A last-minute change that U.S. senators made to their tax bill before passing it early Saturday morning would result in higher-than-intended taxes for technology firms and other corporations, tax experts said.

In a shift now under scrutiny by corporate tax officials and lawmakers alike, Senate tax-writers made an unexpected decision to keep the existing 20 percent alternative minimum tax for corporations—a move that imperils GOP promises of business growth and more hiring, tax lawyers and lobbyists said.

Keeping the provision—which had been set for repeal in an earlier version of the bill—was “a very unpleasant surprise,” wrote Caroline L. Harris, chief tax counsel for the U.S. Chamber of Commerce, in an article titled “The Alternative Minimum Tax Bombshell.” The chamber and other groups are calling for repealing the AMT.

Under current law, the corporate AMT serves as a kind of insurance policy designed to prevent companies from using various breaks to pay too little tax. But because the Senate bill would also cut the regular corporate income tax rate to the same 20 percent level, the AMT would hit virtually every U.S. company, according to experts.

“The fact is, almost everyone who’s a corporate taxpayer is going to be an AMT taxpayer” under the bill, said Bret Wells, a tax law professor at the University of Houston.

As a consequence, planned tax breaks in the Senate bill related to intellectual property and to spending on new equipment—along with the existing research and development tax credit—would lose their effect.

Trump’s Forecast

Technology firms and utilities might be hardest hit by retaining a 20 percent AMT in the tax legislation—factors that appeared to weigh on the stock market Monday. The Standard and Poor’s 500 Index fell 0.1 percent.

It wasn’t supposed to be that way—at least according to President Donald Trump.

“The stock market, I think, is going to have a very big day based on the massive tax cut that we’re very much in the process of getting approved,” the president said Monday morning. The only thing that hurts share prices, Trump said, “is the fake news, and there’s plenty of that.”

A simple “drafting error” most likely left the AMT in the Senate bill at 20 percent, said Jennifer McCloskey, director of government affairs at the Information Technology Industry Council, a group that represents tech companies including Google, Oracle and Amazon. Congress should repeal the AMT completely or cut it to a level proportionate to the new 20 percent corporate tax rate, she said.

Addressing the AMT will be one of her group’s “top priorities” going forward, McCloskey said. In Washington, the House and Senate are set to begin working this week on melding the different aspects of their tax legislation into one bill.

Existing Rules

Under existing rules, every corporation must calculate its tax bill according to both the regular corporate income tax and the AMT, and pay whichever’s higher. With the AMT at 20 percent and the current corporate rate at 35 percent, most companies end up paying tax calculated at the higher regular corporate rate.

The U.S. Capitol building stands before sunrise in Washington, D.C.
Andrew Harrer/Bloomberg

“As a policy matter, the AMT rate is supposed to be lower than the regular income tax rate,” said Neil Barr, head of the tax department at law firm Davis Polk & Wardwell LLP.

Backing the corporate AMT out of the Senate bill now would mean giving up roughly $40 billion worth of revenue over 10 years—an amount that’s not prohibitive in the context of legislation that’s estimated to cut federal revenue by roughly $1.4 trillion over a decade.

“It would be nice if we could figure out a way” to dump the tax in a House-Senate conference committee that will aim to merge the chambers’ differing versions into a final bill, said Senator John Thune, the chamber’s third-ranking Republican leader. Thune, of South Dakota, said lawmakers were analyzing the AMT’s impact on Monday.

‘Work as Intended’

Julia Lawless, a spokeswoman for the tax-writing Senate Finance Committee, said lawmakers would work to make sure that tax breaks—like the Research and Development tax credit— “work as intended.”

Still, the AMT’s interactions with other portions of the Senate bill might pose stricter challenges.

In crafting the broadest tax overhaul in three decades, House and Senate lawmakers intend to shift the U.S. to a system that largely taxes corporations on their domestic profits only. But they also plan to erect guardrails aimed at preventing companies from sending taxable income overseas to affiliates in countries with even lower—or non-existent—tax rates.

In the Senate bill, those guardrails consist of new taxes that would come with special deductions aimed at inducing companies to hold valuable I.P. in the U.S. But retaining the AMT would prevent companies from using the deductions—resulting in higher than planned rates.

One such levy on “global intangible low-taxed income,” or GILTI, would start at 10 percent and increase to 12.5 percent in 2026. The initial rate reflects a 50 percent deduction on that income. Another measure would create a separate 12.5 percent tax on “foreign derived” income from intangibles that comes specifically from trade or business in the U.S. That rate would spike to 15.625 percent in 2026.

BEAT Provision

And a third new provision, called the “base erosion and anti-abuse tax,” or BEAT, applies to certain payments that companies make to their overseas units. For most companies, it would begin at 10 percent, growing to 12.5 percent in 2026. For global banks and securities dealers, the rates would be 11 percent and 13.5 percent, though they’d be allowed to deduct payments tied to derivatives.

Retaining the corporate AMT would also affect companies’ ability to use full and immediate write offs for capital spending on plants and equipment—which the legislation’s backers have billed as one of its main pro-growth provisions. That deduction would be available for five years—and then, under the Senate bill, it would phase out in later years to lower levels. Taking such deductions isn’t possible under the current corporate AMT rules, which apply far more restrictive limits on depreciation.

Because the AMT “doesn’t seem to work with some core elements of the overall tax reform package, it can’t survive conference in its current form,” said Michael Mundaca, the co-leader of the Ernst & Young Americas Tax Center.

Keeping the AMT “eviscerates the impact of certain pro-growth policies like the R&D tax credit and exacerbates the international anti-abuse rules,” wrote the Chamber’s Harris.

Only 10,222 corporations filed returns for 2013 showing that they owed the corporate AMT, according to the latest Internal Revenue Service data. That’s less than 0.2 percent of the 5,887,804 corporate returns filed that year.

—With assistance from Gerrit De Vynck

Bloomberg News