President Joe Biden and Speaker of the House Nancy Pelosi at the U.S. Capitol after a meeting with the House Democratic Caucus on the reconciliation package on Thursday, October 28, 2021.
Tom Williams/CQ-Roll Call, Inc/Getty Images
Taxes are likely to go up. But which ones?
More than a dozen significant tax hikes have been proposed by Democratic lawmakers in recent weeks as they devise—and revise—ways to pay for President Joe Biden’s budget bill, which seeks to fund measures to aid child care, education, healthcare, and clean energy.
After Democratic centrists Sen. Kyrsten Sinema of Arizona and Sen. Joe Manchin of West Virginia resisted tax hikes for corporations and wealthy individuals proposed by the House Ways and Means Committee, a raft of new tax proposals emerged.
Then, on Thursday, as a self-imposed deadline neared, Biden proposed a compromise lineup of tax measures.
“I’m astounded by how things have changed. In less than a couple of weeks, things that were a shoo-in—raising corporate taxes and individual tax rates—were off the table,” says Joan Crain, a senior director and global wealth strategist at BNY Mellon Wealth Management.
With the Senate split 50-50 along party lines, Democrats need unanimity to pass Biden’s budget bill if all GOP lawmakers stick to their vow to reject the bill. A tie would require a vote by Vice President Kamala Harris, who is expected to vote with her party.
The bill’s original $3.5 trillion price tag has been pared back to some $1.85 trillion, which lawmakers aim to pay for with tax revenue raised either through tax hikes or stepped-up Internal Revenue Service enforcement.
Here’s a look at the tax changes that, as of Friday, appear likely, with the estimated annual gains:
Surtax on millionaires ($230 B)
Taxpayers earning more than $10 million would pay a 5% annual surtax on adjusted gross income, or AGI, and those making more than $25 million would face an additional 3%. AGI includes wages, capital gains and dividends, and retirement-plan distributions, among other income.
“This would indirectly increase the top tax rate to 45% for ordinary income, or 48.8% when including the net investment tax, and 28% for long-term capital gains, or 31.8% when including the net investment tax,” says Garrett Watson, a senior policy analyst at the Tax Foundation. The net investment tax, also known as the Medicare tax, is a 3.8% levy on investment gains.
Corporate minimum tax ($325 B)
Corporations that earn more than $1 billion in annual profits would face a 15% minimum tax rate. The Tax Foundation estimates this would affect 230 companies.
Tax on stock buybacks ($125 B)
A corporation buying back its own stock would pay a 1% surcharge on the transaction. That’s unlikely to affect corporate buyback plans, or affect stocks—unless it goes up.
Corporate foreign profits tax ($350 B)
Separate from the 15% minimum tax on U.S. profits, U.S. businesses would also pay 15% on foreign profits.
Medicare tax on active pass-through income ($250 B)
Owners of pass-through businesses such as S corporations and partnerships would be subject to a 3.8% Medicare tax passed under President Barack Obama. It would apply to active, not passive, incomes—typically salaries, as opposed to investments.
A limit on business loss deductions ($170 B)
Biden’s release on Thursday mentioned this provision, but without any detail. It may draw upon an earlier proposal from the House Ways and Means Committee to limit companies’ ability to carry forward losses for deductions to one year.
Gain from more IRS funding ($400 B)
The bill would expand the IRS’ compliance and enforcement operations. Each year, an estimated $400 billion goes unpaid. The new muscle would primarily be used to go after noncompliant taxpayers earning at least $400,000 a year.
Tax specialists are hesitant to declare any measure definitely dead after the resurrection of the surtax on Thursday. That measure had been proposed, rejected, then revised, and revived. On the other hand, it‘s unlikely that a tax on unrealized gains for billionaires will go anywhere. Also unlikely: increases in the capital-gains tax and income-tax rates.
A number of tax increases are still possible as talks continue:
Reducing the estate-tax exemption
A proposal to reduce the estate-tax exemption from $11.7 million per person to around $6 million has been on the table since Biden’s campaign. The Tax Cuts and Jobs Act just about doubled the exemption in 2018, but scheduled it to return to its 2017 level with an inflation adjustment in 2026.
Changes to a wealth-transfer tool
Many lawmakers want to severely limit the benefits of a grantor trust, one of the most popular wealth-transfer tools. A proposed change could make assets held within a grantor trust return to the estate, or make transactions between individuals and their grantor trusts taxable events.
“This would mess up a lot of estate planning,” says Jere Doyle, senior wealth strategist at BNY Mellon Wealth Management. But this would be an easy one for lawmakers to slip into a bill to raise revenue, he add. “This legislation has already been drafted. They could just pull it off the shelf to plug revenue holes.”
Unwinding SALT deduction limits
Lawmakers are still pushing to change the $10,000 limit on deductions for state and local taxes imposed in 2018 under the Trump tax cuts. The problem for lawmakers is that this is a revenue loser: It allows some taxpayers to claim more deductions.
But lawmakers in high-tax states such as New York and California have been adamant that they will only support a bill that undoes some or all of the SALT limits. “One option recently floated is uncapping SALT for two years only, in order to limit the cost,” Watson says. “Some version of SALT relief is likely.”
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