biden has advocated for several tax increases on companies, starting with a substantial increase in the corporate tax rate, currently 21%. “There is this dynamic that Presidents do come back to the topic of tax over and over again,” says John Gimigliano, a principal at KPMG who previously served as senior tax counsel for the House Ways and Means Committee. “What does this tell us? Taxes are the Swiss Army knife of policy implementation—a one-size-fits-all tool for doing indirectly what you might not be able to do directly.”
Even if the Democrats don’t achieve a Senate majority, they’ll have another shot at it in 2022. In that year—as in this one—more Republican-held seats than Democrat-held seats will be on ballots at 21 vs. 13.
The following conversation has been lightly edited.
Fortune: We could talk about the fine points of Joe Biden’s business tax proposals, but maybe they won’t matter. Does it all just depend on what happens in those two Georgia runoff elections?
Gimigliano: I always like to say the world isn’t as simple as it seems, but sometimes it is. If the Republicans are in control of the Senate, they’re just not going to agree with virtually anything in the Biden tax plan. There may be some areas they can work on, but overall, the majority of the Biden plan is off the table in that scenario, and we’re waiting to see what happens in 2022.
The best the Democrats can do this year is a 50–50 split, with the vice president breaking tie votes. Would that slim margin restrict them because they’d always have to please the most moderate Democratic senator?
I would argue it’s even more than just the most moderate senator. It’s really all 50. All 50 senators in that scenario understand the leverage they have, and it’s a dramatic amount of leverage. Each one can hold out at any time to get more or less what they want. That’s really a complicating factor because the bills tend to grow. You need this, you need that, you need this—the bills get bigger. And not only that, but as you give this thing to Senator A, Senator B says, “You just got Senator A’s vote, but you just lost mine because I can’t stand that thing that Senator A got.” So it’s like Rubik’s Cube—it’s not impossible, but it’s complicated.
It’s at least conceivable that Congress could enact some of Biden’s business tax changes. What if they increased the corporate tax rate from 21% to 28%, as he has proposed?
The corporate rate makes everything go, and changing it seems simple: You just strike one rate and insert a new one. But the corporate rate has tendrils that extend to everything else and make it easier or harder. Yes, they could raise the corporate rate. It won’t be easy, especially in an economic recovery, which we will almost certainly be in next year. At 28% it makes the U.S. look like a little bit of an outlier again in the global community, especially when you add on the state taxes we have. And it puts pressure on U.S. companies in terms of where and how they invest. That’s something people had to rethink after the rate was lowered in the Tax Cuts and Jobs Act of 2017, and I think they’d be rethinking it all over again.
Biden has also proposed a sort of Alternative Minimum Tax on companies. Would that have a better chance of enactment?
By the very nature of it, you could say it’s easier to do in an economic recovery because it would only tax companies with profits of $100 million or more. The message is: You should just pay your fair share. That’s exactly how Biden talks about it. If the Democrats get the Senate majority, he could rally them, saying, “Look, we’re going to hold off on a corporate tax rate increase until the economy’s on firmer ground, but at a minimum, we should get these companies that are otherwise profitable to pay their fair share.”
Many business people say divided government is nirvana because it removes the possibility of radical changes. Is that valid?
The IRS has issued something like 7,000 pages of guidance on the TCJA. To put all that in a bonfire and start over is not something the corporate community is ready to do just yet. They’re still trying to figure out how that law affects them. For most businesspeople, stability in a system is viewed as the best possible outcome, and divided government historically provides greater stability.