Washington Weekly: SALT Shake-up

U.S. Office of Public Policy, 05 November 2021

This Week:

The Senate approved various executive and judicial branch nominations and rejected an effort to debate and vote on a comprehensive voting reform bill. The House passed a bill to protect older job applicants.
The chamber is also currently trying to pass a large social spending and tax bill (see below) and a bipartisan infrastructure bill (see below) before leaving town this weekend.

Next Week:

Both the Senate and House will be out of session and will return to Washington the following week.

The Leads

Democrats and Budget Reconciliation Bill.

Following Tuesday’s election setbacks for Democrats, Democratic leaders and President Biden have doubled down on their desire to pass the Build Back Better Act (the official name for the budget reconciliation bill) as quickly as possible. House Speaker Nancy Pelosi (D-CA) is trying to push Democrats to pass this social spending and tax bill today. They are close to doing so, but she and other Democratic leaders are still trying to lock down the support of several moderate House Democrats. If they come up short, the vote would need to be delayed until the week of November 15. Regardless of the exact timing, it is also important to note that the bill the House passes will not be the final bill. Several House provisions will be ineligible under Senate budget reconciliation rules or will be unacceptable to certain Democratic Senators. Consequently, these provisions will need to be revised or eliminated. Nonetheless, a final bill will still spend around the current level of $1.75 trillion and will be funded by various offsetting tax provisions. Despite the bumpy road on which this bill has traveled, we still believe a final bill will be passed by both chambers by Thanksgiving or in early December.

House Budget Reconciliation Bill Provisions.

A revised summary of the bill(PDF, 487 KB) was released this week by the Speaker's office (23 pages). We reported on a few provisions last week and will mention a few others below that have been the subject of inquiries from our colleagues and clients.

  • SALT Shake-up. Up until Wednesday, the budget reconciliation bill did not contain any relief from the current cap of $10,000 on the deduction of state and local taxes. Under the latest draft, the cap, which negatively impacts taxpayers in high-tax states like New York, New Jersey and California, would be raised to $80,000. This increase would apply to 2021, so taxpayers who increased their tax withholding in response to the existing limit on SALT could end up with a refund next April. While the existing SALT cap is set to expire at the end of 2025, Democrats have proposed keeping the new cap in place until the end of 2030. The cap would revert back to 2031 as a way to reduce the overall cost of the proposed increase. Progressive Democrats oppose these changes since the relief would primarily help upper-income Americans and will push for an income limitation in the Senate for those that may utilize the deduction. The details remain fluid, but we expect that this proposal or a version of it will be passed into law as part of the reconciliation package.
  • Capital Gains. The original House bill would have increased the capital gains tax rate to 25% for those earning over $400,000 ($450,000 for married couples). The latest bill has eliminated this provision due to the objection of at least one Democratic Senator. However, the latest bill does include a 5% surtax on income over $10 million and an additional 3% surtax on income over $25 million. These surtaxes would be applied to modified adjusted gross income, which includes capital gains. As a result, the current draft does include some form of tax increase on capital gains and dividends, even if it is less explicit and applies to a much smaller universe of taxpayers than the initial proposal. Given favorable political optics and the need to raise revenues, this surtax is likely to be in the final bill.
  • Retirement. The latest bill also has some changes on retirement security issues. First, the bill has a prohibition on new contributions to accounts exceeding $10 million and would require distributions from such accounts starting in 2029. Additionally, the bill eliminates the ability for backdoor Roth conversion from a retirement plan at the end of this year. Finally, the bill eliminates Roth rollovers for those earning more than $400,000 as of December 31, 2031. While the bill is still evolving, there is an emerging consensus around them. There is still a chance they will be removed from the final bill, but as of today they are secure.

Bipartisan Infrastructure Bill.

The House will vote on the INVEST in America Act (bipartisan infrastructure bill) after it passes the budget reconciliation bill. This could happen today or later in the month. Some Democrats want to attach a debt ceiling increase to this bill, but such a bill would be unlikely to get the 60 votes needed to move forward in the Senate. This bill most likely will be passed by the House without a debt limit increase, with the big question being timing.

Other Issues

Employee Vaccination Mandate.

The Occupational Safety and Health Administration (OSHA) this week issued an emergency rule that requires US companies with over 100 employees to ensure that their employees are vaccinated for COVID (or subject to a regular testing regime) by January 4, 2022. President Biden first announced the mandate in September along with similar mandates for federal employees, federal contractors and front-line workers whose employers receive Medicare and Medicaid reimbursement. The employer mandate also requires those covered to provide paid leave for workers to receive a vaccination and for work time taken to deal with any side effects from the vaccination. Many larger employers have already implemented their own vaccination programs for employees, while employers closer to the 100-employee threshold have expressed concerns about costs and possible worker shortages. The final rule will certainly trigger legal challenges from some employers, labor unions and various states. Some states could also try to pass legislation exempting businesses within their jurisdictions from the federal mandate. It’s likely the final content of this rule will eventually be determined by the courts.

Stablecoin Regulation.

A group of regulators led by the Treasury this week issued a report on stablecoins, which are digital assets issued by private entities but backed by other assets, including fiat currencies like the dollar. While stablecoins are primarily used today to support trading and other financial activity relating to crypto currencies, the report notes that stablecoins could have much broader applications as a form of payment. Regulators have concerns with stablecoins because they fall between regulatory gaps and a perception of their safety could create financial stability risks. The regulators asked Congress to act quickly to address some of these regulatory gaps. In particular, to address the risk of runs on stablecoins, the report recommends that Congress develop legislation that requires issuers of these coins be regulated as banks. It will take some time for lawmakers to better understand these complex issues and it likely will be a while before Congress is able to come to any agreement on appropriate policy solutions. Without Congressional action, the Financial Stability Oversight Council (FSOC) will consider potential actions, including the designation of stablecoin activities as systemically important (something the FSOC has never done before). While the regulators provide a clear view that stablecoin issuers should be regulated as banks, the report raises as many questions as it answers.

Supreme Court Impact.

The Supreme Court made headlines this week as it held oral arguments on two high-stake cases. The first is a case regarding a Texas abortion law that went into effect in September. This will be the Supreme Court’s second ruling on the case (it previously ruled 5-4 to let the law go into effect while lower court challenges played out). The justices will rule this time on how the law is enforced, not on abortion rights directly. The high court also will consider another major abortion case in December that deals with whether Mississippi abortion laws conflict with the landmark 1973 Roe v. Wade decision. The second major case the Supreme Court heard this week is one of the largest Second Amendment cases the court has taken up in a decade. It concerns the right to carry guns in public in certain situations. The Supreme Court will issue rulings on these cases next summer (just months before the mid-term elections) and these rulings could be top of mind for voters passionate about abortion and gun rights issues.

The Last Word

Election Implications.

Tuesday’s election results sent shockwaves through the political world as Glenn Youngkin (R) became the first Republican to win a Virginia gubernatorial race in 12 years and Governor Phil Murphy (D) barely won in New Jersey, a state that voted for Joe Biden by 16% just a year ago. Both races began to tighten in late summer, around the time that President Biden’s approval ratings began to drop. This underscores how the mid-term elections next year will also largely be a referendum on President Biden and his policies. He has nine months (when early voting begins) to 12 months (election day) to improve those numbers and give hope to Democrats that they will maintain their majorities in Congress.