For Iowa: Rubio tax and economic plans take the middle ground
In the last article of our three part series on the Republican candidates and their major economic policies impacting Iowa, we review Florida Senator Marco Rubio and his key programs for business. Like Trump’s plan, Rubio’s plan cuts the 35% nominal corporate tax rate, limits the tax rate on pass-through business income, and enacts a one-time tax on deferred foreign income. Like Cruz, Rubio is in favor of free trade pacts like the TPP, but unlike Cruz, he voted to provide President Obama “fast track” trade negotiating powers which would allow for an up or down vote in Congress on the deal. Lastly, Rubio supports policies that encourage the production of American-made energy, including oil, coal, natural gas, and renewables.
Rubio’s Plan on Tax Reform, Free Trade and Energy
Rubio’s tax plan seems to be a hybrid of the Trump and Cruz plans, as if he were perhaps positioning himself midway on the political spectrum between these two rivals.
According to the Tax Foundation, here are the major components of the plan:
- Reduce the corporate income tax rate from 35 percent to 25 percent.
- Limit the tax rate on pass-through business income (sole proprietorships, S corporations, LLCs, and partnerships) at 25 percent.
- Allow full (tax deductions on all) expensing of all capital expenses.
- Eliminate most business tax credits and deductions.
- Enact a territorial tax system that allows a 100 percent exemption on dividends received from controlled foreign subsidiaries.
- Enact a one-time deemed repatriation tax of 6 percent on all foreign profits currently deferred.
- Eliminate the deductibility of interest paid for businesses but exempts interest income from taxation.
As stated in previous articles, Rubio’s election doesn’t guarantee enactment of these tax provisions by Congress. However Speaker of the House Paul Ryan has stated that he wants to move forward in 2016 on international tax reform, thereby making 2017 a likely time for a larger tax reform package.
On trade, Senator Rubio has voted to give President Obama “fast track” or TPA to negotiate the Trans Pacific Partnership free trade deal. In a WSJ op-ed on April 29th, Rubio wrote, “To this end, the Trans-Pacific Partnership (TPP), discussed between President Obama and Prime Minister Abe this week, will further our strategic goals in Asia and increase prosperity at home. It will advance economic liberty and unleash free-market forces in the world’s most dynamic region. It will create the opportunity for emerging economies to become the next ’tigers’ of Asia and enhance linkages between nations in the Western Hemisphere and East Asia.” However, he also has stated that he wants to see the details of the deal before agreeing to support it.
On energy, Rubio wants to expand many energy sources including oil, coal, natural gas, and renewables. From marcorubio.com, here are the details of his energy program:
Optimize America’s Resources
- Empower States and Tribes to Control Onshore Energy Development Within Their Borders
- Rewrite the Obama Administration’s Flawed Five-Year Offshore Drilling Plan
- Immediately Approve the Keystone XL Pipeline
- Immediately Lift the 1970s-Era Ban on Crude Exports
- Expedite Approval of American Natural Gas Exports
- Defend U.S. Interests in International Climate Negotiations
- Bolster the Energy Security of U.S. Allies
- Conclude TTIP Negotiations Without Restrictions on Access to U.S. Energy Exports
Minimize Government Bureaucracy
- Create a National Regulatory Budget to Limit the Power of Unelected Regulators
- Stop President Obama’s Carbon Mandates
- Expose the True Costs of Environmental Litigation to Taxpayers
- Simplify and Improve the Environmental Review Process
Maximize Private Innovation
- Reform Our Outdated Higher Education System to Support Energy Jobs of the Future
- Facilitate Private-Sector-Led Development of New Technologies
- Overhaul the Tax Code and Cut Taxes for Business of All Sizes
Rubio, Cruz and Trump would all approve the XL Keystone Pipeline. Furthermore, Rubio and Cruz both want to end EPA regulations like the Waters of the U.S. rule and the Clean Power Plan. However, Rubio does lay out the broadest, most detailed plans on energy.
Impact on Iowa
As we did in our analysis on Trump and Cruz, we’re going to focus on these top areas: manufacturing, finance and insurance, and exports (including agriculture).
On business tax reform, Rubio’s plan, which is similar to Trump’s plan for lower corporate and pass-through tax rates, would enhance economic growth in Iowa. However, Rubio’s plan cuts the nominal 35% tax rate to 25% as opposed the Trump 15% or the Cruz 16% flat tax. Also like the Trump plan, Rubio’s plan caps the tax rate on pass-through business income (sole proprietorships, S corporations, LLCs, and partnerships) at 25 percent, compared to Trump at 15%. Both Rubio and Cruz advocate full expensing for capital expenditures.
Like Trump and Cruz, Rubio has a one-time tax on foreign held profits, but his is only 6% versus Trump’s 15% or Cruz’s 10%. Unlike either Trump or Cruz, Rubio moves from an extra-territorial tax system to a domestic tax system and eliminates any tax on foreign earned profits. Cruz eliminates most business tax credits and deductions, including the deductibility of interest paid for businesses but exempts interest income from taxation.
Wrapping up the tax changes, the Rubio plan would benefit Iowa’s top three business sectors significantly by instituting lower tax rates and full expensing. For manufacturers, the full expensing would greatly reduce the cost of investment as they would be allowed to fully deduct the cost of any investment in plant and equipment in the year it was made instead of depreciating it over 10, 20 or 30 years. Financial firms would lose the deductibility of interest costs, but would benefit from the lower tax rate and increase in capital formation.
On trade, Cruz’s free trade stance and support for TPP (if passed) would create significant winners to the Iowa export sector, especially agriculture. As we’ve seen in the Cruz analysis, a wide range of important Iowa industries would benefit from this treaty and it would likely lead to an expansion of the state’s economy.
On energy, Rubio’s support for all forms of energy production, including renewables, is a major positive for ethanol production. This benefits Iowa corn growers and ethanol producers. However, with the RFS mandate come higher corn prices and increased volatility within the Iowa economy as its fortunes become more closely tied to the energy markets. (See Cruz energy analysis)
Points to Keep In Mind for Iowa
As was pointed out in the first article, Iowa has vibrant, diverse economy that is a microcosm of the entire US economy. Therefore, changes to the US tax code, trade and energy policy matter significantly to the state. Candidate Marco Rubio has many policies that are similar to those of Trump and Cruz in that they promote growth by reducing the overall tax burden on US businesses. By far, the best proposal that Rubio shares with Cruz is the full expensing of capital expenditures, as this is the major driver of growth for the Iowa and US economies. Rubio cuts the dividend repatriation tax the most and moves to a full territorial tax system, eliminating taxes on foreign profits. This encourages companies in Iowa and US to use their earnings in the most efficient way and discourages them from deploying foreign earnings overseas to build plants, buy foreign companies, or invest in new foreign technologies. Finally on energy, Rubio supports the current renewable structure on RFS and ethanol production.