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117th Congress Preview: Tax

By Rich Meade

President-elect Biden’s presidential campaign outlined a number of specific positions on taxes the President-elect would take as President including the following:

  • raising the corporate tax rate to 28%,
  • creating an alternative minimum tax for corporations with profits in excess of $100 million,
  • doubling the tax on Global Intangible Low Tax Income (GILTI) on foreign subsidiaries of US companies,
  • creating a manufacturing tax credit for companies that experience layoffs,
  • expand and make permanent the New Markets tax credit,
  • create a tax credit for small businesses who provide retirement plans,
  • increase in Social Security tax by 12.4% split between employers and employees,
  • increase the top rate on income earned above $400,000 from 37% to 39.6%,
  • tax long-term capital gains and qualified dividends at the rate of 39.6% for income above $1 million and eliminates the step-up in basis for capital gains taxation,
  • cap the itemized deductions at 28% of value,
  • phase out the qualified business income deduction (Section 199A) for income above $400,000,
  • expand the Earned Income Tax Credit (EITC) for childless workers older than 65,
  • create a renewable energy tax credit for individuals, expand renewable energy tax credits and eliminates the benefits for fossil fuels,
  • create an $8,000 tax credit for childcare,
  • close real estate tax loopholes,
  • expand the Affordable Care Act tax credits,
  • impose sanctions on tax havens,
  • reform Opportunity Zones, and
  • increase the threshold for deducting state and local taxes.

Some of these tax policies can garner bipartisan support in a closely divided Congress such as the New Markets tax credit, the tax credit for retirement plans, the expansion of the EITC, and the childcare tax credit.  However, many of the proposals will likely face stiff opposition from the Republicans in Congress particularly the tax rate increases.

With the Senate in a Democratic majority, President Biden will have another policy lever to pull for the more controversial or partisan tax proposals – budget reconciliation.  Budget reconciliation is a somewhat arcane process that allows legislation to get through the Senate on a simple majority vote.  Budget reconciliation may be used to alter mandatory spending (spending not subject to an annual appropriation), tax policy or increase the public debt limit.

There are some limitations to budget reconciliation.  First, the Senate parliamentarian will only recognize one reconciliation bill for spending, one for taxes, and one for the debt limit or one bill with all three components.  Therefore, the President and the Democratic majorities will first have to decide if they want one major tax reconciliation bill to implement most or all the policies President-elect Biden outlined on the campaign trail or pick and chose some of their top priorities.

The other limitation to budget reconciliation is the so-called “Byrd rule” which is found in both the permanent rules of the Senate and in statue.  The Byrd rule, named after former Senator Byrd (D-WV) prevents reconciliation bills from carrying any “extraneous” provisions.  There is a five-pronged test to define what is extraneous and the provision only needs to meet one of the prongs to be subject to a point of order under the Byrd rule.  The Byrd rule is a surgical strike meaning the provision is removed from the bill when the point of order is raised rather than halting the bill’s progress as is done under most of the other points of order in Senate rules.

Finally, budget reconciliation can only be used upon the approval of a conference report on a budget resolution for the next fiscal year.  Budget resolutions are often controversial and can be difficult to pass particularly with small majorities in the House and Senate.  However, Republicans were able to pass a reconciliation bill in 2001, the last time the Senate was evenly divided, to implement the tax policies former President Bush outlined in his first run for the presidency.

Tax extenders will likely come into play at the end of the year.  However, the end of the year package signed into law by the President on December 27th included permanent extensions for several tax extenders, gave five-year extensions for 11 tax extenders and one-year extensions for the rest.  There will likely be a push to give at least a one-year extension for those provisions that expire at the end of 2021.

Given the incoming administration’s expected focus on climate change and the environment, there are several key energy provisions that received short-term extensions and will expire at the end 2021. These expiring provisions may very well drive the extenders conversation later this year:

  • 30B Alternative motor vehicle credit
  • 30D Plug-in Electric Vehicle Credit
  • 30C Alternative Fuel Vehicle Refueling Property Credit
  • 25C Nonbusiness Energy Property Credit
  • 45L Energy-efficient Homes Credit
  • 45(d) Credit for Electricity from Certain Renewable Resources
  • 6426(c) Credit for Alternative Fuels

There will likely be a push to give at least a one-year extension for those provisions the many provisions set to expire at the end of 2021, however Congress has previously demonstrated a propensity to let them lapse and retroactively enact tax extenders.