Post-Election Analysis 2020: Tax
*Updated January 6, 2021
Key Takeaways* * * * *
Watch our Tax webinar. |
Read Ahead: General Outlook for Business Taxes | General Outlook for Individual Taxes | International Taxes | Tax-Exempt Organizations | Pharmaceutical Tax Issues | Clean Energy Tax Issues | Real Estate Issues | Legislative Proposals of Interest
Overview
In contrast to President Trump, President-elect Biden campaigned on increased taxes for businesses and the wealthy to support his "Build Back Better" campaign platform. Rather than standing alone, the tax proposals generally are tied to issues like climate change, infrastructure, and healthcare. Some are tied to penalizing off-shoring US businesses. Thus, a legislative "tax reform" effort, similar to the Tax Cuts and Jobs Act of 2017 (TCJA), likely will not be offered. Instead, tax policy changes are expected to be associated with domestic policy initiatives to offset their fiscal cost or to incentivize related behaviors.
The 116th Congress concluded with a substantial year-end legislative effort, including enacting a number of tax provisions, such as (1) ensuring the deductibility of expenses paid with forgiven PPP loan proceeds and the proceeds of certain other forgiven grants; (2) providing a 100% business meal deduction for two years; and (3) providing $600 rebates to qualifying individuals. The legislation also updated the employee retention tax credit, and made permanent a number of provisions that regularly expire, such as reduced excise tax rates for alcohol, a subsidy for shortline railroad track maintenance, and the medical expense deduction floor of 7.5% of adjusted gross income. The legislation also extended various tax provisions, including the production tax credit for wind energy, the investment tax credit for solar energy, and the look-thru rule for related controlled foreign corporations.
Generally, the tax measures President-elect Biden campaigned on would make the US Internal Revenue Code more progressive, but it remains to be seen how hard the President-elect will push for tax increases such as raising rates on the wealthy or increasing the corporate income tax rate. In an economic environment where many are calling for additional federal stimulus, especially given the impact of the coronavirus pandemic, those tax increases may be delayed while rate cuts and targeted tax benefits are deployed to spur economic activity.
On the other hand, the President-elect may face substantial criticism from Republicans in the House and Senate because of sky-rocketing debt and deficits. Early this year, the CBO projected deficits would exceed their 50-year average of 3% in each year through 2030, driving the national debt past its previous peak in 1946. The CBO estimates the deficit will be 109% of gross domestic product by 2030. Although the response to the pandemic drove much of the current year's deficit, long-term policies that pre-date the coronavirus pandemic have contributed significantly to the sky-rocketing debt. To address the deficit, we expect the executive and legislative branches will have to work together.
To enact tax legislation in an environment where Democrats hold a narrow Senate majority, the President-elect and congressional Democrats likely will use the budget reconciliation process. This is a procedural tool that allows Congress to consider laws affecting spending and revenue provisions in an expedited manner. Budget reconciliation generally proceeds in two steps: First, the House and Senate budget committees pass budget resolutions that set federal fiscal targets and direct committees to produce legislation achieving those targets. Second, the legislation produced pursuant to those budget directives are combined into an omnibus budget reconciliation package, which is considered under expedited procedures in both chambers. Most importantly, the budget reconciliation package sidesteps rules in the Senate requiring 60 votes to cut off debate. Thus, substantive legislation can be enacted with only a majority, so long as it meets the budget reconciliation procedure. Absent changes to the filibuster rules, under a Democratic sweep, broad tax changes are likely to be considered under such a reconciliation process, where a variety of spending and revenue measures can be considered together.
As discussed further below, the TCJA was enacted in 2017 as part of a budget reconciliation measure. The procedural rules of the budget reconciliation process required the Act to have either no revenue effect or a positive revenue effect in its tenth year. While these tax cuts are estimated to reduce revenues by $1.9 trillion during their first decade, in the tenth year (i.e., 2027), the Joint Committee on Taxation estimated the cuts will increase revenues by $32.9 billion. To achieve this counterintuitive result, the legislative drafters phased out many of the cuts, so that in the target year, the TCJA raised revenue. Consequently, future policy makers face the choice of either finding the votes to extend the tax cuts further or allowing the steep tax increases called for in the Act to come into effect.
General Outlook for Business Taxes
President-elect Biden's tax policy will stand in stark contrast to that of President Trump. President Trump's tax policy generally has been favorable to businesses and corporations, while President-elect Biden's campaign platform included several proposals increasing taxation of businesses and the wealthy. The foundation of President Trump's tax policy was the TCJA, which Democrats strongly opposed. In fact, the TCJA passed Congress without a single Democratic vote. Therefore, President-elect Biden and Congressional Democrats likely will target many of its provisions.
Current Policy: The TCJA included a number of tax provisions that benefit businesses, some of which will expire after 2025. The primary TCJA provision benefitting corporations was the replacement of the graduated corporate tax rates, which included a maximum rate of 35%, with a flat rate of 21%. The TCJA also repealed the corporate alternative minimum tax (AMT). With respect to businesses operating in "pass-through" form (e.g., sole proprietorships, partnerships, and S corporations), the TCJA introduced a special deduction for non-corporate owners of pass-through entities, allowing them to deduct 20% of certain qualifying pass-through income, subject to certain limitations, through the end of 2025 ("pass-through deduction"). Subject to the boundaries of President-elect Biden's campaign pledges, such as no increased taxes on those earning less than $400,000 per year, Democrats likely will target these provisions to raise revenue for other policy objectives.
Corporate Tax Rate: During the 2020 campaign, President-elect Biden proposed increasing the corporate tax rate from 21% to 28% and reinstating a corporate AMT. The proposed corporate AMT would be a 15% minimum tax on book income for corporations with at least $100 million in annual income. When calculating this new AMT liability, corporations would be allowed to claim credits for foreign taxes paid and deductions for net operating losses (NOLs) from other years. With respect to the TCJA's pass-through deduction, President-elect Biden proposed maintaining the deduction for those making under $400,000 per year, while phasing the deduction out completely for higher earners. President-elect Biden likely will be cautious about protecting economic growth, which may delay efforts to impose these taxes until after economic activity has fully recovered from the coronavirus pandemic. Democratic leaders in Congress strongly opposed the corporate rate reductions in TCJA, and will share the Biden Administration's caution about tax increases.
Social Security Taxes: President-elect Biden proposed subjecting income above $400,000 to the 12.4% social security tax. Currently, for salaried workers, such taxes are split equally by the employee and employer. Self-employed workers pay the entire tax themselves. In 2020, such taxes are applied only to income up to $137,700. Thus, President-elect Biden's proposal would impose social security taxes on income below $137,700 and above $400,000, but not on income between those levels. Although social security is politically popular, the taxes that support it are not. Attempts to impose this tax, even to protect the solvency of social security, likely will be highly partisan.
Business Deductions and Tax Credits: President-elect Biden made a number of other proposals with respect to business deductions and tax credits. President-elect Biden proposed, among other things, expanding and making permanent the new markets tax credit program (extended at an annual $5 billion allocation through 2025 in the year-end tax legislation described in the overview of this section), expanding the work opportunity tax credit (also extended through 2025 in the year-end tax legislation), creating a new childcare construction tax credit to encourage business to build childcare facilities at places of work, and creating a new manufacturing communities tax credit that targets communities that experience mass layoffs. President-elect Biden proposed ending many of the tax incentives available for businesses investing in fossil fuels and expanding several renewable-energy-related tax credits and deductions. Several of the renewable tax provisions were extended for one- or two-years in the year-end tax legislation, but the Biden administration will seek to make them permanent or provide equal or greater subsidy in a new mechanism. While many of these proposals have some level of support from congressional Democrats, they may not garner enough moderate Democratic and Republican support in the Senate, where 60 votes are required to end debate. Unless the Senate changes the filibuster rules, Congress may only be able to pass narrow, targeted proposals, especially those tied to economic relief from the coronavirus pandemic. Many of these proposals will be tied to other policy initiatives, such as infrastructure, healthcare, or climate policies, which will put additional pressure on lawmakers to vote along party lines.
General Outlook for Individual Taxes
Current Policy: President Trump's tax policy generally resulted in lower individual income taxes. The TCJA lowered the maximum individual income tax rate from 39.6% to 37%. However, the Act imposed limitations on various itemized deductions, including a $10,000 cap on state and local income and property tax deductions, while doubling the standard deduction. With respect to wealth transfer taxes, the TCJA doubled the tax exemption amounts applicable to the estate, gift, and generation-skipping transfer taxes through 2025 (increasing the exemption to $10 million adjusted for inflation). The amount of the exemption will revert to $5 million (adjusted for inflation) after 2025.
In addition to opposition to the TCJA, many congressional Democrats are eager to use tax policy to support an economic recovery from the coronavirus pandemic, curtail economic inequality, and support other policy goals like transportation infrastructure, climate policy, and re-shoring manufacturing. Where the policies detailed below raise revenue, they may be considered in combination with other policy goals.
Individual Income Tax Rate and Deductions: President-elect Biden proposed increasing the top individual income tax rate from 37% to 39.6% for taxpayers making more than $400,000. For individuals earning over $1 million, he proposed taxing long-term capital gains and qualified dividends at the rate of 39.6%, instead of the current maximum rate of 20%. Certain leading congressional Democrats would go further and tax capital gains annually on a mark to market basis at ordinary income rates. Neither of these proposals have been tested across the caucus, so the strength of support in Congress is unknown, but support for increased taxes on the wealthy is broadly held in the Democratic caucus. President-elect Biden also proposed capping itemized deductions at 28% (i.e., taxpayers in brackets with tax rates higher than 28% will receive limited benefit from itemized deductions) and putting additional limitations on deductions of individuals earning above $400,000. In addition, President-elect Biden proposed ending the $10,000 cap on state and local tax deductions, a proposal House Democrats included in the HEROES Act and are likely to push for as part of an economic recovery package in the next Congress.
Inherited Property: Under current law, when heirs inherit appreciated property, they receive a "step up" in tax basis, meaning they inherit the asset with a tax basis equal to its current market value. This minimizes, or even eliminates, the capital gains tax if the heir sells the property shortly after receipt or reduces future gains if the heir holds the property. President-elect Biden proposed eliminating the step-up in tax basis that a recipient receives with respect to inherited property, likely in an attempt to eliminate the opportunity for taxpayers to pass appreciated property at death without such appreciation ever being subject to tax. Estate tax changes tend to be highly charged and any such change would face partisan opposition.
Tax Credits: President-elect Biden proposed expanding a number of existing tax credits and establishing new tax credits, such as, among other things, reinstating a home buyers' tax credit, introducing a new low-income renters' credit, and expanding the earned income tax credit and the child and dependent care tax credit. There is support for these proposals across congressional Democrats. For instance, Vice President-elect Harris, as Senator, and Rep. Danny Davis (D-IL), proposed the Rent Relief Act of 2019 (H.R. 2169/S. 1106), which would provide a refundable tax credit equal to a portion of "excess" rent. President-elect Biden also proposed cancelling student loans, tax-free, after borrowers have been enrolled in an income-based repayment plan for a specified period. These proposals may be attractive to congressional Democrats as a way to provide economic relief to individuals and families hit hard by the coronavirus pandemic and could be included in a recovery package.
Retirement Benefits: President-elect Biden made a number of proposals with respect to retirement benefits, including with respect to 401(k) plans. Under current law, workers contribute pre-tax dollars to 401(k) plans and thereby reduce their annual taxable income, but pay full tax on those funds when they are eventually withdrawn in retirement. The upfront tax break is perceived as more beneficial for higher earners since deductions are more valuable the higher one's income tax bracket is. President-elect Biden proposed replacing this deduction with tax credits for each dollar contributed to a 401(k) plan. President-elect Biden also proposed to permit automatic enrollment in individual retirement accounts for workers who do not have a pension or 401(k)-type plan. Similar policies have support in Congress, as demonstrated by the enactment of the SECURE Act (Pub. L. 116-94, Division O), which made a number of changes to retirement savings plans, including making it easier to offer 401(k) plans and increasing incentives for employees to save, as well as the recent bipartisan introduction of the Securing a Strong Retirement Act. In addition, House Democrats, including members of the House Ways and Means Committee, introduced the Encouraging Americans to Save Act (H.R. 7418) during the 116th Congress, which had been introduced in the past by Sen. Ron Wyden (D-OR), the expected incoming chair of the Senate Finance Committee. The legislation would provide a federal match to eligible taxpayer contributions to certain retirement accounts.
International Taxes
In light of the Democratic sweep, President-elect Biden is expected to have more flexibility in passing many of his international tax priorities. President-elect Biden's international tax policy proposals generally would increase taxes on businesses' income related to international activities. Under a Democratic Congress, the Biden Administration likely will pursue proposals for higher taxes on multinational companies and tighten several rules regarding current international tax laws.
GILTI: The TCJA created a new category of income called "global intangible low-taxed income" (GILTI), which is includable pro rata in the income of certain US shareholders of "controlled foreign corporations" (CFCs) without regard to actual distributions. This provision expands on the previous CFC rules by subjecting a portion of the active income generated by a CFC (and not just passive and related-party income) to current US federal income tax. The current tax rate on such income allocated to a US corporate shareholder of a CFC is 10.5%. President-elect Biden likely will aggressively pursue his proposal subjecting GILTI of a US corporate shareholder of a CFC to the full corporate tax rate, which currently is 21%. President-elect Biden's plan to raise the corporate tax rate on GILTI is intended to increase the tax cost of companies shifting profits to non-US subsidiaries. As a compliment to these proposals, President-elect Biden has signaled that he will propose tightening the anti-inversion tax provisions. As with many of the changes proposed to the TCJA, passage of such a change would be partisan, and require the use of budget reconciliation procedures to sidestep a Republican filibuster in the Senate.
BEAT: President-elect Biden has not published any plans to change the current minimum base erosion and anti-abuse tax (BEAT), a provision enacted as part of the TCJA. The BEAT generally is an AMT on the modified income of certain large US corporate taxpayers with significant deductible payments to non-US related parties. The tax rate under BEAT currently is 10% and will increase to 12.5% after 2025.
Domestic Workforce Incentives: President-elect Biden proposed a plan for both tax breaks and penalties to encourage US companies to move or keep manufacturing jobs in the United States, which shares some similarities with proposals from President Trump. He proposed a surcharge increasing a company's tax liability on non-US income by 10% if that company uses non-US manufacturing facilities to sell products into the United States. The charge also would apply to companies that remotely supply services to the United States. He also campaigned for a 10% advanceable tax credit for a variety of domestic investments, including revitalizing or retooling US facilities, and reshoring non-US production into the United States. The credit would also apply to expansion of US facilities or an increase in a company's wages. These proposals could be enacted separately from his other international tax proposals and could form part of a legislative stimulus package.
Digital Taxes: While President-elect Biden has sharply criticized technology companies for their tax practices, his administration likely will continue the Trump Administration's stance opposing foreign digital taxes (i.e., those taxes imposed on online services or other revenue generated online). The Trump Administration, together with a bipartisan group of lawmakers, opposed the proliferation of digital service taxes, reasoning US firms would bear the brunt of these taxes. This issue has implications for negotiations undertaken by the Organization for Economic Cooperation and Development's (OECD) base erosion and profit shifting (BEPS) project. The Biden Administration is expected to continue taking a hard line against proposals that unduly burden US businesses, though President-elect Biden has not indicated whether he supports the Trump Administration's proposal to make digital taxes a safe harbor regime.
Tax-Exempt Organizations
Tax policies under President Trump generally were unfavorable for tax-exempt organizations. The TCJA imposed several new restrictions and requirements on tax-exempt organizations. These included requiring tax-exempt organizations to compute unrelated business income tax separately with respect to each unrelated trade or business of an organization (preventing a tax-exempt organization from using losses from one unrelated business to offset income from a different unrelated business), placing a 1.4% excise tax on the net investments of certain private colleges and universities with large endowments, and enacting a 21% excise tax on the excess renumeration of the five highest paid employees of applicable tax-exempt organizations. More generally, the TCJA increased the standard deduction for individual taxpayers while also capping the state and local tax deduction and eliminating some other itemized deductions, which raised concerns charitable giving would decrease because individuals who previously itemized would have less incentive to donate. The TCJA also doubled the estate tax exclusion, which could potentially decrease charitable giving as a function of estate planning. Despite these concerns, there does not appear to have been a material decrease in charitable giving since the enactment of the TCJA.
President-elect Biden has not provided detailed policies with respect to nonprofit organizations. He proposed scaling back the estate tax exclusion to $5 million from its current threshold of $11.58 million. Reducing this exclusion could increase charitable giving as part of estate planning. President-elect Biden also proposed the elimination of the step-up in basis for inherited assets. This could encourage individuals to donate more to charitable organizations during their lifetimes to minimize tax consequences at death. With a Democratic Congress, President-elect Biden may be able to pass and implement these proposals, though, as with most changes to the TCJA, it would likely require use of budget reconciliation to sidestep an expected filibuster in the closely divided Senate.
While President Trump has proposed eliminating the "Johnson Amendment," which prohibits 501(c)(3) tax-exempt charitable organizations, including churches, from supporting or opposing political candidates or participating in, or intervening in, any political campaign, this change is not widely supported by congressional Democrats, and President-elect Biden is unlikely to propose this change.
In the near-term, nonprofit organizations have been affected by the COVID-19 pandemic. The CARES Act (Pub. L. 116-136) and the Protecting Nonprofits from Catastrophic Cash Flow Strain Act of 2020 (Pub. L. 116-151) provided relief to nonprofit organizations operating as "reimbursing employers" by offsetting 50% of the cost of unemployment benefits. The HEROES Act (H.R. 6800), passed by the Democratic House in 2020, proposed relief to nonprofit organizations through the Paycheck Protection Program, the expansion of the employee retention tax credit, and the creation of a lending program for mid-size nonprofits serving low-income communities. A Democratic Congress likely will revisit these policies, with the support of the Biden Administration. In addition, the Biden and Sanders Unity Task Force Recommendations propose increasing emergency funding for school districts and public and nonprofit colleges and universities. This proposal is intended to offset declines in state revenue and to prevent job losses for teachers and school support staff. While President-elect Biden has not clarified how he will advance the Unity Task Force recommendations, the Democratic Congress likely will support these proposals.
Pharmaceutical Tax Issues
While President Trump's tax policy has been generally favorable to pharmaceutical companies (as opposed to his contentious relationship with the industry on trade matters), President-elect Biden frequently made statements during the 2020 election regarding "standing up to" pharmaceutical companies. While we expect the Biden Administration will seek policies that support research and development, he is also likely to propose tax policies that reduce tax benefits for pharmaceutical companies. For example, given the focus on drug pricing issues during the 2020 election, President-elect Biden proposed imposing a tax penalty on drug manufacturers that increases the costs of brand-name, biotech, and "abusively priced" generic drugs by more than the general rate of inflation. In addition, the President-elect promised to end a tax deduction for advertising spending for pharmaceutical companies as part of his proposal to address the opioid epidemic, which is similar to a 2018 proposal from Sen. Claire McCaskill (D-MO) (S. 2478 – 115th) and a 2019 proposal from Sen. Jeanne Sheehan (D-NH) (S. 73). The proposal would disallow a deduction for expenses related to direct-to-consumer advertising of prescription drugs.
The TCJA contained several new tax provisions, including the BEAT and the GILTI provisions, which were intended to prevent companies from avoiding taxes by offshoring intangible assets. As a result of the reduced corporate effective tax rate for GILTI, the implementation of these provisions appears to have led to a lower effective tax rate for some pharmaceutical companies who moved intangible income, such as intellectual property, outside of the US, which has led to increased importations of pharmaceuticals. Due to supply chain difficulties raised by the COVID-19 pandemic, President-elect Biden proposed increasing the effective tax rate on GILTI earned by corporations, including pharmaceutical companies.
The TCJA also included a provision ending the election to expense or amortize research costs for tax years after 2022. We expect Congress to repeal this provision, which would allow taxpayers to continue to elect to expense these costs.
Clean Energy Tax Issues
President-elect Biden campaigned on an extensive climate and clean energy platform, including promises to achieve net-zero emissions, economy-wide, by no later than 2050, as well as a carbon pollution-free power sector by 2035. Such achievements rest on, among other things, heavy subsidies for electrical generation, electric vehicle and charging deployment, and energy efficiency across residential and commercial buildings. We anticipate, however, the President-elect will not make a concerted effort to enact a price on carbon due to the economic challenges posed by the coronavirus pandemic.
The Democratic Congress will largely support these efforts, given Democratic members in both chambers vocally supported aggressive climate policies during the 116th Congress. Tensions, however, still remain between more moderate and progressive factions of the Democratic Party, demonstrated by disagreements regarding the Green New Deal resolution and a proposed ban on fracking.
In the face of broad and ambitious climate and energy goals, elements such as the extension and expansion of tax measures such as the Production or Investment tax credits for clean energy may be areas of modest bipartisan agreement. For instance, in the year-end tax package described in the overview to this section, Congress created a new investment tax credit for wind energy facilities located in inland navigable waters of the United States or in US coastal waters, effective through 2025. Such areas of agreement, however, are unlikely to alter the overall partisan nature of such a legislative project. In the event of a narrow legislative window, such as a budget reconciliation package, longer-term clean energy tax incentives are likely to be easily enacted.
In addition to these policies, President-elect Biden has proposed several tax policies to incentivize research and development, with a particular focus on research and development related to energy efficiency and clean energy. During the 2020 campaign, President-elect Biden proposed reforming and extending tax incentives to generate energy efficiency and clean energy jobs. President-elect Biden also promised to increase research investments and tax incentives for technology that captures carbon and permanently sequesters or utilizes that captured carbon.
Real Estate Issues
President Trump's tax policy generally has favored the real estate industry. For example, the TCJA preserved the ability to do tax-deferred exchanges of like-kind real property (but eliminated such exchanges for personal property) and included favorable rules for the real estate industry in connection with the pass-through deduction. The TCJA also allowed for the deduction of 100% of the cost of certain qualifying property in the year such property is placed in service (so-called "bonus" depreciation).
During the 2020 campaign, President-elect Biden proposed to eliminate like-kind exchanges of real property (potentially only for filers with taxable income over $400,000) to fund some of his domestic policy priorities. While President-elect Biden's campaign promise was, at least in part, politically motivated to target President Trump's tax avoidance practices, the Biden Administration will face pressure to find ways to fill budget holes created by the coronavirus pandemic. According to the Joint Committee on Taxation, like-kind exchanges for real property are projected to save real estate investors $51 billion in taxes between 2019 and 2023. The elimination of this provision is likely to be very attractive to the Biden Administration.
Aside from eliminating like-kind exchanges for real property, the Biden Administration is likely to propose tax policies, including repealing certain TCJA provisions, that will significantly impact real estate investors, such as increasing ordinary income tax rates and long-term capital gain rates. Similarly, President-elect Biden proposed phasing out the pass-through deduction for filers with taxable income over $400,000, which would impact non-corporate taxpayers investing in real estate through pass-through entities. In addition, during previous campaigns, President-elect Biden criticized "bonus" depreciation, though his campaign has not provided details on what changes the Biden Administration would propose. President-elect Biden also proposed eliminating the $25,000 exemption from the passive loss rules for rental losses and accelerated depreciation of rental housing.
Based on previous campaigns, President-elect Biden may consider eliminating a "carried interest" provision. A manager of an investment fund, including real estate funds, typically receives as a component of its compensation, a "carried interest," which generally is a percentage of the profits (including capital gain) recognized by the fund. Such manager may be taxed on income related to the carried interest at preferential long-term capital gain rates, instead of ordinary income rates, to the extent such income is treated as long-term capital gain in the hands of the fund. Although President-elect Biden has campaigned on eliminating the carried interest provision in the past, saying in 2016 there was "no justification for it," his campaign has not provided details on what changes the Biden Administration will propose in 2021. There is some bipartisan support for curtailing these rules, as President Trump also campaigned on eliminating the provision.
Legislative Proposals of Interest
With Democrats in control of Congress and the presidency, we expect several Democratic tax proposals to be considered in the 117th Congress. President-elect Biden is expected to introduce an economic recovery package that contains tax provisions within the first hundred days of his administration. Perceived economic weakness may limit Democratic appetite to raise taxes, at least initially. In addition, Sen. Ron Wyden (D-OR), who is in line to become chairman of the Senate Finance Committee, likely will use his proposed capital gains tax reform package as the foundation for tax reform in the 117th Congress.
While President-elect Biden's campaign proposed the "Build Back Better" plan to provide pandemic relief to individuals, small businesses, and communities, the plan's policy details are scant. As discussed above, President-elect Biden has proposed several tax changes as ways to pay for climate change, infrastructure, health care, education, and research & development programs. These proposals include:
- raising the corporate income tax rate from 21% to 28%;
- imposing a 15% tax on the book profits of corporations with $100 million or more in income, allowing for deduction of net operating losses and credits for foreign taxes (companies would pay the greater of their regular corporate income tax liability or the 15% minimum tax);
- doubling the tax rate on GILTI earned by foreign subsidiaries of US corporations from 10.5% to 21%;
- restoring the top marginal income tax rate to 39.6%, from 37%, for individuals with taxable income of more than $400,000;
- taxing capital gains and qualified dividends at ordinary income tax rates for individuals with taxable income of more than $1 million; and
- imposing the Social Security payroll tax of $12.4% on wages earned above $400,000.
President-elect Biden called for reforming and extending the tax incentives that support renewable energy to support his pledge to "achieve carbon-pollution free energy in electricity generation by 2035." Of note, the President-elect has called for these subsidies to be provided to developers who meet high labor standards, which parallels provisions from the GREEN Act (H.R. 7330) that would have added labor standards to certain tax incentives.
In addition, the 2020 Democratic Party Platform includes several tax reform proposals that may be considered by Congress. These proposals include: (1) increasing the Child and Dependent Care Tax Credit, (2) creating a first-time homebuyer tax credit, (3) expanding the Low-Income Housing Tax Credit to incentivize affordable housing construction, (4) expanding and making permanent the New Markets Tax Credit, (5) eliminating tax breaks for prescription drug advertisements; and (6) raising the estate tax to pre-TCJA levels. We would expect many of these proposals to be considered by the 117th Congress; while several, such as the New Markets Tax Credit, have bipartisan support, most of these will face partisan opposition.
In Congress, Sen. Wyden proposed restructuring and increasing capital gains taxes. Specifically, Sen. Wyden's proposal would apply income taxes to the annual appreciation of assets, even if the holdings are not sold, for individuals with taxable income of at least $1 million or $10 million in assets for three consecutive years. In addition, the proposal would eliminate the capital gains preference and tax gains at ordinary income tax rates. The tax would also apply to built-up gains on existing assets, minus a deduction for losses, which resembles a one-time wealth tax. According to Sen. Wyden, his capital gains proposal would raise at least $1.5 trillion over a decade, which would be dedicated to extending the solvency of the Social Security program. To be viable, this proposal must resolve various technical concerns and build additional Congressional support, but it provides a starting point for Democratic efforts to tax appreciated wealth.
One factor that may complicate the Biden Administration's tax reform efforts is the economic impact of the coronavirus pandemic, which may take up much of the Biden Administration's first hundred days. Legislation providing for a dramatic economic stimulus likely will not have the effect of raising taxes. In addition, Congress and the administration likely will face pressure to use the proceeds of proposals like Sen. Wyden's capital gains proposal to address more immediate needs. Regardless, we expect Congress to take up significant domestic policy changes that incorporate tax reform provisions during the 117th Congress.
* * *
To help our clients navigate the impact of the 2021 Election, we have created a Post-Election Analysis Center covering a wide range of topics. Please visit the Center to learn more and to subscribe for future client Advisories and notice of upcoming webinars.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
Key Contacts
