Tax Legislation to Expect This Fall
This fall is going to be a busy one for Congress on multiple fronts. In August, the House and Senate adopted a budget reconciliation resolution, setting up work on the Democrats’ $3.5 trillion spending and tax package. The Senate also passed a bipartisan infrastructure bill and House Democrats agreed to vote on the bill by September 27, which also is when Congress will be considering government funding and the country’s debt limit. With so much going on, here is a primer on what to expect in potential tax legislation this fall.
This summer, a group of Republican and Democrat senators negotiated a bipartisan infrastructure framework with the White House. The Senate passed the bill 69 to 30 on August 10, and the House plans to vote on the bill by September 27; that vote has not yet taken place as of this writing. The infrastructure bill comes in at $1.2 trillion, with $550 billion in new spending that includes $110 billion for roads and bridges, $73 billion of power grid upgrades, $66 billion for rail and Amtrak, and $65 billion for broadband expansion among the larger appropriations. See the full proposed spending breakdown in this White House fact sheet.
This bill is relatively light on tax provisions, as Senate Democrats plan to include the bulk of their tax policies in the budget reconciliation bill. Nonetheless, here are a few relevant tax provisions you should be aware of from the infrastructure bill:
- The bill restricts availability of the Employee Retention Credit (ERC) to wages paid prior to October 1, 2021 (Q3), which means the ERC would no longer be available for Q4, except for recovery startup businesses. Previously, the ERC was available for wages paid prior to January 1, 2022, but presumably to help with revenue scoring for the infrastructure bill, the credit is rolled back by a quarter. The IRS and other industry groups have been lobbying to not include this provision, but as it is projected by the Joint Committee on Taxation to raise $8.2 billion, the provision was included in the version passed by the Senate.
- Effective January 1, 2024, tax enforcement on transactions involving cryptocurrencies is strengthened, which would require crypto brokers to report certain transactions of digital assets, including virtual currencies, to the IRS. Businesses also would be required to report crypto transactions of more than $10,000. These provisions got a lot of pushback from the cryptocurrency industry and investors, who see these rules as overly broad and may require crypto-related businesses to report to the IRS data they do not have access to. In response, the Senate proposed two amendments:
- Senate Finance Committee Chair Ron Wyden, Sen. Pat Toomey, and Sen. Cynthia Lummis proposed an amendment that gained support from the cryptocurrency industry as it would redefine crypto broker in the bill as referring only to those who conduct transactions on exchanges where consumers buy, sell, and trade digital assets.
- Sens. Rob Portman, Mark Warner, and Kyrsten Sinema (who originally drafted this provision) proposed a definition of crypto broker that would only exclude miners and a few developers. The White House endorsed this amendment.
However, neither amendment received unanimous support in the Senate and so the bill proceeded to the House as written. The House could respond to lobbying efforts to amend these cryptocurrency reporting provisions prior to enacting the infrastructure bill, but as of now, the House agreement to vote on the bill by September 27 is a vote on the bill as is, without amendments.
- Reinstatement of the Superfund Tax, which imposes an excise tax on chemical manufacturers through 2032. The Superfund program was established in 1980 by Congress to clean up highly contaminated waste sites, but the excise tax that funded this program expired in 1995 and since then, the funding has come from the U.S. Department of the Treasury’s general fund account. Now, the infrastructure bill proposes to revive the Superfund program, so effective July 1, 2022, these excise taxes would affect businesses that manufacture, produce, or import certain chemicals, and importers who sell or use specified substances.
Budget Reconciliation Bill
On August 11, the Senate approved a $3.5 trillion budget resolution in a party-line vote. The House followed with its approval in a 220 to 212 vote on August 24, moving the Biden’s administration tax policies and spending priorities one step closer to becoming law.
The fiscal year 2022 budget resolution includes reconciliation instructions for House and Senate committees to draft spending and tax provisions in line with the Democrats’ policy priorities. The resolution instructs the House Ways and Means and the Senate Finance committees to raise enough revenue to offset the cost of the bill’s proposals, and the proposed legislation may reduce the deficit by not less than $1 billion over 10 years. Congress has set a September 15 deadline for each committee to draft its sections of the bill.
The bill would require the votes of all 50 Democrats to pass the Senate, as well as the support of almost all the House Democrats. However, several moderate Democrats have expressed opposition to certain aspects of Biden’s proposed policies, and House Democrats have had disagreements about procedural issues. House Speaker Nancy Pelosi announced her desire to hold off voting on the bipartisan infrastructure bill until the budget reconciliation bill is written and ready for a vote, but moderate Democrats want to pass the infrastructure bill now. In a compromise, House Democrats agreed to vote on the infrastructure bill by September 27, regardless of whether the reconciliation bill is ready.
Although the entire legislative text has not yet been released for the budget reconciliation bill, there are several tax-related provisions expected to be on the negotiation table. For example, Sen. Wyden introduced a series of tax proposals that he hopes will make it into the reconciliation bill:
- The Decent, Affordable, Safe Housing for All Act (DASH Act), which would create a renter’s credit, a middle-income housing tax credit, and a $15,000 first-time homebuyer’s tax credit. The DASH Act also would expand the 9 percent Low-Income Housing Tax Credit by 50 percent, provide a 50 percent basis boost to projects that prioritize extremely low-income renters, and expand the 4 percent credit for rural areas.
- The Ending the Carried Interest Loophole Act, which proposes to eliminate carried interest tax breaks. Currently, carried interest profits are generally taxed at the top capital gains rate of 20 percent, rather than the top individual income tax rate of 37 percent. Wyden’s bill would tax these profits at the income tax rate instead of the capital gains rate. And, if you combine this with the Democrats’ proposal to raise the top individual income tax rate to 39.6 percent, and the 3.8 percent investment income tax that some taxpayers are subject to, this could raise the rate for carried interest up to 43.4 percent. In addition, the bill would remove the current provision that allows carried interest to remain within a partnership for years before being taxed at withdrawal.
- The Modernization of Derivatives Tax Act of 2021, which would require investors to pay ordinary tax rates on annual gains from certain derivative investments instead of capital gains rate, and to deduct losses annually. Banks and securities dealers are already subject to ordinary income rates with respect to derivatives.
- The Small Business Tax Fairness Act, which would phase out the 20 percent qualified business income (QBI) deduction under Section 199A for individuals earning more than $400,000, and attempt to do away with the confusion and “red tape” of what is a “specified service trade or business” by removing restrictions on which industries qualify and which do not. The proposal also would establish one threshold for determining whether a taxpayer gets the deduction and one simple definition of QBI that applies to all taxpayers.
In addition, Sen. Wyden, along with Sens. Sherrod Brown and Mark Warner, also released draft legislation to overhaul international taxation, which primarily targets three types of taxes enacted under the Republicans’ 2017 Tax Cuts and Jobs Act (TCJA): global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT):
- GILTI: The proposal would repeal the tax exemption for foreign factories that incentivizes shipping jobs overseas, raise the GILTI rate, and move to a country-by-country system that the senators believe would prevent multinational corporations from shielding income in tax havens from U.S. tax.
- FDII: The proposal would end the built-in incentive to offshore factories and other assets and equalize the FDII and GILTI rates. The offshoring incentive would be replaced with a new provision to reward current year innovation-spurring activities in the U.S., like research and development.
- BEAT: The proposal would restore the full value of tax credits for domestic investment by creating a higher, second tax bracket for income associated with base erosion.
Other tax-related proposals that could show up in this bill include:
- SALT cap. A group of 20 House Democrats indicated they would vote against the budget reconciliation bill if it does not address the $10,000 cap on the deduction for state and local taxes (SALT). The cap was enacted into law under the TCJA, and since then politicians and lobbying efforts have sought to repeal or reform the cap. According to the Joint Committee on Taxation, a repeal of the state cap is estimated to primarily benefit taxpayers with incomes over $100,000.
- Tax rate increases. To pay for all the spending provisions, the budget reconciliation bill is likely to include tax rate increases. Initially, the Biden administration proposed raising the corporate tax rate from 21 percent to 28 percent, effective for taxable years beginning after December 31, 2021. However, in recent negotiations with Senate Republicans, the White House proposed a 15 percent minimum tax rate for corporations in lieu of raising the corporate tax rate to 28 percent. In addition, some moderate Democrats have indicated their support of a corporate rate no higher than 25 percent and a 28 percent rate for capital gains.
Other proposals also would increase the top individual ordinary income tax rate to 39.6 percent and tax capital gains and qualified dividends investment income at the same rate as ordinary income.
- Stepped-up basis. President Biden’s American Families Plan includes changing the way capital gains taxes are paid on estates. Currently, the basis of inherited assets rises to the fair market value of the property at the date of the decedent’s death. But Democrats want to change this to raise the top end of the capital gains rate to 39.6 percent and eliminate the stepped-up basis provision. There would be a potential exemption of $1 million for individuals and $2 million for married couples.
Congressional Democrats earlier indicated they were close to having the requisite votes to get this policy passed. In recent days, however, a group of moderate Democrats have broken away from the group and are voicing opposition due to the effect on family farms and small businesses. In addition, Senate Republicans published a letter urging the Biden administration to drop the proposal in its entirety. According to the Republicans, these changes would be a significant tax burden on family-owned businesses, farms, and ranches, particularly in rural communities.
This is just the beginning of a multitude of tax and spending provisions that will likely make it into this budget reconciliation bill. For example, the Democrats also plan to focus on extending the expanded Child Tax Credit, addressing paid family and medical leave, improving Medicare, and investing in climate-related spending (likely relying on the Growing Renewable Energy and Efficiency Now Act (GREEN Act) introduced by Chairman of the House Ways and Means Subcommittee on Select Revenue Measures Mike Thompson). However, the budget reconciliation resolution prohibits any new taxes on families making less than $400,000 per year, and on small businesses and family farms.
Congress remains out on their August recess, with the Senate scheduled to return September 13 and the House on September 20. In the meantime, House and Senate committee staff continue to draft the budget reconciliation legislative text for lawmakers to review upon their return. Once each committee drafts its respective section, the legislative text will go to the House Budget Committee, which assembles the final package and votes it out to the House Rules Committee. After that, the bill goes to a House floor vote, before moving on to the Senate.
Speaker Pelosi has indicated that the House plans to enact both the infrastructure and the budget reconciliation bills by October 1. The bipartisan infrastructure bill has a planned vote in the House by September 27, which is the last stop before the bill goes to President Biden for signing, assuming it is passed by the House with no changes from the Senate version.
Congress also is coming up on several fiscal deadlines this fall, including considering a continuing resolution to maintain funding for federal departments and agencies, which is scheduled to expire on September 30, and taking up the federal debt limit. The temporary suspension of the federal debt limit expired on July 31, but Democrats and Republicans disagree on how to handle this—Democrats want to take up this issue as part of a short-term government funding continuing resolution, while Republicans say they won’t support a debt limit increase unless a measure is included to reduce the federal budget deficit.
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