While there are some votes still being counted (and even more being contested) there is enough certainty to provide at least an early bird take on taxes – in both the lame duck session and in the new Congress. That said, with control of the Senate dependent on the outcome of the two Georgia runoff elections on January 5th 2020 – there are two distinct scenarios: 1) the Senate stays Republican (with the Republicans winning one or both Georgia seats); or, 2) the Senate is tied with the Democrats winning both Georgia seats and the Vice President casting the deciding vote. Casting a significant shadow over all this is the surprising results in the House – where the Republicans won a number of seats and reduced the Democrat majority to a handful.
Lame Duck – Covid Relief
Leader McConnell (R-KY), post-election, repeated his support for a coronavirus relief bill by the end of the year. Tax elements of such a bill would likely be: expansion of the PPP loan program (as well as clarification on treatment of forgiven PPP loans); an expanded employment retention credit; a credit to employers for Covid-related health and safety improvements – and possibly another round of checks. Spending elements would also include expanded/extension of federal unemployment benefits as well as funding for Covid-19 testing, tracing healthcare, etc. The fights remain over the extent of state/local relief and also litigation protection for government; businesses and tax-exempt organizations. In addition, there is an outside chance that tax extenders could be added into the package.
The two wild cards are: the House and the White House. Speaker Pelosi’s ability to maneuver will be more limited in the new Congress (although the Speaker may benefit from her own members viewing that they need to be responsive to a President Biden) – and the Speaker is facing renewed calls from her own members to push forward a deal now. The White House prior to the election was for a Covid deal – but is understandably focused elsewhere at the moment. It may be a number of days before clear guidance is provided by the administration as to their thoughts on a lame duck Covid bill. Regardless, while prior to the election Leader McConnell was somewhat in the backseat of discussions – I would expect him front and center now on any final Covid deal. A reminder, the new Congress is sworn in on January 3, 2021, and the President on January 20, 2021.
My best bet would be that we will have a comparatively modest Covid bill before Christmas along the lines outlined by Leader McConnell with some give on state/local funding and perhaps some other tax provisions such as extenders included. Traditionally the fight at this time after an election for the party that wins the White House is: “why do a deal now, we can get a better deal later.” That outlook of bright sunshine ahead is not at all apparent now – with a Senate more likely to stay Republican and a tighter Democrat majority in the House. More importantly, the Covid numbers and the economic numbers are concerning with more clouds on the horizon. The push will be to act in the lame duck. Otherwise, the new administration will have a great deal of oxygen and energy taken up with a Covid bill in its first 100 days in office (and potentially not much more to show for it).
Senate Stays Red
If the Senate stays in Republican control – the major tax increases that were put forward by Vice President Biden in the campaign will be largely off the table. No increases in: the ordinary income tax rate at the top; capital gains tax; corporate tax; social security payroll tax; estate tax; no curtailment of Section 199A for small and medium businesses.
That is no. What is yes? Some of the Vice President’s proposals on green energy tax incentives (including extending expiring provisions); the family-friendly tax incentives will get a hard look (See Senator Rubio (R-FL); the proposals to encourage domestic manufacturing – and potentially some of the provisions for a renter’s credit and first-time homeowners. The Senate may be open to some tweaking/clean up on the international provisions as well as anti-abuse provisions that are put forward and perhaps some SALT relief targeted for middle income families.
Bipartisan provisions such as retirement (the so-called Secure Act II put forward by Chairman of Ways and Means Committee Neal (D-MA) and Ranking Member Brady (R-TX) and multiemployer pension (interest for Senator Grassley (R-IA) will be in a strong position for consideration.
As always, there will be must-pass items that must be addressed or will serve as vehicles for tax provisions – including the Highway/Infrastructure bill in the Fall (need to pay for it) and debt extension. In addition, another “to do” item is eliminating the penciled in amortization of R&D costs starting January 1, 2022. There is strong bipartisan and bicameral support for proposals by Senators Hassan (D-NH) and Young (R-IN) as well as Congressman Larson (D-CT) and Estes (R-KS) to remove this job-killing provision – and to also consider proposals to increase the R&D tax credit.
Senate Goes Blue
Even if the Senate were to go blue – dealing with a 50/50 Senate (yes, even with a Vice President as tie-breaker) is a joy without end – as I saw first-hand as a counsel on the Senate Finance Committee. While the Democrats can look to use reconciliation as a vehicle for avoiding the filibuster rules of the Senate – (color me skeptical that the filibuster rules will be removed) the administration and the Democrat Congressional leadership will still have to deal with a very tight House and a situation where every Senator is a “decider.” Fun.
While there might be room to do the more popular/consensus tax items put forward by Vice President Biden (especially those provisions that are providing tax incentives/benefits) – some of the tax increases could have a very tough go. Tax increases on employers in the face of an economy struggling with Covid might be particularly difficult. Bottom line – while on the margin there might be some tax increases that get through in a reconciliation process (reminder, you can only do reconciliation once a year) – a Democrat-controlled Senate may find its way back to the list of bipartisan provisions discussed above if they want to show accomplishments and get bills on the President’s desk for signature.
Georgia on my mind.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. 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. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill. He holds an LL.M. in Taxation from NYU and a J.D. from George Mason University.