Biden administration tax priorities: prospects for enactment
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Alan Winston Granwell
Holland & Knight, Washington, DC
Alan.Granwell@hklaw.com
Ronald J Klein
Holland & Knight, Fort Lauderdale/Washington, DC
Ron.Klein@hklaw.com
William M Sharp
Holland & Knight, Atlanta
William.Sharp@hklaw.com
Meital Stavinsky
Holland & Knight, Miami/Washington, DC
Meital.Stavinsky@hklaw.com
Introduction
For the first time since 2011, the Democrats control the executive branch and both houses of Congress. Democratic control increases the legislative prospects for passage of some of the Biden Administration tax priorities, although the slim margins by which the Democrats control the House and the Senate circumscribe the types of tax proposals that may be enacted.
In this article, we review the electoral developments that resulted in Democratic control of the White House and legislative branches, outline the Congressional pathways for enactment of tax legislation, overview the tax priorities of the Biden administration and comment on the prospects for enactment of tax legislation.
Electoral developments
When the votes were tallied (after all of the electoral challenges mounted by President Trump and the Republicans) in the 3 November Presidential election:
• The Presidency: Democrat Joe Biden won.
• The House of Representatives: the Democrats controlled the House, albeit narrowly – of the 435 House seats, Democrats hold 221 seats and Republicans hold 211 seats.[1]
• The Senate:
? prior to the 5 January 2021 Georgia Senate runoff election the Republicans controlled the Senate (50/48) – Republicans held 50 seats, Democrats held 46 seats (plus the two seats of independent senators Angus King of Maine and Bernie Sanders of Vermont, that caucus with the Democrats).
? after the Georgia Senate runoff election, the Democrats won the two Georgia Senate seats, resulting in an evenly divided Senate (50 Democrats/50 Republicans). The Democrats, however, now control the Senate, as Vice President Harris has the tie-breaking vote.
Comments
Control of the Senate is critical to the success of the Biden Administration’s legislative agenda. Democrat Senator Chuck Schumer (New York), the new Senate majority leader, will control the Senate floor schedule, with the power to cause or block Senate consideration and votes on any piece of legislation coming before the Senate.
Senator Schumer and Senator McConnell, the minority leader, have agreed to a ‘power-sharing’ agreement as to how the Senate will be organised, clearing the way for the Senate to commence work upon passage of a Senate resolution adopting the agreement.[2]
Prior to reaching agreement, Senator McConnell had requested a guarantee that the Democrats would not repeal the ‘filibuster’ rule.[3] However, Senator McConnell relented on this demand when two Democratic Senators said they would not vote to do away with the filibuster. The result of the filibuster remaining in place in the Senate is that most legislation will require 60 members for approval.
The ‘flipping’ of the Senate has resulted in a political trifecta for the Democrats – control of the executive branch and both houses of Congress, easing the pathways for the Democrats to enact their legislative agenda.
Legislative pathways to enact tax legislation
Democrats have two legislative procedures to pass tax legislation.
Regular order
The normal legislative process known as ‘regular order’ is a systematic lawmaking process rooted in a committee structure that promotes deliberation, negotiation, and compromise, as well as amendment opportunities for lawmakers of both parties. Regular order requires House passage of the bill by a majority vote and Senate passage of the bill, generally by 60 votes, as described below.
With respect to tax bills, in brief:
• Origination: the Constitution requires that all bills for raising revenue originate in the House of Representatives.
• In the House, a representative sponsors a bill; the bill is then assigned to the House Ways and Means committee for study. If voted out by the committee, the bill is put on a calendar to be voted on, debated or amended by the full House; if the bill passes by simple majority (218 of 435), the bill moves to the Senate.
• In the Senate, the bill is initially assigned to the Senate Finance Committee for consideration; if voted out by the Committee, the Senate filibuster effectively requires a 60-vote super majority (rather than a simple majority with the Vice President breaking a 50–50 deadlock) for the passage of most legislation, including tax legislation, unless the bill is subject to special procedures such as reconciliation (discussed below).
• Conference Committee: the bills passed by each of the House and Senate are considered together by a joint conference committee of House and Senate members. The Committee must resolve differences between the House and Senate versions of the bill prior to consideration of a final bill by the House and Senate.
• Approval: the bill returns to the House and Senate for final approval; the President has ten days to sign or veto the enrolled bill.
Reconciliation
Budget reconciliation enables passage of tax and spending legislation based on a simple majority vote in both the House and the Senate, rather than through regular order.
Reconciliation is a powerful but complex process, can only be used under certain conditions – to include the prior adoption of a Congressional budget resolution – and is governed by a Senate rule that places limits on the kinds of legislative provisions that can be included in the reconciliation legislation.
The primary benefits of the reconciliation process are:
• Legislation can be passed in the Senate by majority vote. A majority 51 vote or 50 votes with a tie-breaking vote by the Vice President rather than the usual 60-vote threshold.
• The legislative process is expedited in the House and Senate by limits on the amount of time for debate and for consideration of amendments.
Democratic tax legislation priorities
General
The Biden administration tax priorities focus on a more progressive tax code, with corporations and wealthy individuals paying their ‘fair share’ and rolling back ‘giveaways’ passed to wealthy individuals and corporations as part of the Tax Cuts and Jobs Act (TCJA). The proposals, to the extent known, will impact individuals, corporations, international taxation, supply chains and selected industries. They would be used to pay for, in part, several of the Biden Administration initiatives, such as infrastructure.
Corporate
The administration will focus on:
• increasing the corporate tax rate;
• imposing a minimum tax on corporations with book profits of $100m or higher to ensure that corporations that do not pay any regular federal income tax will pay tax;
• modify aspects of the global intangible low-taxed income (GILTI) tax regime;
• disencentivise US companies from moving jobs overseas; and
• incentivise US companies that invest in US infrastructure, green energy, transportation, and manufacturing.
Individual
The administration will focus on:
• tax increases for individuals earnings more than $400,000;
• capital gains reform, by ending the lower capital gains tax for households with annual income over $1 million;
• closing the carried interest ‘loophole’;
• reducing the benefit of itemised deduction to a tax benefit of no more than 28 per cent;
• eliminating the 20 per cent pass-through deduction for those making more than $400,000; restricting the use of current like-kind exchange rules for taxpayers earning more than $400,000;
• a new 12.4% Social Security tax on wages above $400,000 to be shared equally between the employee and employer;
• increasing US estate tax rates;
• lowering the TCJA estate tax exemption;
• eliminating the step-up of cost basis on death; and
• importantly, for ‘working families’, enacting new and revised tax benefits.
An important initiative for working families is the use of tax credits, often refundable, rather than tax deductions, to counter the greater savings that deductions provide to higher-income taxpayers compared to lower and middle income families.
Phase out of selected provisions of the TCJA
While the TCJA made many of the corporate provisions permanent, the significant temporary changes to individual income taxes and the estate tax will expire after 2025.
Prospects for enactment
A preview of how the Biden Administration intends to deal with Congress can be found in President Biden’s 14 January announcement of a $1.9tn American Rescue Plan (Rescue Plan),[4] the first of a two-step plan of rescue and recovery to a more secure America.
The second step – the Build Back Better recovery plan – will be a stimulus package and provide innovation, research and development, clean energy investments and job creation.
In connection with the Rescue Plan, it has been reported that:
• President Biden and his administration are focusing on passing the Rescue Plan to provide financial relief to struggling taxpayers. There is great urgency by the administration to pass this bill to provide the needed relief.
• There will be a reliance on federal borrowing, not spending cuts or tax increase offsets, to fund the Rescue Plan.
• The Biden administration would like to move the Rescue Plan in a bipartisan manner through regular order. However, if Republican support for the Rescue Plan were not to materialise, the reconciliation pathway would be used.[5]
• The Build Back Better plan would be financed, at least in part, by raising taxes on corporations and higher income individuals.
Comments
Slim Democratic majority in Congress
In considering the viability of each process in the current Congress with the slim Democratic majorities, note:
• Passage of tax legislation through regular order will require near-unanimous Democratic support (progressive/moderate/conservative) in the House and bipartisan support in the Senate (essentially,all 48 Democrat Senators,plus the two independent members that caucus with the Democrats andtenRepublican Senators).
• Passage of tax legislation through reconciliation will require similar near-unanimous Democratic support in the House and full support of the 48 Democratic members and the two independent members that caucus with the Democrats, plus support of the Vice President. Achieving full support in the Senate may be difficult, particularly because of the views of conservative Democratic Senators.
Nature of reconciliation process
The process can be viewed as inherently partisan. Why? The majority party can enact tax legislation without concurrence by the minority party, and, upon a shift in control of a latter Congress, the other party through reconciliation can modify or repeal the legislation; see the unsuccessful efforts of the Republicans to repeal the Affordable Care Act, and now the intention of the Democrats to modify/repeal major portions of the TCJA.
Timing
The budget reconciliation process can occur twice in one year. Since Congress did not pass a budget resolution for the 2021 fiscal year (FY), Democrats could pass a FY 2021 budget resolution in the first 100 days of the Biden administration, and then turn to the FY 2022 budget resolution. Based on precedent, the FY 2022 budget resolution likely would not be passed by Congress until late spring and would not be fully reconciled until the autumn of 2021. Timing and strategy should become clearer in the coming months.
Revenue raisers
On 26 January 2020, Mark Mazur, the Biden administration Deputy Assistant Secretary for Tax Policy of the US Department of Treasury, said (before the American Bar Association Section of Taxation virtual meeting) that it is unlikely that Congress would enact revenue raisers in the short run, in view of the current state of the economy. In the longer run, however, he stated Treasury should be encouraged to think broadly about revenue-raising policies, even if politically unpopular.[6]
Retroactivity
Apart from tax legislation content, the question arises whether the effective date provisions of the legislation would be prospective or retroactive. When the Biden tax proposals were announced during the campaign, there was great concern (and a flurry of ‘no regret planning’ in the waning weeks prior to the end of 2020) about the possibility of retroactivity of legislation to 1 January 2021 (ie, increase in the rate of the corporate tax).
While infrequently used, historical precedent exists to support retroactive tax rate increases. Recent public statements by Biden administration officials evince that retroactive tax increases do not seem to be the preferred approach, particularly if legislation were to be enacted in the latter part of the year.[7] Ultimately, whether a tax law change is prospective or retroactive likely would be impacted by political (the narrow margins in the House and Senate) and other factors, such as whether regular order or reconciliation procedures are utilised.[8] Lawmakers generally are disinclined to make changes retroactive because of their unpopularity.
Deficits
The massive coronavirus rescue spending and the steep economic downturn have caused the federal budget deficit to skyrocket – $3.1tn in the 2020 budget year – to more than double the previous record.[9] This raises the question of how the Biden administration will factor in the increasing deficit with spending and tax increases, particularly in the longer term.
2022 mid-term elections
This is an important factor to consider in connection with the timing of tax legislation. Democrats could retain control of both chambers, retain control of one chamber but lose the other, or lose both chambers. One well-known political commentator remarked: ‘Democrats may ultimately have a better shot to win the Senate than the House in two years, although winning either will be challenging’.[10]
Conclusion
Tax changes are coming in 2021–2022, and the Biden administration has already previewed some of its plans. To avoid surprises, businesses and individuals need to pay close attention to the Biden administration legislative proposals, the timing of such proposals, and the Congressional procedures chosen to pass these provisions.
[1] Unresolved seats: one Republican member died before taking the oath of office; an election in a NY State Congressional district remains unresolved, and Cedric Richmond (D) of Louisiana resigned on 15 January 2020 to become Senior Advisor to President Biden and Director of the White House Office of Public Engagement.
[2] Under the power-sharing agreement, each party will have an equal number of committee seats, equal budgets, and the ability of the majority and the minority leaders to advance legislation out of deadlocked committees; however, and significantly, Democrats will chair the committees and the Senate majority leader will set the agenda for the floor.
[3] The filibuster is a Senate rule governing debate. Without 60 votes, a senator can block most bills using the filibuster. In other words, it allows a 41-vote minority in the Senate to block legislation. The filibuster is embodied in a Senate rule that provides for cloture – a motion to end debate on a bill, which requires a supermajority threshold of 60 votes.
[4] Key provisions of the Rescue Plan include healthcare, assistance for businesses; individual aid, nutrition and rental assistance; other aid for state, schools and childcare providers; and limited tax provisions relating to enhancing child tax credits.
[5] It has been reported that the Democrats in the House and Senate should be prepared to vote on a budget resolution, the first step in the reconciliation process, during the week of 1 February; both chambers need to agree and affirm the same budget resolution. Some of the items in the Rescue Plan may not be susceptible to passage through the budget resolution process.
[6] Eric Yauch, ‘Immediate Tax Increases Unlikely, Treasury Official Says’, Tax Notes (27 January 2021).
[7] In remarks by Mr Mazur (referred to in the text) he said ‘You want to have a tax system where people – taxpayers – can react to the increases in the tax system so that they can change their behaviour. When you do retroactive tax increases that’s not possible. That tends to be not the first choice. He also noted that retroactive tax increases have been made in the past, and, if that’s the case, it probably is better to enact the provision earlier in the year’. As for retroactive tax reductions, Mr. Mazur said that tends not be a problem. See Laura Davison, ‘Retroactive Tax Hikes Aren’t the ‘First Choice,’ Biden Aide Says’, Bloomberg Law News (26 January 2021; Eric Yauch, ‘Immediate Tax Increases Unlikely, Treasury Official Says’, Tax Notes (27 January 2021).
[8] Mr Mazur, in his remarks, noted that less-than-ideal policy outcomes can arise if legislation were passed using reconciliation, which allows lawmakers to bypass the Senate filibuster and pass revenue-raising or spending proposals through a simple majority vote in each chamber. Eric Yauch, ‘Immediate Tax Increases Unlikely, Treasury Official Says’, Tax Notes (27 January 2021).
[9] Martin Crutinsger, ‘Awash in red ink: US posts record $3.1T 2020 budget deficit’, Associated Press (16 October 2020), in view of declining revenues and increased spending.
[10] Kyle Kondik, ‘Senate 2022: An Early Look’, Sabato’s Crystal Ball (19 November 2020).
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