The House yesterday passed a fiscal year 2022 budget resolution. The Senate previously passed this same budget resolution on August 11. Approval of the budget resolution is significant in that it is a necessary precursor to developing and passing a large package of spending and tax priorities as part of a budget reconciliation bill. Democrats in the House and Senate would like to pass this reconciliation package as early as late September. Note our distinction between budget resolution and budget reconciliation throughout this note (they are different).
The budget resolution contains directives that will guide the drafting of the budget reconciliation bill. It calls for a reconciliation bill with up to $3.5 trillion of additional federal spending on a variety of social programs and up to $1.5 trillion in offsetting deficit reduction measures, which will consist fully or mostly of tax increases and reforms. The budget reconciliation bill will flesh out the detail on the level of funding for specific federal programs and on changes to tax rates (both corporate and individual) as well as the effective dates of those changes.
Individual committees in both chambers with relevant jurisdiction are now working on specific parts of the budget reconciliation bill. For example, the House Ways and Means Committee and the Senate Finance Committee are working on the tax changes, while the appropriations committees will determine how much new funding certain federal programs will receive. The approved budget resolution sets a target date of September 15 for these committees to complete their work. At that time, the chairmen of the House and Senate Budget committees each will combine the work of the various committees into a single bill in preparation for final votes in the full House and Senate.
However, this process could face delays. House and Senate Democrats could produce different bills, which would require additional time to reconcile. Given the slim margins in both chambers, Democrats will need unanimous support in the Senate and nearly unanimous support in the House. Some Democrats may demand changes that could take time to accommodate. Some Democrats may even oppose the bill, which would put its passage in jeopardy. Nevertheless, the vast majority of Democrats and President Biden are eager to pass a final budget reconciliation bill and there will be significant political pressure to pass the bill in a timely manner.
The details of the bill, including proposed changes to tax laws, will be better known over the course of September as the relevant committees try to finish their work by the aforementioned September 15 target date.
Why are the September dates important? Most tax changes in the pending budget reconciliation bill (such as increases to individual and corporate tax rates) likely will be made effective on January 1, 2022. However, some changes could have an earlier effective date tied to the introduction (or passage) of the bill. For example, we think changes to capital gains tax rates will be made effective as of the date of the bill’s introduction (that could be as early as September 7) or the date of the passage of the final bill (late September/October). Some Democrats have suggested an earlier application date (such as April of this year, which President Biden proposed at one point) for changes to capital gains rates, but we don’t believe the effective date will be set that early.
The writing of the budget reconciliation bill will be very fluid over the next few weeks. Provisions will be added and dropped every day. The spending and tax levels will fluctuate as Democratic members weigh in and decide what is acceptable to them. Some ideas will be floated as trial balloons to gauge public reaction. Amidst this activity, we shouldn’t lose track of the following big-picture points:
- Bill text specifying spending increases and tax rate changes on businesses and individuals should be available to the public as early as the first full week of September.
- Some tax changes – including on capital gains rates – could be made effective as early as the date of the reconciliation bill’s introduction. Investors sensitive to the tax rate on capital gains should know that the lifespan of the current 20% rate may be only two more weeks.
- While there will be political drama around the crafting and debate of this very comprehensive tax and spending bill, we believe there is a very good chance a final bill will pass.
- Businesses, individuals and investors should all be aware of these impending tax changes. While the bills have not yet been written, we believe it is a near certainty that changes will be made to increase taxes on capital gains (likely to a top rate of 28%), on corporations (to at least a 25% rate), to the highest individual tax bracket (to 39.6%), to estate taxes (still too fluid to call) and to a wider range of taxes.
A final point is that there is no official connection between the passage of a budget reconciliation bill and the pending bipartisan infrastructure bill (which should also receive a vote in the House in late September). Many readers have confused the two in notes to us over the past month. Many provisions in both bills were considered as part of one bill months ago, but they have since diverged and taken their own separate paths. It is best to view them as separate measures for now.