Biden’s Tax Plan: Democrats Have Control, but Tax Reform Details Remain Unclear
Now that President Biden has taken office and Democrats have a slim majority in the House and Senate, many are eagerly awaiting details on any new significant tax legislation the administration will aim to pass. It is premature to predict when and how new tax legislation will be enacted, but clearly comments made by the administration regarding legislative priorities and the future of the Senate filibuster will impact any potential tax reform.
Biden has indicated that his administration may consider potential changes to the corporate tax rate, capital gains rate, individual income tax rates, and the estate and gift tax exemption amount and may favor scaling back of some of the tax cuts made by the 2017 Tax Cuts and Jobs Act (TCJA).
Procedurally, it is unclear how tax legislation might proceed. A tax package could be included as part of another COVID-19 relief bill. While it is possible that the Biden administration may seek to repeal provisions in the TCJA, modifications to those provisions are more likely. It is also unclear how a package would proceed through Congress. Under current Senate rules, the legislative filibuster can limit the Senate’s ability to pass standalone tax legislation, leaving such legislation to the budget reconciliation process, as was the case with the TCJA in 2017. It also remains unclear whether Democrats and Republicans will come together to work on any bill.
Finally, it will be important to note who fills key Treasury tax positions in the Biden administration, as these individuals will play a strategic role in developing, recommending, and implementing Federal tax policy. While Janet Yellen has been confirmed as Treasury Secretary, three important positions that have yet to be filled are Assistant Secretary for Tax Policy, Deputy Assistant Secretary for Tax Policy, and Tax Legislative Counsel.
How tax changes could take shape:
Part of a COVID-19 relief package
With the new administration eager to provide immediate relief to individuals and small and medium-sized businesses affected by the COVID-19 pandemic, some tax changes could be included as part of an additional relief bill for which Biden is likely to seek bipartisan support. As part of his $1.9 trillion pandemic relief plan (America Rescue Plan) announced on Jan. 20, 2021, Biden has proposed temporarily increasing the child tax credit for one year to $3,000 per child and $3,600 for children under age six. The credit would also apply to 17-year-olds for the first time. However, Biden has not yet indicated if the plan would provide tax relief to businesses that have struggled during COVID-19, or other relief, such as expanded retirement contributions.
Any changes attached to a COVID-19 relief bill would likely go into effect immediately.
Repeal and replace TCJA
Another possibility is for Biden to pursue a full rollback of the TCJA and replace it with his own tax bill. This would be a challenge since the Democrats only have a slim majority in the Senate, meaning that Republicans could filibuster the bill unless Senate Democrats repeal the filibuster. While not impossible, repealing the filibuster is looking increasingly challenging for the Democrats, as now two Senate Democrats have indicated they will not vote to overturn the legislative filibuster.
Pare back or modify the TCJA
An overall theme of Biden’s campaign was not sweeping, radical change but making incremental shifts that he views as improvements. We may see this theme come into play in Biden’s approach to tax legislation. He may choose not to repeal the TCJA completely (prompting a return to 2016 taxation levels) but instead to roll back some of the tax changes enacted in 2017. This could be in the form of raising the corporate tax rate by a few percentage points, which could garner bipartisan support. Biden has already demonstrated a willingness to pursue this path, stating he would raise the corporate rate from 21% to 28%, not back to the 2016 level of 35%. Biden could also retain some measures such as middle-class tax cuts, while letting others expire, so that the legislation becomes significantly different from that passed in 2017.
Treasury Secretary Janet Yellen has noted that the president would likely hold off on reversing any parts of the TCJA until later in the economic recovery. She has also mentioned she will actively participate in the OECD’s initiative to reach a multilateral agreement on the appropriate taxation of the digital economy, signaling a departure from the position of the previous administration in this area.
Unknowns: Factors that will influence potential tax changes
Senate legislative filibuster
Currently, the minority party in the Senate can delay a vote on an issue if fewer than 60 senators support bringing a measure to a vote. Thus, for more ambitious tax increases, Republicans may seek to filibuster a bill. The increased use of the filibuster in recent decades is a symptom of congressional deadlock, and there are calls from many Democrats to eliminate the filibuster so that more ambitious legislation could be passed without bipartisan support (in fact, in recent years, the filibuster has been removed for appointments and confirmations).
While the agreed-to Senate power-sharing agreement does not specifically include retaining the filibuster, two Democratic Senators, Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, have indicated that they would not vote to remove the filibuster.
If the filibuster remains in place, tax legislation would likely have to be passed as part of the budget reconciliation process, which only requires a simple majority (51 votes) to pass. However, the tradeoff is that any changes generally would have to expire at the end of the budget window, which typically is 10 years. This is how both the 2001 Economic Growth and Tax Relief Reconciliation Act and the TCJA were passed.
Another factor that will influence Biden’s tax policies is who will fill key tax appointments at the Treasury Department, in addition to that of Janet Yellen as Treasury Secretary. Three positions that will have a major effect on any tax plan are Assistant Secretary for Tax Policy, Deputy Assistant Secretary for Tax Policy, and Tax Legislative Counsel, all of whom typically steer the administration’s voice on tax legislation.
These appointments may take several weeks or longer to get in place, so it is possible that there will not be any tax legislative activity until the positions are filled.
Appetite for bipartisanship
President Biden has signaled that he wants to be a president for all Americans and seek to heal the partisan divides in the country. He may be looking to reach across the aisle on certain legislation and seek bipartisan support, even if such support is not necessary to pass a bill. Achieving a middle ground corporate tax rate at 28% might be viewed as a compromise approach.
What these factors mean for your business
It is important to note that sweeping tax changes are not an immediate priority for the Biden administration. With the escalating health and economic crises resulting from the COVID-19 pandemic, the administration’s immediate focus is on addressing the current fragmented approach to COVID-19 vaccinations, accelerating the distribution of the vaccines, taking steps to bring the spread of COVID-19 under control, and providing much needed economic relief. As noted above, there could be some tax changes and impacts resulting from future COVID-19 relief bills. Those will be the bills to watch for any early tax changes, including cuts or credits, that businesses may be able to take advantage of. Larger scale tax changes, particularly any tax increases, may not go into effect until 2022 at the earliest. Moreover, factors such as the continuation of the legislative filibuster, the appetite for bipartisanship, and the filling of key tax appointments at Treasury will help determine the path and details of those changes.
Regardless of your current tax position, it is important to remain informed on potential policy changes, how these will play out and how they will affect your organization. As details come to light, we will provide more insights on how new policies will affect the tax position of middle market businesses.
The following table sets out the current rules and how Biden is proposing to deal with these rules:
Current Tax Law
Corporate Tax Rate and AMT
Corporations are subject to a flat 21% tax rate and the corporate alternative minimum tax (AMT) was repealed for corporations (changes made by the TCJA).
These do not expire.
Biden would raise the corporate rate to 28%, which is still below the pre-TCJA level of 35%. He would reinstate the corporate AMT, requiring corporations to pay the greater of their regular corporate income tax or the 15% minimum tax (while still allowing for net operating losses (NOLs) and foreign tax credits).
International Taxes (GILTI, Offshoring)
GILTI (global intangible low-tax income): Introduced under the TCJA, the GILTI rules require U.S.multinationals to pay a tax of between 10.5% and 13.125% on unrepatriated profits of foreign subsidaries from intangible assets.
A scheduled increase in the effective rate to 16.406% is scheduled to take effect in 2026.
Offshoring taxes: The TCJA includes a tax deduction for corporations that manufacture in the U.S. and sell overseas.
GILTI: Biden would double the GILTI tax rate to 21% and assess a minimum tax on a country-by-country basis.
Offshoring taxes: Biden would penalize companies that offshore manufacturing and service jobs in order to sell goods or provide services back to the U.S. market by imposing a 10% penalty surtax on such profits. Biden would also close offshoring tax loopholes in the TCJA.
A 10% “Made in America” tax credit would be granted to encourage businesses to bring manufacturing jobs back to the U.S. and help the recovery of the economy.
The 12.4% payroll tax is divided evenly between the employer (6.2%) and the employee (6.2%) and applies to the first $137,700 of an individual’s income (scheduled to go up to $142,800 for 2021). A 2.9% Medicare Tax is split equally between the employer and the employee with no income limit.
Biden would maintain the 12.4% tax split between the employer and the employee, retain the $142,800 cap and would impose the payroll tax on earned income exceeding $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.
Individual Income Tax Rates
The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married persons filing jointly.
Biden would restore the top 39.6% rate for taxable income exceeding $400,000.
Individual Tax Credits
Individuals can claim a maximum $2,000 child tax credit, plus a $500 dependent credit.
Individuals can claim a maximum dependent care credit of $600 ($1,200 for two or more children).
The child tax credit is scheduled to revert to pre-TCJA levels ($1,000) after 2025.
Biden would expand the child tax credit to $3,000 for children age 17 and under and offer a $600 bonus for children age six and under. The credit would be fully refundable.
He has also proposed increasing the child and dependent care tax credit to $8,000 ($16,000 for two or more children), and a new tax credit of up to $5,000 for informal caregivers.
Separately, Biden has proposed a refundable $15,000 tax credit for first-time homebuyers.
For 2020, the standard deduction is $12,400 for single/married persons filing separately and $24,800 for married persons filing jointly.
After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single /married filing separately and $12,700 for married filing jointly.
The TCJA suspended the personal exemption and most individual deductions through 2025.
It also capped the state and local tax (SALT) deduction at $10,000, which will remain in place until 2025, unless repealed.
Biden would enact a provision that would cap the tax benefit of itemized deductions at 28%.
Incoming Senate majority leader Charles Schumer has pledged to repeal the SALT cap (the House of Representatives has already passed legislation to repeal to the cap).
Capital Gains and Qualified Dividend Income
The top capital gains tax rate is 20% for income over $441,450 for individuals and $496,600 for married persons filing jointly. There is an additional 3.8% net investment income tax.
Biden would eliminate tax breaks for long-term capital gains and dividends for income above $1 million; instead, these would be taxed at ordinary rates.
Forgiven student loan debt is included in taxable income.
There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.
Biden would exclude forgiven student loan debt from taxable income.
Estate and Gift Taxes
The estate and gift tax exemption for 2020 is $11,580,000. Estate beneficiaries receive appreciated property with a basis equal to the property’s fair market value, meaning that the beneficiary can dispose of the property immediately without the appreciation being taxed.
The exemption is scheduled to revert to pre-TCJA levels in 2026.
Biden would return the estate and gift tax to 2009 levels and eliminate the step-up in the basis on inherited assets, as well as the step-up at death provision for inherited property passed along by the decedent.
Qualified Business Income Deduction
Many businesses qualify for a 20% qualified business income tax deduction, lowering the effective rate of tax for S corporation shareholders and partners in partnerships to 29.6% for qualifying businesses.
Biden would phase out the tax benefits associated with the qualified business income deduction for business owners whose annual income is more than $400,000.
Tax credits are available for some of the costs to start a retirement plan.
Biden would offer tax credits for businesses that adopt a retirement savings plan and offer most employees without a pension or 401(k) access to an “automatic 401(k)”.
Investors can defer taxes on capital gains by keeping those funds in a Qualified Opportunity Fund (QOF).
Biden has proposed incentivizing opportunity zone funds to partner with community organizations and have the Treasury Department review the regulations under the program to ensure the program is operating as intended. Biden would also increase reporting and public disclosure requirements for developers in opportunity zones.
The renewable energy tax credits have gradually stepped down to 22% (from 30%) for 2021.
Biden would expand renewable energy tax credits and credits for residential energy efficiency, and restore the Energy Investment Tax Credit and the Electric Vehicle Tax Credit.