Significant Changes to U.S. Tax Law Likely on the Horizon

Now that Joe Biden is the 46th president of the United States, and we have two newly elected Democrat senators from Georgia, the Democrats have control of the White House and both houses of Congress for the first time since 2011. And while the Democrats slim one-vote majority in the Senate will place limits on some of the legislation the Democrats can pass, they will be able to pass tax legislation without any Republican support via the budget reconciliation process.

This article summarizes the budget reconciliation process and the proposed legislation that could become reality over the next two years via that process.

Budget Reconciliation Process

The budget reconciliation process allows the Senate to pass budget legislation, subject to certain rules, with limited debate and a simple majority vote. The Congressional Budget and Impoundment Control Act of 1974 implemented the process as a way to ease the passage of legislation that would reconcile taxes, spending and budget deficits. Rules specific to budget reconciliation, however, limit the type of legislation that can be passed via this process.

Specifically, the reconciliation process requires the president to first submit a budget request to Congress and then for the House and Senate to pass identical budget resolutions. The resolutions must also abide by the “Byrd Rule” (named for Senator Robert Byrd), which excludes provisions that are “extraneous” to the budget. This includes, among other things, provisions that do not change revenues or spending, provisions that increase the deficit for a fiscal year beyond the “budget window” (usually a period of 10 years), and provisions that recommend changes to Social Security.

Congress can pass up to three reconciliation bills per year, with each bill addressing the major subjects of reconciliation: revenue, spending and the federal debt limit. However, if Congress passes a reconciliation bill affecting more than one of those subjects, it cannot pass another reconciliation bill later in the year affecting one of the subjects addressed by the previous reconciliation bill.

Historically, in practice, one reconciliation bill was passed per year at most. However, it is possible for two reconciliation bills affecting the same subjects to be passed in 2021 – one for fiscal year 2021 (which began on October 1, 2020, and for which a resolution has yet to be passed) and one for fiscal year 2022 (which begins on October 1, 2021).

2021 Legislation Priorities

By using the budget reconciliation process, the Biden administration and the Democratic-controlled Congress can pursue a range of tax and spending initiatives, including President Biden’s individual and corporate tax proposals aimed at reversing changes brought by the Tax Cuts and Jobs Act of 2017 (TCJA).

For individuals, major Biden proposals include:

• An increase in tax rates on ordinary income, capital gains and qualified dividends
• Additional limitations on itemized deductions
• A reduction in the amount of lifetime exemption from estate and gift taxes
• Elimination of the basis adjustment at death
• Extension of the 12.4 percent Social Security tax to wages and self-employment earnings above $400,000
• New and expanded tax credits targeted at lower – and middle – income households

For corporations, major Biden proposals include:

• An increase in the corporate tax rate
• A minimum tax for large corporations
• Penalties and incentives aimed at keeping foreign production by U.S. companies in the United States
• Changes to the global intangible low-taxed income (GILTI) rules

Congressional Democrat priorities that could be included in a budget reconciliation bill are a repeal of the $10,000 state and local tax deduction cap and various tax provisions contained in the HEROES Act, which House Democrats passed during the summer of 2020.

Democratic control of the government could also affect whether and how Congress extends the expiring provisions of the TCJA. These include:

• The exclusion, until 2022, of depreciation and amortization from the calculation of adjusted taxable income for purposes of the limitation on business interest expense
• The phase-out of 100 percent bonus depreciation during 2023 – 2027
• The expiration of the individual tax cuts after 2025

Likely Outcome

With the one-vote majority in the Senate and the narrow 221-211 majority in the House, the Biden administration will be able to pursue more policy changes than would otherwise be possible under a divided government. However, political calculations, legislative priorities and the state of the economy may impose limits. Nonetheless, it is widely anticipated that many of the above legislative priorities, along with additional COVID-19-related measures, will be passed over the next two years via the budget reconciliation process.

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Authored by Phil MacFarlane.

© 2021