Washington Weekly: The Tax Part

Infrastructure Bill.

There has been a flurry of activity over the past two weeks regarding the negotiation of a comprehensive infrastructure package. With discussions between President Biden and Senator Shelley Moore Capito (R-WV) having stalled, the focus is now on what can be developed by a bipartisan group of 10 Senators. Meanwhile, another bipartisan group in the House that helped negotiate last December’s stimulus bill has proposed an alternative bill. While the Senate group has made some progress (it already has ruled out tax hikes as a source of funding), we remain skeptical that the bipartisan negotiations will bear fruit. Instead, we still expect Democrats to eventually rally around a larger bill (in the ballpark of $2 trillion) that will be paired with corporate and individual tax increases (perhaps totaling about $1 trillion). We expect Democrats in the coming weeks to begin a months-long process of passing such a bill through budget reconciliation, which only requires a majority vote in the Senate. Given that a ruling last week by the Senate Parliamentarian has the practical effect of giving Democrats just one more opportunity to use budget reconciliation this year, there will be a premium on cramming as much infrastructure spending and tax proposals as politically possible into this bill.

A Smaller Infrastructure Bill.

A separate and smaller bill that addresses only surface transportation infrastructure (mostly highway improvements) is also in play and likely will pass the House by the end of June. However, it should not be confused with the more comprehensive infrastructure bill discussed above. This smaller bill must be acted on to keep funding in place for current projects, but the larger bill should be the focus given its broader scope and given its likely use of tax increases as a source of partial funding.

The Tax Part.

President Biden’s proposed budget for fiscal year 2022, which was released late last month, includes 114 pages worth of tax proposals. Many of these proposals could function as major sources of funding for the infrastructure package. We discuss below potential provisions that have been top of mind for colleagues and clients in conversations over the last few months. Additionally, we want to note that we had expected this tax bill to be introduced in July. However, with the recent decision by the Senate Parliamentarian to limit Democrats’ use of budget reconciliation, we now believe this bill will be introduced and acted on in September.

• Capital Gains.

President Biden continues to propose an almost doubling of the tax rate on capital gains for the highest earners (from 20% to 39.6%). We believe that the concerns of some moderate Democrats will effectively lower the proposed increase. It will likely end up at or near 28%. The effective date for such a change is less certain. President Biden has proposed an effective date of April 28, 2021, but we believe Democratic lawmakers instead will use the date of when the bill is introduced (or when it is passed). This is extremely fluid, but if we think the effective date is more likely to be in September or October than this summer.

• Corporate Taxes and International.

The Biden budget continues to call for an increase in the corporate tax rate to 28%, but we don’t believe this will be the rate in the final bill. Congressional Democrats have instead discussed a corporate tax rate of 25%, which we think is more indicative of where the rate will end up. In addition to the corporate tax increase, the budget proposal also has other tax provisions that raise nearly $1 trillion from multinational corporations. These provisions may be revised in some ways, but we think they will be included in some form in the eventual bill.

• Inheritance/Estate Taxes.

President Biden’s proposal eliminates step-up basis, which would tax an asset based on its value when originally purchased versus when it was inherited. This idea has triggered bipartisan angst, but proponents hope that a news report on the low level of taxes paid by the richest Americans will breathe life into the plan. We believe that lawmakers ultimately will shelve changes to step-up basis and that the conversation will turn to lowering the exemption level and raising the tax rate for estate taxes. While more likely than changes to step-up basis, changes to estate taxes are not a certainty given that a few key Democrats have opposed such a tax increase in the past.

• What Will Likely be Left Out?

We often focus on what will be included in a final bill, but it is also worth noting significant tax proposals that we think will not make the final cut. A proposal to change the current retirement saving benefit to a tax credit was left out of the budget and is not part of a set of bipartisan legislative proposals to encourage retirement savings. Additionally, we have heard many progressive Democrats propose a variety of taxes on “Wall Street,” such as a financial transaction tax or a bank tax. Neither of these proposals was included in the President’s budget nor has sufficiently broad support among Democrats on Capitol Hill. Progressives may continue to advocate for these taxes, but we don’t see them getting traction.