by Dean Zerbe, National Managing Director at alliantgroup and Former Senior Counsel to the U.S. Senate Finance Committee
September 23, 2020
What is the outlook for tax policy both for the Fall and after the elections? Here is an overview, with a focus on implications for small and mid-sized businesses.
The House Democratic leadership and the administration have been unable to come to terms on a COVID-19 relief bill. While the Senate Republicans put forward a comparatively “small-ball” bill, the focus has been on the discussions between Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin. There has not been any real progress – and the sands of time are draining – with members wanting to get back to their districts to campaign. It looks very dim for anything to happen before the elections. Even if there is a bill, any tax provisions may be limited, including checks.
One issue to pay attention to is that the administration and Congress just agreed to funding for the government to be extended to December 11th (the administration’s position), and not February (the Democrat’s position – roughly). With the funding for the government extended to mid-December the continued extension would serve as a vehicle for many other provisions to be included, including those involving tax. Think of funding for the government as Santa’s sleigh to carry all the other presents.
What might we see in the lame-duck session on taxes? There likely would be some of the tax provisions that have been considered for COVID-19 relief, but haven’t come over the finish line. These include a major expansion and enhancement of the employee retention credit; a credit to businesses for safety, health, and cleaning in response to the pandemic; and, clarification on the treatment of Paycheck Protection Program loans (to allow small businesses to deduct PPP expenses related to loans that are forgiven). Multi-employer pension relief could also be in the cards, as well as a temporary increase in the R&D tax credit.
Extenders would also be part of the discussion in a lame-duck period – the Democrats in particular are focused on the number of green provisions – including Section 179D (energy efficient commercial buildings) being extended. The green provisions mostly expire at the end of this year.
While there may be possible tension in a lame-duck session if Joe Biden is elected, with Democrats thinking “why make a deal now when we can get a better deal later?” that take would be balanced by a desire to “clear the decks” for an incoming administration so that they aren’t having to grapple with these to-do items in January and February. The received wisdom in D.C. at the moment is we will have a lame-duck tax bill.
There are three possible variants: one, President Trump wins (and most likely keeps the Senate Republican and the House stays Democrat); two, Biden wins (but the Senate stays in control of Republicans); and three, Biden wins (and Democrats take the Senate). Looking at the polls today, the third variant has the pole position.
The first two variants are fairly straightforward in regards to tax. If Trump wins, the House Democrats would still block any significant tax cuts. Recall that the tax cuts for individual taxes don’t expire until 2025, so there isn’t a compelling requirement to force either side to come to the table. While there would be perhaps additional tax relief in response to the pandemic (a mix of individual and business relief), that would be the main effort. There would be the usual grab-bag of provisions, but in general I would expect taxes (and particularly major tax cuts) to be fairly quiet.
The equation is basically similar with a Biden win, but the Senate stays in Republican hands. There may be some small give to Biden on some tax proposals. For example, encouraging U.S. domestic manufacturing could be in play, but nothing dramatic, and certainly not any net tax increases.
The real play is if Biden wins and Democrats take the Senate. A reminder that for all the discussion about whether Senate Democrats would break the long tradition of 60-vote rules for cloture: that is not necessary for tax bills where the Democrats can make use of the rules of reconciliation that allow a 50-vote requirement (where the Vice-President breaks a tie) to go forward with consideration of legislation. Reconciliation can be used once a year, though the procedure is commonly reserved by the leadership for very big bills. The rules of the Senate bar putting extraneous (non-scoring) provisions on the bill. For example, you couldn’t put immigration reform on a reconciliation bill.
Even if the Democrats get a majority and use reconciliation, the other hurdle they have is the size of their majority. A 50/50 Senate, or a one-vote majority, can be extremely difficult to work with. We worked with both when Senator Chuck Grassley was first Chairman of the Finance Committee from 2001-2003, just above zero fun. With a small majority, one Senator can really grind the works, and could limit the more ambitious Biden tax proposals. Looking at the map of vulnerable Senate seats, to win the majority in the Senate, the Democrats will have to pick up Senate seats in traditionally conservative states. Those new Senators may not be all-in for the full menu of tax proposals being put forward. Even two or three of the current Democratic Senators may be less than bought-in.
Biden and Taxes
With all that said, let’s look at Biden’s tax proposals and a thumbnail handicap on whether it becomes law with a Democratic Senate.
The major ones to consider:
Corporate – There is a strong likelihood that the top rate is raised to 28 percent.
International – It is likely that we see an increase in tax on overseas earnings
Small business owners
Section 199A – Let’s look at the phase out for owners with income above $400,000. I, at one-time, thought this provision (while dealing with big dollars) was below the radar. No. There is a strong interest by some House Democrats on Ways and Means members to reduce or eliminate this provision. I think there’s a strong likelihood this happens.
Top Rate – There would be an increase to 39.6% for those making more than $400,000.
Pease – In looking at the reintroduction of the Pease limitation on itemized deductions for above $400,000, I would hope sanity would prevail and this tax simplification measure is not brought back. That said, it raises a significant amount of dollars, so I think there is a good likelihood this happens.
State and Local Deduction – I’m surprised how much the Democrats have made this a priority (the deduction is significantly weighted to the very wealthy). I would put it in the “might” category. I think more likely is that Democrats expand significantly the deduction for those making less than $400,000.
Capital Gains – Likely to see this on ordinary income rates for those making more than $1 million.
Dividends – Likely to see this on ordinary income for those making more than $1 million.
Estate Tax – A basis step-up at death – tax unrealized gain at death. There is a good likelihood that this happens, but I would expect carve-outs for farms and small businesses. I also would expect it set back to $3.5-$5 million. Regarding the estate tax, I see it as fairly likely, at least some aspects.
Social Security Tax – The big hit for high-earners comes less from the increase in ordinary income rates, and more from having income above $400,000 now subject to social security tax at 12.4 percent (increased over time to 14.8 percent after 2042). I would mark this likelihood as “possible.”
- We are likely to see an expanded child/dependent care tax credit.
- We are also likely to see an expanded EITC for older workers.
Other Business Provisions
Energy Incentives – I would guess that we are likely to see extended and expanded (including Section 48; Section 25D).
Encourage Domestic Manufacturing – Likely to see this in order to help communities suffering from layoffs. I would expect Congress would also then address amortization of R&D expenditures that was part of the tax reform bill by either eliminating the revenue raiser or delaying it by several years. The amortization provision is deeply unpopular.
Encourage Retirement Savings – I would label this as likely.
Carbon Tax – I would put this in the camp of “maybe.”
So, when does this all happen? The new administration and Congress could make the provisions retroactive. However, that would be a change from long-time practice to, in general, make tax increases prospective (the exception being anti-abuse provisions). The outlook in the D.C. tax world is that the Biden administration tax increases would be prospective – but if you have a client that is having to make a big decision with significant tax implications – the obviously safer decision is pre-January 1, 2021. For perspective, when we moved the Bush tax cuts in 2001 through reconciliation (reconciliation is quite a dance) – we got it on to the President’s desk by June – and that was with the threat of losing the Senate majority due to Senator Jeffords switching parties. We shall see.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.