What's the Latest on Tax Reform?
As many taxpayers are working to finalize extended returns, many in Congress are working to finalize language for tax reform legislation. Here we provide a brief update on the status of tax reform and what we may expect in the next several weeks.
On August 10, by a vote of 69-30, the Senate passed a $1.2 trillion infrastructure package by a vote of 69-30. Called the “INVEST in America Act,” this somewhat bipartisan bill would fund the replacement and repair of roads and bridges, expand access to internet broadband, including rural broadband, and modernize ports, waterways, rail, water pipes, power grid, airports, and more. The final bill removed provisions earlier proposed by the American Jobs Plan, including ambitious climate change proposals, and the mechanisms to fund these changes. The President had proposed to pay for these upgrades with increases to the corporate tax rate and an overhaul to the way international corporate income is taxed.
Proponents have said that the current infrastructure bill would be paid for using repurposed COVID funds and dynamic scoring ($550 billion would be new funding).
Note: Ending the Employee Retention Credit September 30, 2021, for all but recovery startup businesses, would be part of repurposed COVID spending.
Provisions not included in the infrastructure bill have been shifted to a $3.5 trillion reconciliation bill, currently being written.
The day after passing the infrastructure bill, on August 11, Senate Democrats approved a $3.5 trillion budget resolution for fiscal year 2022 (50-49). This vote opens door for the Senate to later pass (with 50 votes) provisions proposed by the President, including those described in the American Families Plan and more, through budget reconciliation. The American Families Plan promises two years of free community college, free universal preschool, direct support for families with children, paid family and medical leave, increased Medicare benefits, and much more.
Note: The Congressional Budget Act allows reconciliation for legislation that changes spending, revenues, and the federal debt limit. This allows Congress to enact legislation flowing from a budget resolution. Such bills are resistant to filibuster, which means that only 51 votes are needed to pass such bills in the Senate. Subject to the so-called Byrd rule, provisions that do not change revenue or spending are extraneous and may not be included a budget reconciliation bill. The legislation may also not increase the deficit beyond 10 years. Even so, the budget reconciliation possibilities are far reaching. In the recent past, the Affordable Care Act, the Tax Cuts & Jobs Act, and the American Rescue Plan Act were all passed through the reconciliation process.
As part of the resolution vote, the Senate approved a non-binding amendment proposed by Senator Thune by a vote of 99-0. This amendment resolved “to protect owners of generationally-owned businesses, farms, and ranches so that they may continue to transfer ownership or operations to family members or others based upon the same tax principles that existed when they began operations and under which they currently operate, including the full benefit of the step-up in basis.”
After the two Senate votes, Senate Majority Leader Schumer instructed committees to write legislative language necessary for a budget reconciliation bill. The proposed bills are due September 15, when the Senate returns from August recess. Senate Schumer has stated, “The Democratic budget will be the most significant legislation for American families since the era of the New Deal and Great Society.”
Although the Democratic majority in the House supports the provisions funded by the infrastructure bill, the House did not take up the bill for a vote. Moderate Democrats wanted to pass infrastructure first. Progressive Democrats want infrastructure to be tied to passage of the $3.5 trillion reconciliation bill. Speaker Pelosi struck a deal. The House voted on and agreed to the budget resolution on August 24, by a vote of 220-212. In exchange for this vote, Speaker Pelosi promised the moderate Democrats that the House would vote on the infrastructure bill passed by the Senate by September 27, 2021. This could mean that the reconciliation bill takes shape sooner than some had previously thought.
It is unclear what, if any, new tax legislation will pass this fall. Although there is concern among some Democrats about the cost of the budget reconciliation bill, there is widespread support for many of its provisions, especially the benefits proposed.
As we’ve discussed more thoroughly in prior articles, key tax provisions on the table include the following (and more):
- Increase the top marginal rate for individual taxpayers to 39.6% (from 37%).
- Tax capital gain at ordinary income rates for those making more than $1 million in a year.
- Tax unrealized gain at death or gift, subject to $1 million exemption per person and a deferral for family owned businesses and farms.
- Subject all trade or business income of high-income taxpayers (> $400,000/year) to the 3.8-percent Medicare tax, either through the NIIT or SECA tax.
- Restrict tax deferral through a real property like-kind exchange to gain of $500,000 per year.
- Increase corporate tax rate from 21 percent to 28 percent (or perhaps to 25 percent).
- Increase the minimum tax on U.S. corporations to 21 percent and calculate it on a country-by-country basis.
- Encourage other counties to impose a minimum tax.
- Impose a 15 percent minimum tax on corporate “book income.”
- Eliminate tax preferences for fossil fuel companies.
- Increase enforcement of corporate tax compliance.
Because of the significance of many of these provisions, it will be important to monitor developments closely. Although they are just proposals, proposals can become law very quickly, as was the case with the Tax Cuts & Jobs Act.
The Democrats seeking to pass the $3.5 trillion reconciliation bill face no small task. The “success” of some provisions with more support—like increasing the capital gains tax on those making more than $1 million a year—seem dependent upon provisions with less support, like taxing unrealized capital gain at death. Without a forced recognition event, increased taxes on gain would serve to increase the lockout effect and limit revenue potentially generated by any increase. Additionally, despite the widespread support for some type of exemption or deferral provision for family businesses and farms, such exemptions are difficult to write so as to properly protect those lawmakers wish to protect, but effectively leave out those they seek to tax.
It is also important to note that the debt limit suspension, which was instituted by the Bipartisan Budget Act of 2019, recently expired July 31, 2021. Since that time, Treasury has moved forward with “extraordinary measures,” allowing bills to be paid under temporary emergency powers. The Congressional Budget Office recently stated that this can continue until October or November. After that time, Congress must act to raise the debt ceiling or the government would be unable to pay its obligations.
We will keep you posted!
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.