Biden’s Tax Plan: Democrats Have Control, But Tax Reform Details Remain Unclear

Author: BDO
Published: January 2021
Original Article Link

Democrats Jon Ossoff and Raphael Warnock have now won the
January 5, 2021, Senate
runoff elections in Georgia, so the Democrats will have control of the
Presidency, House of Representatives and Senate, giving them a governing
mandate (the Georgia runoff election results have not yet been officially
certified but this will take place before January 20, 2021).



While President-elect Joe Biden expressed
interest in raising taxes on corporations and wealthy individuals during his
campaign, it is best to think of that as a framework for where the new
administration intends to go, rather than a set-in-stone inevitability. We know
the new administration is likely to favor a paring back of some of the tax cuts
made by the 2017 Tax Cuts and Jobs Act (TCJA). Biden has indicated that his
administration may consider changes to the corporate tax rate, capital gains
rate, individual income tax rates, and the estate and gift tax exemption
amount.



Procedurally, it is unclear how tax legislation
would be formulated under the Biden administration. A tax package could be
included as part of another COVID-19 relief bill. The TCJA could be modified,
repealed or replaced. It is also unclear how any package would proceed through
Congress. Under current Senate rules, the legislative filibuster can limit the
Senate’s ability to pass standalone tax legislation, thus leaving any such
legislation to the budget reconciliation process, as was the case in 2017. It
also remains unclear if the two parties will come together to work on any bill.
Finally, it will be important to note who fills key Treasury tax positions in
the Biden administration, as these individuals will have a strategic role in
the development of administration priorities and the negotiation with Congress
of any tax bill.

How Tax Changes Could Take Shape:

Part of a COVID-19 Relief Package

With the new administration eager to provide immediate relief to
individuals and small and medium-sized businesses affected by the coronavirus
pandemic, some tax changes could be included as part of an additional relief
bill on which the new administration is likely to seek bipartisan support. Such
changes could take the form of tax cuts for some businesses and individuals,
tax credits, expanded retirement contributions and/or other measures. If
attached to a COVID-19 relief bill, these changes would likely go into effect
immediately and would provide rapid relief to businesses and individuals that
have been particularly hard hit during the pandemic and economic downturn.

 

Repeal and Replace TCJA

Another possibility is for Biden to pursue a full rollback of
the TCJA and replace it with his own tax bill. This would be a challenge since
the Democrats only have a slim majority in the Senate, meaning that Republicans
could filibuster the bill unless Senate Democrats take steps to repeal the
filibuster.



Given that the Biden administration’s immediate priorities will be delivering
financial assistance to individuals and businesses, ensuring the rollout of
COVID-19 vaccines and flattening the curve of cases, a repeal and replacement
of the TCJA might not be voted on until at least late 2021 and likely would not
go into effect until 2022 at the earliest.

Pare Back or Modify the TCJA

An overall theme of Biden’s campaign was not sweeping, radical
change but making incremental shifts that he views as improvements. We may see
this theme come into play in Biden’s approach to tax legislation. He may choose
not to repeal the TCJA completely (prompting a return to 2016 taxation levels),
but instead to pare back some of the tax changes enacted in 2017. In practice,
this could be in the form of raising the corporate tax rate by a few percentage
points, which could garner bipartisan support. Again, this likely would not be
a legislative priority until after the country has passed through the worst of
the COVID-19 pandemic.

 

Unknowns: Factors That Will
Influence Potential Tax Changes

Senate Legislative Filibuster

Currently, the minority party in the Senate can delay a vote on
an issue if fewer than 60 senators support bringing a measure to a vote. Thus,
Republicans would be likely to filibuster any bill that contains more ambitious
tax rate increases. The uptick in the use of the filibuster in recent decades
is perhaps a symptom of congressional deadlock, and there are calls from many
Democrats to eliminate the filibuster in order to pass more ambitious
legislation without bipartisan support (in fact, in recent years, the filibuster
has been removed for appointments and confirmations). While President-elect
Biden and incoming Senate Majority Leader Chuck Schumer may be open to ending
or further limiting the filibuster, with the current composition of the Senate,
every Democratic senator would have to agree. Last fall, West Virginia Senator
Joe Manchin indicated he would oppose ending the legislative filibuster.



If the Democrats are successful in removing the filibuster, it would be easier
for Congress to pass more permanent tax legislation. However, if the filibuster
remains in place, tax legislation would likely be passed as part of the budget
reconciliation process, which only requires a simple majority to pass. However,
the tradeoff is that any changes generally would have to expire at the end of
the budget window, which typically is 10 years. This is how both the 2001
Economic Growth and Tax Relief Reconciliation Act and the TCJA were passed.

Treasury Appointments

Another factor that will influence Biden’s tax policies is who will
fill key tax appointments at the Department of Treasury. Three positions that
will have a major effect on any tax plan are Assistant Secretary for Tax
Policy, Deputy Assistant Secretary for Tax Policy and Tax Legislation Council,
each of whom typically steer the administration’s voice on tax legislation.



These appointments may take several weeks or longer to get in place, so it is
possible that there will not be any tax legislative activity until the
positions are filled.

Appetite for Bipartisanship

President-elect Biden has signaled that he wants to be a
president for all Americans and seek to heal the partisan divides in the
country. He may be looking to reach across the aisle on certain legislation and
seek bipartisan support, even if such support is not necessary to pass a bill.
Biden stated during his campaign that he wants to increase the corporate tax
rate—not to the 2017 rate of 35%—but to 28%. Achieving this middle ground rate
might be viewed as a compromise approach.



As the new government takes office, it remains to be seen how much
bipartisanship is desired, or even possible.

What These Factors Mean for Your Business

It is important to note that sweeping tax changes probably are
not an immediate priority for the incoming Biden administration. With the
escalating health and economic crises resulting from the COVID-19 pandemic, the
new administration’s immediate focus likely will be on addressing the current
fragmented approach to COVID-19 vaccinations, accelerating the distribution of
the vaccines, taking steps to bring the spread of COVID-19 under control and
providing much needed economic relief. As noted above, there could be some tax
changes and impacts resulting from future COVID-19 relief bills. Those will be
the bills to watch for any early tax changes, including cuts or credits, that
businesses may be able to take advantage of. Larger scale tax changes,
particularly any tax increases, may not go into effect until 2022 at the
earliest. Moreover, factors such as the continuation of the legislative
filibuster, the appetite for bipartisanship and the filling of key tax
appointments at Treasury will help determine the path and details of those
changes.



Regardless of your current tax position, it is important to remain informed on
potential policy changes, how these will play out and how they will affect your
organization. As more details come to light, we will provide additional
insights on how new policies will affect the tax position of middle market
businesses.



The following table sets out the current rules and how Biden is proposing to
deal with these rules:

 

For any questions regarding this resource, kindly contact Larry
Miao, smiao@bdo.com