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President Biden's American Families Plan calls for tax increases on high-income individuals

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April 2021

In brief

President Joe Biden on April 28 called on Congress to enact both the newly released $1.8 trillion “American Families Plan,” to be paid for by tax increases on higher-income individuals, and his previously released $2.3 trillion “American Jobs Plan,” to be paid for by increasing the US corporate tax rate to 28% and changing international tax rules. According to a White House summary, the American Families Plan includes “$1 trillion in investments and $800 billion in tax cuts for American families and workers.” 

Key Biden individual tax proposals affecting high-income individuals include:

  • increasing the top individual income tax rate from 37% to 39.6%, 
  • taxing investment income at the same rate as ordinary income for individuals with income above $1 million, 
  • limiting the ability of individuals to use the current ‘step-up in basis’ at death rule, 
  • broadening application of the 3.8% net investment tax,
  • ending the “carried interest loophole,”
  • extending permanently the current limitation on certain excess business losses, and
  • eliminating like-kind exchange tax treatment for real estate gains greater than $500,000.

President Biden’s plan also calls for a significant increase in IRS tax enforcement efforts “to make the wealthy pay what they owe.”  

Observation: As demonstrated by the enactment with only Democratic votes of the $1.9 trillion COVID-19 relief “American Rescue Plan Act” (ARPA) in late March, President Biden and Democratic leaders can use ‘budget reconciliation’ procedures to enact major fiscal policy legislation over the unified opposition of Congressional Republicans. However, with narrow Democratic majorities in the House and Senate, moderate Democrats are in a position to scale back corporate and individual tax increase proposals and could reject some proposals entirely.

Action item: Corporations and individuals should be evaluating and modeling the potential effect of the tax increase proposals being put forth by President Biden. Companies should be communicating with policy makers about how specific proposals may affect their employees, job creation, and investments in the United States. At the same time, policy makers will be interested in how President Biden’s individual tax increase proposals -- in particular calls for sharply higher capital gains tax rates -- may affect financial markets, capital formation, and the retirement savings of individuals at all income levels.

In detail

OVERVIEW

President Biden on April 28 called for Congress to increase taxes on both corporations and high-income individuals to offset the costs of a range of infrastructure spending proposals outlined in his American Jobs Plan and ‘human capital’ spending proposals outlined in his American Families Plan. While inviting efforts to reach bipartisan agreements on infrastructure and other issues, President Biden stated that Democrats must be prepared to act this year on legislation that promotes job creation and addresses the needs of American families as well as issues of income inequality, racial justice, and climate change. 

To pay for the President’s American Jobs Plan, the White House previously on March 31 released the President’s Made in America Tax Plan proposals to increase the corporate tax rate and change US international tax rules (for more on the Made in America Tax plan, see our PwC Insight “White House lists corporate tax offsets for Biden infrastructure plan”). 

To pay for his American Families Plan, President Biden proposes rolling back several individual tax cut provisions of the 2017 tax reform act (the 2017 Act) for individuals with income above $400,000. The White House on April 28 released a summary of specific proposals to increase taxes for higher-income individuals. 

Note: Under current law, individual and passthrough tax provisions enacted as part of the 2017 Act are set to expire at the end of 2025. 

President Biden’s plan calls for increasing funding for IRS tax enforcement efforts by $80 billion over 10 years, representing a more than 100% increase in the agency’s enforcement budget from the 2021 level. The plan includes proposals to require financial institutions to report information on account flows to increase reporting on earnings from investments and business activity. The plan also calls for Congress to give the IRS authority to regulate paid tax preparers. The White House summary states that increased tax compliance efforts focused on corporations and wealthy individuals are projected to raise $700 billion over 10 years.

Key Biden individual tax proposals include:

  • increasing the top individual tax income rates by increasing the current top rate from 37% to 39.6%,
  • taxing capital gain and qualified dividend income at ordinary rates for individuals with income above $1 million,
  • limiting the current step-up in basis rule and providing a new rule for capital gains in excess of $1 million (per spouse),
  • broadening application of the 3.8% net investment tax to eliminate “inconsistent” application of the provision due to “holes in the law,”
  • ending the “carried interest loophole” for the capital gains treatment of certain partnership investment income,
    extending permanently the current limitation on certain “large, excess business losses,” and
  • eliminating like-kind exchange tax treatment for real estate gains greater than $500,000.

Observation: Reinstating the top individual income tax rate to the 39.6% level that applied under then-President Barack Obama may have broad support among Congressional Democrats. By contrast, President Biden’s proposals to sharply increase taxes on investment income and make changes to step-up in basis tax rules are more likely to face objections from moderate Democrats in the House and Senate.  

Note: The President’s individual tax increase proposals do not include his campaign tax proposal to restore estate, gift, and generation-skipping tax (GST) rules to 2009 levels. Other campaign proposals to increase individual taxes that are not currently being proposed include increasing Social Security taxes for upper-income individuals, eliminating the Section 199A deduction for passthrough business income, and limiting the tax benefit of itemized deductions to 28%. The President’s proposals also do not address the current $10,000 cap on individual itemized deductions for state and local taxes, which is a priority for some Congressional Democrats, as discussed below.

According to the White House summary, the current 20% capital gains income tax rate would be increased to 39.6% for individuals with income above $1 million (the same 39.6% top rate that would apply to ordinary income in the top bracket). At the same time, a broadened version of the current 3.8% net investment income tax rate also would apply, which would result in a combined top federal capital gains tax rate of 43.4%. After factoring in current state-level capital gains taxes, the average top capital gains tax rate for individuals with income above $1 million would be 48.7%. The combined federal, state, and local capital gains tax rate could be over 58% in some places. 

At the same time, President Biden is proposing to change the current step-up in basis at death rule. The White House summary indicates that a $1 million exclusion per spouse would be provided, totaling “$2.5 million per couple when combined with existing real estate exemptions.” The White House summary states that gains on property donated to charity will not be subject to tax and protections will be provided so that “family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.” It is not clear how this exception for family-owned businesses and farms would be implemented (whether by instituting carryover basis generally, carryover basis for family-owned businesses and farms only, or by taxing the gains upon gift or at death), but an anticipated Treasury Green Book technical explanation should provide more details.

Observation: The Joint Committee on Taxation staff have estimated previously that increasing the capital gains tax rate above a certain level could result in a loss of revenue as the effects of the higher rate would be more than offset by a decrease in dispositions; i.e., the higher rate would apply to a smaller amount of realized gains. The revenue-maximizing rate for capital gains under present law is estimated to be approximately 28%. Biden’s proposal with respect to step-up in basis seeks to increase the revenue-maximizing capital gains rate by reducing the incentive taxpayers might otherwise have to hold appreciated assets until death.

Several legislative proposals have been introduced recently by House and Senate Democrats to modify step-up in basis rules and to propose a ‘wealth tax,’ along with other proposals. Some of these House and Senate step-up in basis proposals also would provide a $1 million exclusion. For more on these legislative proposals, see our PwC Insight “Legislative outlook for high income and net worth individuals.”

Key spending proposals featured in the American Families Plan include:

  • $465 billion in education funding to provide universal preschool for all three- and four-year-olds, to make two-year community colleges tuition-free, to increase Pell Grants, and to fund teacher training;
  • $225 billion for childcare assistance programs, including funding for a $15 an hour minimum wage for early childhood staff;
  • $225 billion to create a “national comprehensive paid family and medical leave program;” and
  • $45 billion to increase funding for nutrition security programs, including making permanent ARPA expanded summer free and reduced-price meals to children in low-income families.

Tax relief provisions for individuals and families include:

  • extending ARPA child tax credit increases through 2025 and permanently making the child tax credit fully refundable;
  • making permanent the ARPA earned income tax credit expansion for childless workers;
  • extending expanded Affordable Care Act (ACA) tax credits that were provided as part of the ARPA; and
  • permanently increasing tax credits to support families with childcare needs for children under age 13, up to $4,000 for one child or $8,000 for two or more children (a 50% reimbursement will be available for families making less than $125,000 a year, while families making between $125,000 and $400,000 will receive a partial credit).

Observation: Under the recently enacted COVID-19 relief package, the federal child tax credit amount was increased temporarily from $2,000 to $3,000 per qualifying child ($3,600 per qualifying child under age six) and was made fully refundable for 2021 only. The earned income tax credit also was expanded temporarily for 2021 only. President Biden’s proposal would extend the expanded child tax credit and earned income tax credit through 2025, the same year in which key individual tax cut provisions from the 2017 Act are set to expire, while making the full refundability feature of the child tax credit permanent. Some key Democrats in the House and Senate are proposing to make these expanded tax credits permanent. 

NEXT STEPS

The specific details, as well as the precise timing, of proposed tax legislative changes remain uncertain, but eventual legislative action appears likely before the end of 2021. Treasury Department officials previously have indicated that a Green Book technical explanation of the President’s tax proposals could be released in May or early June, along with other parts of the President’s fiscal year (FY) 2022 budget proposals. The White House recently sent to Congress the President’s proposals for discretionary spending requests for federal agencies for FY 2022, which begins on October 1, 2021.  

Key House and Senate Democrats, including House Ways and Means Chairman Richard Neal (D-MA) and Senate Finance Committee Chairman Ron Wyden (D-OR), are expected to offer their own tax proposals this year. Ways and Means Chairman Neal on April 27 announced his own proposals to provide paid family and medical leave and make permanent the expanded child tax credit, along with other measures. Finance Chairman Wyden recently released a framework for “overhauling international taxation” with Finance Committee members Sherrod Brown (D-OH) and Mark Warner (D-VA). In addition, Treasury Secretary Janet Yellen has been working with foreign leaders to reach a consensus on a global minimum corporate tax rate and other issues. For more on these developments, see our PwC Insight “Senate Finance Democrats, Treasury Secretary Yellen call for international tax policy changes.” 

Critical decisions for President Biden and Congressional Democrats include whether to attempt first to reach a bipartisan agreement on a smaller infrastructure package, and then seek to enact the President’s broader spending measures and tax increase proposals later this year with only Democratic votes using budget reconciliation procedures. Other issues to be considered include the current $10,000 cap on individual itemized deductions for state and local taxes; several Democratic members of Congress have stated that they will oppose any legislation that fails to address the SALT deduction cap. 

A group of Senate Republicans recently released an outline for a five-year, $568 billion infrastructure framework in response to President Biden’s eight-year, $2.3 trillion American Jobs Plan. Instead of corporate tax increases, the Republican proposal would be paid for with user fees, making permanent the SALT deduction cap, and by repurposing unused federal funds. In response, Finance Chairman Wyden said, “Republicans’ insistence that middle-class families and local communities foot the bill for everything from roads to water to broadband, while mega-corporations not pay a penny more in taxes isn’t acceptable.”

Observation: House Speaker Nancy Pelosi (D-CA) has called for the House to act on infrastructure legislation before the July 4th Congressional recess period. President Biden and Democratic leaders may need to decide before the end of May whether a bipartisan infrastructure agreement is possible since reaching an agreement among Democrats on a budget resolution providing budget reconciliation instructions may take some time. 

Reconciliation provides a path for tax increase legislation

Budget reconciliation procedures provide a legislative path for President Biden potentially to achieve much of his overall fiscal policy goals with only Democratic votes. An FY 2021 joint budget resolution approved by the House and Senate provided reconciliation instructions that allowed for enactment of the COVID-19 relief American Rescue Plan. A subsequent joint budget resolution would need to be approved by the House and Senate to create budget reconciliation instructions for legislative action on President Biden’s American Jobs Plan and his American Families Plan, along with the corporate and individual tax increase proposals. 

Observation: The scope of any tax increase proposals will be limited by the need to gain the unanimous support of all 50 Democratic Senators and the near-unanimous support of House Democrats at each step in the legislative process. With narrow margins of control in both the Senate (a de facto 51-50 majority with the tie-breaking vote of Vice President Kamala Harris) as well as the House (with a slim Democratic majority), moderate Democrats in both chambers will play a key role in determining whether a second reconciliation bill featuring large spending measures and significant tax increases can be enacted.

Prospective effective dates are expected

Treasury Secretary Yellen has stated that tax increase proposals generally are expected to be effective on a prospective basis beginning in 2022 (i.e., not retroactive to a date in 2021). Both Ways and Means Chairman Neal and Finance Chairman Wyden earlier this year reaffirmed their opposition to retroactive tax increases. 

Observation: Congress historically has approved tax increase proposals only on a prospective basis; for example, an income tax rate increase proposed in 2021 generally would become effective for tax years beginning after December 31, 2021. The only exception to this practice in recent decades was in 1993, when individual and corporate rate increases proposed by President Bill Clinton were made effective retroactive to January 1, 1993. At times, changes to investment income tax rates have been proposed to be effective on the date first proposed -- for example, the date such a proposal is first offered by the chairman of the House Ways and Means Committee. In the end, however, capital gains rate increases since 1986 have become effective prospectively after the general effective date of the legislation.

The takeaway

Corporations and individuals should be evaluating and modeling the potential effect of the tax increase proposals being put forth by President Biden. In addition to communicating with policy makers on the potential effects of the President’s proposals on job creation and investment in the United States, companies and individuals should consider actions they may want to take in advance of the potential enactment of legislation.

For more information

For the White House summary of President Biden’s American Families Plan, click here.

For a transcript of the White House press briefing on the President’s proposals, click here.

For a detailed discussion of the benefits and limitations of budget reconciliation procedures and other tax policy issues, see PwC’s “2021 Tax Policy Outlook: The Changing Horizon.”

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Pat Brown

Washington National Tax Services Co-Leader, PwC US

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