President Joe Biden on March 28 sent to Congress a $5.8 trillion FY 2023 budget that proposes new tax increases, including a new 20% minimum tax that would apply to certain high-income individuals, and other measures to reduce federal deficits by $1 trillion over 10 years. New business tax increase proposals include an “undertaxed profits rule” that would replace the current base erosion anti-abuse tax (BEAT). The President’s budget also re-proposes a 28% corporate income tax rate and numerous other tax provisions that were included in his FY 2022 budget.
The release of the President’s FY 2023 budget and a 120-page Treasury Department “General Explanation of the Administration’s FY 2023 Revenue Proposals” (the Green Book) comes at a time when Senate Democrats are attempting to advance the “Build Back Better” reconciliation bill (H.R. 5376) that passed the House with only Democratic votes last November. The House-passed reconciliation bill has been stalled in the Senate due to objections from Senator Joe Manchin (D-WV) over the legislation’s spending provisions and other issues.
Observation: While the reconciliation process still provides a pathway for the enactment of significant tax provisions with only Democratic votes, it is noteworthy that the President’s FY 2023 budget re-proposes many corporate and individual tax proposals that were unable to secure the support of House and Senate Democrats last year. The President’s new minimum tax on the unrealized capital gains of certain high-income individuals also is similar to certain “wealth tax” proposals that have been opposed previously by moderate House and Senate Democrats.
The House-passed reconciliation bill pending Senate action features numerous tax increase proposals, including a new corporate profits minimum tax, a surtax on corporate stock repurchases, international tax law changes, new surcharges on individual adjusted gross income above $10 million, and an expansion of the individual net investment income tax. H.R. 5376 also includes some taxpayer-favorable provisions, including a measure that would reinstate current deductionabilty for Section 174 research expenditures that became subject to amortization in 2022 under a provision of the 2017 tax reform act.
Action item: Significant tax proposals affecting businesses and individuals may be enacted under budget reconciliation procedures if Democrats can secure the unanimous support of all Senate Democrats. Stakeholders, and especially CEOs and CFOs, should communicate with policy makers on the potential effects of tax increase proposals on their employees, job creation, and investments in the United States.
President Biden’s $5.8 trillion FY 2023 budget proposes new tax increases and other measures that are intended to reduce federal deficits by $1 trillion over 10 years. At the same time, the President’s budget proposes to increase overall spending on defense and non-defense discretionary programs.
The FY 2023 budget seeks to take into consideration the fact that Congressional Democrats are still attempting to pass an FY 2022 budget reconciliation bill. The President's budget includes a "deficit neutral reserve fund" for Build Back Better budget reconciliation legislation offset by business and individual tax increases. "The Budget includes a reserve for legislation that reduces costs, expands productive capacity, and reforms the tax system," the budget document states. "While the President is committed to reduce the deficit with this legislation, this allowance is shown as deficit neutral to be conservative for purposes of the budget totals. Because discussions with Congress continue, the Budget does not break down the reserve among specific policies or between revenues and outlays."
Observation: The President’s budget inclusion of a "deficit neutral reserve fund" for the pending Build Back Better budget reconciliation legislation seeks to avoid choosing among House-approved spending and tax measures that may not have sufficient support from Senate Democrats.
The President’s new proposal for a 20% minimum tax on high-income individuals is projected to raise $360 billion over 10 years, according to Treasury estimates. While the President’s budget refers to the proposal as a tax on “billionaires,” the proposed 20% minimum tax would apply on total income, including unrealized capital gains income, for all taxpayers with net wealth greater than $100 million. The provision is proposed to be effective for tax years beginning after December 31, 2022.
Under the proposal, taxpayers could choose to pay the first year of minimum tax liability in nine equal, annual installments. For subsequent years, taxpayers could choose to pay the minimum tax imposed for those years (not including installment payments due in that year) in five equal, annual installments.
According to the Treasury Green Book, “a taxpayer’s minimum tax liability would equal the minimum tax rate (that is, 20 percent) times the sum of taxable income and unrealized gains (including on ordinary assets) of the taxpayer, less the sum of the taxpayer’s unrefunded, uncredited prepayments and regular tax. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once. The amount of a taxpayer’s uncredited prepayments would equal the cumulative minimum tax liability assessed (including installment payments not yet due) for prior years, less any amount credited against realized capital gains in prior years.” A special rule would apply for certain illiquid assets.
Taxpayers with wealth greater than the threshold would be required to report to the IRS on an annual basis, separately by asset class, the total basis and total estimated value (as of December 31 of the tax year) of their assets in each specified asset class, and the total amount of their liabilities.
The President’s budget would repeal the BEAT and replace it with a new undertaxed profits rule (UTPR) that is intended to be consistent with the UTPR described in the OECD Pillar Two Model Rules. When another jurisdiction adopts a UTPR, the proposal also includes a domestic minimum top-up tax that seeks to protect the US fisc from the imposition of UTPR by other countries. Separately, the proposal would provide an unspecified mechanism that seeks to ensure US taxpayers would continue to benefit from US tax credits and other tax incentives that promote US jobs and investment.
The UTPR would primarily apply to foreign-parented multinationals operating in low-tax jurisdictions. In addition, UTPR would apply only to financial reporting groups that have global annual revenue of $850 million or more in at least two of the prior four years.
The proposal to repeal the BEAT and replace it with the UTPR would be effective for tax years beginning after December 31, 2023. The new proposal is projected by Treasury to raise $239 billion over 10 years.
Additional business and individual tax increase proposals in the President’s budget would:
Biden Administration FY 2023 budget
Treasury “General Explanation of the Administration’s FY 2023 Revenue Proposals” (Green Book)
PwC Insight: Senate Democrats release initial Build Back Better reconciliation tax proposals.