May 2, 2021
Americas Tax Policy: This Week in Tax Policy News for April 30
This week (May 3-7)
Congress: The Senate is out, returning May 10, and the House is in the middle of two Committee Work Weeks, meaning there are hearings and other committee business but no floor votes.
Last week (April 26-30)
American Families Plan: President Biden April 28 detailed the American Families Plan on "human infrastructure," providing funding for early childhood and postsecondary education, childcare affordability, paid leave, nutrition, and extensions of enhanced tax credits included in the American Rescue Plan enacted earlier this year. It is financed with tax increases on individuals. Tax provisions would:
On the last provision, the Wall Street Journal reported, "Currently, there is a 3.8% tax on investment income and an equivalent set of taxes on wages and self-employment income. The administration, citing holes in the law, says it would apply those taxes consistently to income over $400,000. That could mean applying a 3.8% tax to the active income earned in businesses such as S corporations and partnerships."
During an address to a joint session of Congress April 28, President Biden made the case for tax increases using many of the arguments Democrats have been making for years — essentially, that the wealthy and corporations were the main beneficiaries of the TCJA and must pay their fair share in taxes, and there shouldn't be a lower rate for investment income over wage income. President Biden said corporations "benefit from tax loopholes and deductions that allow for offshoring jobs and shifting profits overseas. That's not right. We're going to reform corporate taxes so they pay their fair share — and help pay for the public investments their businesses will benefit from." He said, "we're going to reward work, not wealth," including by taking the top tax bracket "for the wealthiest 1% of Americans — those making $400,000 or more — back up to 39.6%." The President also said, "We're going to get rid of the loopholes that allow Americans who make more than $1 million a year pay a lower rate on their capital gains than working Americans pay on their work." President Biden said the TCJA "was supposed to pay for itself and generate vast economic growth. Instead it added $2 trillion to the deficit. It was a huge windfall for corporate America and those at the very top."
Outlook: Following President Biden's address and the release of high-level details on the American Families Plan, there is plenty of speculation about which tax increases in that plan and the American Jobs Plan — the traditional infrastructure proposal paired with tax increases on corporations — may be enacted and when. While more details on the tax proposals will come in the Administration's FY2022 budget, expected to be released sometime in May, the long-awaited rollout of the two-part plan is now complete and the President has put his cards on the table on tax increases. Uncertainty over the congressional outlook for the plans makes it difficult to predict what tax proposals may become law, and whether other proposals not in the President's plan will be considered. The $568 billion infrastructure plan proposed by a group of Republican senators April 22, as an alternative to the $2 trillion-plus Jobs Plan, got positive mentions from the President (during the address) and Senator Joe Manchin (D-WV), a key moderate. The GOP senators who put forward the plan, who serve as ranking members on committees of jurisdiction over infrastructure, are opposed to including tax increases but didn't prescribe other pay-fors, although a vehicle-miles-traveled tax was mentioned. Republicans in general don't want big changes to the TCJA. The Hill reported Senate Environment & Public Works Ranking Member Shelley Moore Capito (R-WV) as saying she and her staff have been in touch with the White House on infrastructure. "I think we'll probably move to a more negotiating phase that once we get the data down," she said. "It's all moving forward, it's all positive." If an infrastructure deal with Republicans emerges, tax increases will likely be out, but Democrats would likely move forward on the remainder of the President's plan with some tax increases using budget reconciliation procedures. The Families Plan portion almost certainly requires reconciliation as it is mostly Democratic priorities. One way or another, the budget reconciliation process will most likely be used and nearly all Democrats in Congress must agree to the same package.
The first key decision for Democrats will focus on the size of the reconciliation bill, and how much of it will be offset with tax increases. That decision must ultimately find its way into a budget resolution that must be agreed to by the House and Senate before actual drafting of the reconciliation bill can get started.
Already there are differences among Democrats: Senator Manchin and others want a smaller corporate tax rate increase, to 25%, Democrats from high-tax states want repeal of the $10,000 SALT deduction cap, and members have various other priorities. The Washington Post April 29 reported Manchin as expressing skepticism over the tax increases, including on capital gains. "That's a heavy lift," Manchin said. "We just can't make ourselves noncompetitive. We have an economy that's ready to take off and boom. We can't put the brakes on it." An April 29 New York Times analysis said, "Now it is up to Senator Chuck Schumer to make" President Biden's vision for a post-pandemic America "a reality." With the Senate GOP plan only a fraction of what the Administration proposed to spend on infrastructure, "the gulf between the two parties could not be larger. Yet a handful of Democrats who could be crucial swing votes believe it is misguided and politically dangerous to pass legislation this big without buy-in from the other party." With Schumer facing pressure to act "before the political warfare of the midterm elections drown out any chance of making a law," there's a short window to test the waters of bipartisanship. While there was bipartisanship on "modest measures" like a water infrastructure bill, "on crucial components of Mr. Biden's plan — like the tax increases on high-earners and corporations to pay for it — there is no such middle ground to be found," it said.
Neal plan: House Ways and Means Committee Chairman Richard Neal (D-MA) April 27 unveiled a plan on universal paid family and medical leave, guaranteed access to childcare, and permanent extension of the expanded CTC, CDCC, and EITC. The plan doesn't identify tax increases to offset the revenue loss.
SFC climate hearing: The Senate Finance Committee (SFC) held a hearing April 27 on clean energy that focused on Chairman Ron Wyden's (D-OR) bill to consolidate more than 40 tax provisions into a new set of three incentives for clean energy, clean transportation, and energy efficiency. "It would be a job-creating, free market competition to get to net-zero carbon emissions. Clean energy producers and businesses that focus on cutting-edge transportation would no longer have to worry about their tax incentives disappearing because Congress is deadlocked yet again. The bill would help to supercharge innovation in clean transportation and energy storage," Wyden said. Republicans expressed concern over tax increases backed by Biden and Wyden to pay for energy tax credits. Wyden's energy bill proposes to eliminate fossil fuel tax incentives; provide an emissions-based, technology-neutral tax credit for clean electricity production, either as a production tax credit an investment tax credit; provide a clean fuels credit; and repeal of the 200,000 unit per-manufacturer EV cap plus a credit for commercial EV purchases.
Fairness hearing: An April 27 SFC subcommittee hearing chaired by Senator Elizabeth Warren (D-MA) focused on a wealth tax, a corporate minimum tax based on book income, and the tax gap, which has taken on a new allure given IRS Commissioner Rettig's estimate that it may be $1 trillion per year in the age of cryptocurrency. Warren advocated an annual 2-cent tax on wealth over $50 million, and the Real Corporate Profits Tax, under which corporations that report profits to their shareholders and the public of more than $100 million would pay a minimum tax of 7% of reported profits. Witnesses had arguments for and against such proposals. It was noted that the wealth tax would get at income that escapes taxation in the current system, but it has been tried and abandoned in Europe (though one witness said it's now harder to hide wealth abroad because of FATCA) and has administrability issues; and a minimum tax based on book income would keep corporate taxpayers from trying to inflate reported earnings but would also introduce complexity into the corporate tax code.
During both the climate hearing and subcommittee hearing, in the context of proposals by Biden and Warren for a minimum tax based on book income, Republicans criticized Democrats for taking exception to companies reducing taxable income with deductions while at the same time proposing more deductions for clean energy, etc. Senator Chuck Grassley (R-IA) said the reason companies pay zero taxes is they are eligible for provisions like green energy incentives, and he asked whether making such incentives refundable, through a direct pay option, could result in negative tax liability. Senator Bill Cassidy (R-LA) similarly suggested it is hypocritical for Democrats to advocate tax credits for renewable energy but criticize their use to reduce tax liability. Witness Alex Brill of AEI, a former Ways & Means Republican staffer, said it is normal and natural for firms not to pay corporate income tax even while showing book income as a result of a sound system of NOL carryforwards and carrybacks and is not necessarily something policymakers should be concerned with. Proposals to create minimum taxes based on book income amount to bringing back the AMT in another form, something that is not good, he said. Brill advocated for a price on carbon, and noted that the business community — BRT, U.S. Chamber of Commerce, API — have joined in that view.
Budget: There isn't a clear sense of timing for release of the President's FY2022 budget. The Hill reported House Armed Services Committee Chairman Adam Smith (D-WA) as expressing concern about being able to process the NDAA and annual spending bills saying, "There is not time to get through the legislative process if we don't get this thing before May 10." Previous indications were that the budget would be released closer to the end of May. On a related issue, an increase in or suspension of the federal debt ceiling that must occur later this year, MarketWatch reported that Democrats want to avoid a fight with Republicans using the debt limit increase as leverage to force spending cuts. Democrats may decide to incorporate a debt ceiling increase in a budget reconciliation bill to avoid such a fight. The limit is suspended through July but won't need to be addressed until late summer or the fall. Spending, revenue, or the debt limit may be addressed under reconciliation together or separately. A parliamentarian ruling on revision may allow more reconciliation legislation under the FY2021 budget resolution, even before Congress agrees to an FY2022 resolution. In February, it was reported Democrats were considering another avenue, a House rule that treats a vote to adopt a budget resolution as a vote to suspend the debt ceiling for the entire fiscal year.