Biden Administration’s Tax Priorities Take Shape, Face Procedural Hurdles

During the primary and general election campaigns, tax policy was barely a few sound bites. As November 2020 approached, however, it was clear that then-candidate Biden would seek to increase the corporate tax rate from 21% to 28%, reinstate a corporate alternative minimum tax (AMT), increase the top individual rate from 37% to 39.6% for households earning more than $400,000 and increase the long-term capital gains rate from 20% to 39.6% for households making over $1 million. Since the election, the Biden Administration’s tax policy priorities for businesses and individuals have become clearer, as have the procedural hurdles such legislative action may face.

 

The policies

President Biden would raise the top marginal rate for households making more than $400,000 annually. The 20% deduction for qualified business income from passthrough entities would be phased out at this income level, and itemized deductions would be capped at 28% as under prior law. Many Democratic members of the Senate and House would like the $10,000 state and local tax (SALT) deduction cap removed, particularly those in higher tax states.

The President has also indicated his interest in returning the estate tax to 2009 levels. The exemption amount would drop from $11.7 million per person ($23.4 million per married couple) to $3.5 million per person ($7 million per married couple). (The current exemption amount is scheduled to sunset after 2025 and return to $5 million/$10 million, adjusted for inflation.) The Biden plan also would repeal the long-standing policy of stepping up the basis of assets received from an estate. While the prospects of elimination of the step-up seems remote, possible changes to the exemption amounts would be more likely.

On the business side, the President’s priority has been increasing the corporate rate from 21% to 28%. Recent remarks from more moderate Democratic members of the Senate, however, may put a rate closer to 25% in play. The tax on global intangible low-tax income (GILTI), which is currently between 10.5% and 13.125%, would be increased to 21%. President Biden also would repeal the foreign-derived intangible income (FDII) deduction for corporations that derive gross income from export activities. It is important to note, however, that Democratic members of the tax writing Senate Finance Committee would modify – rather than repeal – the FDII deduction.

President Biden has proposed several policies to encourage keeping manufacturing and jobs within the United States. First, the President would enact a new 10% “Made in America” tax credit for businesses that invest in revitalizing areas with a need, and that bring jobs back into the United States. Included would be expanded tax credits for energy and manufacturing. The proposals would also deny deductions to taxpayers that move jobs and manufacturing outside the United States. In addition, a new 10% “offshoring penalty surtax” on profits and manufactured goods and services (e.g., call centers) would be imposed on American companies that produce offshore and sell back to the U.S. market.

 

The procedure

Tax bills, like most legislation, must pass the House and Senate by a simple majority before they are sent to the President for signature. (Tax legislation must originate in the House of Representatives under the federal constitution.) Under Senate filibuster rules, however, any member of the Senate may filibuster a bill through endless speech, which can essentially derail a bill. In the Senate, to overcome – or end – a filibuster, i.e., to invoke “cloture,” it takes 60 Senators to vote to do so. In today’s partisan Washington, achieving 60 votes to invoke cloture to overcome a filibuster on tax increases is not likely.

Since 2001, to sidestep the filibuster, Congress has used the budget “reconciliation” process to enact certain tax legislation. Such was the case with the Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA) and the 2017 Tax Cuts and Jobs Act (TCJA). (The budget reconciliation process also was utilized for enactment of the American Rescue Plan in 2021.) The budget reconciliation process generally requires only a simple majority for budget-related legislation to pass the Senate without threat of filibuster. There are, however, drawbacks to use of the reconciliation procedure.

First, there are limits on the number of budget-related bills that can be passed in a year. Second, any legislation passed through reconciliation must affect spending and revenue (and have more than an incidental effect on spending and revenue). Third, the provisions in the bill cannot increase the deficit outside the budget window, which generally has been 10 years. Note that most of the provisions in both the 2001 EGTRRA and 2017 TCJA expired or will expire within their 10-year budget windows. After the provisions “expired” or “expire,” the law reverted or reverts back to what it was prior to the effective date of the law (except for the 2017 TJCA 21% corporate rate, repeal of corporate AMT, and alimony provisions, each of which are permanent).

The Senate parliamentarian has indicated that the Senate could have as many as three additional opportunities in the near future to use the budget reconciliation process to pass legislation. That, however, is not the end of the inquiry. Democratic West Virginia Senator Joe Manchin has indicated that he does not support regular use of the budget reconciliation process to pass legislation. With the current 50/50 Senate, the loss of one Democratic member could effectively derail the hopes of passing a bill through reconciliation.

Currently, there is discussion of Congress taking up infrastructure-related legislation coupled with tax changes. If we do not see a more comprehensive bill, there is discussion about infrastructure and associated tax changes appearing in several smaller bills. We will continue to watch the legislative process – and negotiation – unfold.

 

How BDO can help

As the likelihood of new tax legislation continues to grow, so does the need for careful planning around the possible changes – which could very well include increased corporate, individual and capital gains tax rates. Taxpayers should consider consulting with their tax advisors regarding the potential impact of the proposals, including consultation before engaging in any transactions.

BDO’s Tax Reform Resource Center can help keep you up to date on proposed tax changes and what they could mean for you and your business. BDO professionals are available to help analyze tax legislation and proposals and their tax impacts. For more information, contact BDO.

 

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