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. This is the conclusion of a recent report, co-authored by Arizona State University’s Seidman Research Institute and Ernst & Young’s Quantitative Economics and Statistics Team (QUEST) titled, “Economic Impact of the Proposed GILTI Tax Increase on Publicly Traded U.S. Multinationals Operating in Arizona.”
The study follows a National Association of Manufacturers report, which found that changes to how U.S. multinationals are taxed abroad could eliminate up to one million jobs and $20 billion in U.S. investments across the U.S.
Arizona is currently leading the nation in private sector economic recovery post-COVID-19. However, the international tax rate changes proposed by Congress and the Biden Administration — such as the Global Intangible Low Tax Income (GILTI) tax — could potentially reverse Arizona’s positive momentum. This is particularly relevant in the technology manufacturing industry, which has been responsible for a major boost to Arizona’s economic recovery.
The purpose of this study is to estimate the economic impact of proposed legislation that would increase the Global Intangible Low Tax Income (GILTI) tax for U.S. multinational corporations with significant operations in Arizona.
GILTI operates as a form of minimum tax on certain earnings of the foreign subsidiaries of U.S.-based multinational corporations. It 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.
Focusing exclusively on publicly traded U.S. multinationals with a local employment footprint of at least 100 people in Arizona, this study determines that 266 public companies currently operating in the state could be negatively affected by the proposed changes to the GILTI rules. This is based on recent financial statements lodged with the U.S. Securities and Exchange Commission.
Drawing on the empirical literature on how changes in the foreign activity of a U.S. multinational corporation translates into changes in their domestic activity, the study estimates the total number of direct job losses at the 266 U.S. multinationals (combined). Two (point estimate) scenarios are derived with a low of 1,508 direct annual job losses and a high of 27,728 direct annual job losses in Arizona if the current GILTI proposal is implemented.
The total (direct, indirect and induced) annual job losses are estimated at 2,326 employees (low scenario) and 42,569 employees (high scenario) in the first year of the full effect of the GILTI tax increase.
These indirect and induced impacts are estimated using a REMI model, customized for the State of Arizona. REMI is a dynamic forecasting and analysis tool, developed by Regional Economic Models Inc., which takes account of variations in the economic impact of business operations and policies through time. It is widely used by business and academics throughout the United States.
Total economic impact estimates are provided one year, five years, and ten years after the full effect of a GILTI tax increase on U.S. multinationals.
ESTIMATED IMPACTS IN ARIZONA
Low-Impact Scenario
The study’s low scenario estimates 1,508 direct jobs will be lost at the 266 U.S. multinationals currently operating in Arizona after the full effect of the GILTI tax increase is implemented by those companies.
The total economic impacts of this low scenario one year, five years, and ten years after the full effect of the GILTI tax increase is implemented by U.S. multinationals are shown in Table ES1. 2 2
EY’s direct employment scenarios estimates are not assumed to immediately start in full on implementation of the proposed GILTI change. EY notes that it might take time for U.S. multinationals to make whatever changes they need in order to adapt to the higher GILTI taxes. Seidman’s total impact estimates are therefore assumed to start after the full effect of the GILTI tax increase is implemented by U.S. multinationals.
The annual loss to State GDP is estimated at $276.7 million in the first year after the full effect of the GILTI tax increase is implemented by U.S. multinationals, rising to $348.9 million in the tenth year. This equates to an annual loss of 0.07% to 0.08% of GDP in Arizona, compared to a Business as Usual (BAU) scenario in which the GILTI tax increase is not implemented.
An estimated 2,326 total jobs could be lost in the first year after the full effect of the GILTI tax increase is implemented by U.S. multinationals. In the fifth year, there could be 2,555 fewer jobs in the state. In the tenth year, there could be 2,532 fewer jobs in the state. This equates to an annual loss of 0.06% of total employment in Arizona, compared to a BAU scenario in which the GILTI tax increase is not implemented.
High-Impact Scenario
The study’s high scenario estimates that 27,728 direct jobs will be lost among the 266 U.S. multinationals currently operating in Arizona after the full effect of the GILTI tax increase is implemented by those companies.
The annual loss to State GDP is estimated at $5.1 billion in the first year after the full effect of the GILTI tax increase is implemented by U.S. multinationals, rising to $6.4 billion in the tenth year. This equates to an annual loss of 1.29% to 1.40% of GDP in Arizona, compared to a Business as Usual (BAU) scenario in which the GILTI tax increase is not implemented.
An estimated 42,569 total jobs could be lost in the first year after the full effect of the GILTI tax increase is implemented by U.S. multinationals. In the fifth year, there could be 46,872 fewer jobs in 3 The estimate of total employment job losses in Year 10 is slightly lower than in Year 5 due to the dynamic nature of the REMI model. 7 the state. In the tenth year, there could be 46,452 fewer jobs in the state. This equates to an annual loss of 1.05% to 1.14% of total employment in Arizona, compared to a BAU scenario in which the GILTI tax increase is not implemented.
There is a general consensus in the economic literature that the proposed GILTI changes could expose Arizona’s economy to a risk of growing more slowly than its current projected path (the BAU case).
The study suggests the proposed GILTI changes could result in a total annual loss of 0.06% to 1.14% of jobs in Arizona (all types of industry and firm).
The precise size of the effect is uncertain given the complexity around this issue and wide-ranging estimates in the literature used to develop both direct employment scenarios.
The GILTI proposal is part of the Biden Administration’s “Made in America Tax Plan”, which attempts to eliminate offshore investment incentives, and reduce profit sharing. It includes repealing the deduction for foreign-derived intangible income, raising the tax rate on GILTI to 21 percent, and moving from a worldwide to a country by country basis for calculating GILTI tax liability.
The study is carried out by the Seidman Research Institute (Seidman) at Arizona State University and Ernst & Young’s QUEST group (EY) at the request of Hamilton Place Strategies.
EY is responsible for identifying the range of point estimates leading to the development of low and high direct job loss scenarios. Seidman is responsible for the REMI modeling to arrive at total estimates of economic impact in the State of Arizona.
