• Allon Advocacy

In Washington, August Will Go Out With A Bang

Democrats in Congress are inching closer to enacting a significant "human" infrastructure bill, which will include significant changes to the tax code.

It has been a busy week in the U.S. Senate. Late on Tuesday morning, the chamber passed a bipartisan $1.2 trillion physical infrastructure bill. Senators then immediately turned to debate on a $3.5 trillion budget resolution sets up a process through which Democrats are likely to advance a “human” infrastructure and tax bill later this year. The House will cut its summer recess short to come back to vote on the budget resolution later this month.

The infrastructure bill will impact individuals who hold cryptocurrency assets and will result in early termination of the pandemic-related Employee Retention Tax Credit, but it will not otherwise have a large impact on individual and corporate tax levies. On the other hand, the “human” infrastructure bill that Congress will soon turn towards advancing is likely to have a significant individual and tax impact.

Let’s examine how.

Budget Resolution Sets Broad Parameters for Tax Policy

In a nine-page summary of the 92-page resolution, Senate Democrats described the new investments that the resolution calls for and the tax changes senators would like to see. To increase revenues, Democrats want to:

  • Reform the corporate and international tax system;

  • Impose new policies to impose “tax fairness” for high-income individuals;

  • Provide the Internal Revenue Service (IRS) with additional funding to improve tax enforcement; and

  • Impose a new fee on imports that have a significant carbon footprint.

Even with these revenue increases, analysts estimate the bill the Democrats will seek to advance would increase the deficit by $1.75 trillion over the next 10 years.

To provide additional tax relief to middle class taxpayers, the budget resolution calls for:

  • Expanding Paid Family and Medical Leave;

  • Extending and/or expanding the child tax credit, the earned income tax credit, and the child, and dependent care tax credit;

  • Increasing the amount of state and local income and property taxes that taxpayers may deduct on their federal returns.

As one news outlet said, “[T]here is no detail on that or any other tax and spending proposals in the resolution” because “budget resolutions provide general instructions to House and Senate committees but no detail on how the money would be spent or how revenue would be raised.” The American Action Forum explains it this way: “The budget resolution is, notionally, a fiscal blueprint for the Congress but does not change any laws.” But based on President Joe Biden’s American Families Plan, legislation outlining Democrats’ tax priorities, and other news and industry reports, we can try to narrow down the universe of proposals on which Democrats are likely to settle.

President Biden’s American Families Plan

Earlier this year, President Biden released his American Families Plan, which called for investing hundreds of billions of dollars in “human” infrastructure. The White House said the president would pay for those proposals in part by raising taxes. As the Tax Foundation explained, the American Families Plan would:

  • Raise the top marginal income tax rate from 37 percent to 39.6 percent for single taxpayers with incomes totaling more than $452,700 and for head of household and joint filers with incomes higher than $509,300;

  • Tax long-term capital gains and qualified dividends as ordinary income for taxpayers with taxable income above $1 million;

  • Tax unrealized gains at death for unrealized gains above $1 million for single filers and $2 million for joint filers; and

  • Apply a new 3.8 percent tax to active pass-through business income above $400,000.

The right-leaning Tax Foundation estimates these changes “would reduce the economy’s size by 0.4 percent in the long run.” Additionally, “capital stock would fall by 0.7 percent, wages by 0.4 percent, and employment by about 64,000 full-time equivalent jobs.”

There is another provision in the American Families Plan that is particularly distressing to the financial services sector. As scholars at the left-leaning Urban-Brookings Tax Policy Center have noted, President Biden’s plan would “require banks and other financial institutions to tell every account holder and the IRS total deposits and withdrawals for the year, adding two new boxes to the current Form 1099-INT that now is used to report interest income.”

Scholar Steven M. Rosenthal concluded, “In practice, the IRS’ task would be daunting and, in fact, bury the agency in a sea of unproductive information.” It is too soon to know for certain whether this provision will be added to the actual bill the Democrats seek to move later this year.

Raising Taxes on Corporations

While the Senate was tackling the infrastructure bill and the budget resolution, Sens. Elizabeth Warren (D-Mass.) and Angus King (I-Maine) and Rep. Don Beyer (D-Va.) released the Real Corporate Profits Tax Act of 2021. This bill also could help put meat on Democrats’ tax plans.

According to The Hill, Sen. Warren said the legislation would help bring an end to “corporate double dealing” and ensure large companies “pay their fair share so that we can raise essential revenue needed to invest in families and our economy.” The legislation would achieve these objectives by:

  • Raising taxes on roughly 1,300 public companies and all private companies that report more than $100 million in book income to their shareholders;

  • Creating a seven percent surtax of every dollar of book income above $100 million; and

  • Allowing companies to claim a credit of one-third of federal income taxes paid.

The senators and Rep. Beyer estimate the legislation will raise nearly $700 billion in revenue over 10 years. As readers are well aware, Democrats also would like to raise the corporate income tax levy to 28 percent and rework how the country — and countries across the globe — tax multinational companies.

Sen. Ron Wyden’s Small Business Tax Plan

Another proposal that Democrats could consider is Senate Finance Committee Chair Ron Wyden’s Small Business Tax Fairness Act. The 2017 tax reform legislation signed into law by President Donald Trump created a special tax deduction for small business owners that pay their business taxes through the individual income tax system.

Sen. Wyden says most of the benefits of this provision to wealthy Americans. “As created by Republicans, the 20 percent pass-through deduction disproportionately benefits the wealthiest Americans,” the senator’s office said in a press release. “Sixty-one percent of the monetary benefit of the pass-through deduction goes to the top 1 percent of households. The Small Business Tax Fairness Act would ensure the pass through deduction helps Main Street small business owners, not wealthy real estate investors.”

The Finance Committee chair’s bill would phase out the deduction for individuals earning more than $400,000 – in line with the President’s commitment during the campaign not to raise taxes on anyone earning less than that amount annually. It also would reduce taxes for some small firms by expanding eligibility for middle-income services business owners by removing arbitrary restrictions on which industries qualify for the deduction and which do not.

Addressing the Tax Gap

In May, the U.S. Treasury Department unveiled a plan to address the “tax gap” — the gulf between what taxpayers actually owe and what they pay. Treasury analysts believe that gap was around $600 billion in 2019 and could increase to roughly $7 trillion over the next 10 years.

Treasury’s outline called for:

  • Investing an additional $80 billion in IRS resources over the next 10 years to modernize technology, improve data analytics, and hire agents dedicated to complex enforcement;

  • Giving IRS access to third-party reports, including reports from financial institutions, that could reveal unreported income streams;

  • Improving technology by incorporating machine learning capabilities, providing protection against cyberattacks, and enhancing external communication with taxpayers;

  • Increasing penalties for individuals and businesses that do not report their full incomes.

Treasury officials said these initiatives could raise $700 billion or more in revenue.

Other Priorities Make Resolution Even More Controversial

If the tax increases in the bill were not enough to raise the ire of Republicans (and even moderate Democrats), there is more. In addition to reshaping federal tax policy, the Democrats’ budget resolution calls for reforms and legislation that would:

  • Establish universal pre-kindergarten and create a new child care benefit for working families;

  • Makes community college tuition-free for two years;

  • Put the United States on track to meet President Biden’s 80 percent electricity and 50 percent economy-wide carbon reductions;

  • Provide new consumer rebates for home electrification and weatherization;

  • Make new investments in public housing, green and sustainable housing, housing production, and affordability;

  • Provide green cards to millions of immigrant workers and families;

  • Make new economic development investments to revitalize communities;

  • Expand access to capital and markets for small businesses; and

  • Build on Democrats’ goal of providing universal healthcare to all Americans.

As noted above, senators already have approved the budget resolution on a strictly party-line vote. That does not mean these priorities are on a glide path to President Biden’s desk, however. Senate committees will now start work to write the budget reconciliation, which, if passed and signed by the president, would have the force of law. Senate Democrats need a bare majority, 50 votes, to pass a reconciliation bill.

As we have noted before, that threshold is hard to achieve. Just hours after the Senate passed the budget resolution, moderate Sen. Joe Machin (D-W.Va.) made it clear he is uncertain about voting for the budget reconciliation even though he voted for the budget resolution. According to The Hill, Sen. Manchin said, “Given the current state of the economic recovery, it is simply irresponsible to continue spending at levels more suited to respond to a Great Depression or Great Recession – not an economy that is on the verge of overheating.”

House leadership doesn’t have a much larger margin for error. When the House finally takes up the budget resolution, and then the reconciliation, House Speaker Nancy Pelosi (D-Calif.) can lose just three votes or the legislation will go down in defeat.

The House will be back on August 23. So much for a quiet summer!

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