President-elect Joe Biden has been very clear that his proposed tax policies will result in higher tax bills for large corporations and wealthy individuals. His ability to get those tax legislative priorities enacted into law, however, is less clear and will depend on some important factors beyond his control.
Biden will not move into the White House until Jan. 20, but his agenda during his early days in office may well be shaped by what happens this month in the closing days of the current 116th Congress. An unproductive lame-duck session will force the incoming Congress and the Biden administration to start the new year having to deal with leftover business, including high-priority funding decisions and further actions to address the health and economic impacts of the global pandemic that has upended all of our lives, left millions out of work, and forced countless businesses to close their doors. And even a productive lame-duck session may leave the administration and Congress feeling an urgent need to do more on these issues before focusing on new priorities.
Another pivotal moment that will help determine the incoming administration’s path forward will come today, Jan. 5, when voters in Georgia cast their ballots in runoff elections to fill the state’s two seats in the U.S. Senate. The outcome of those races will be critical for Biden as they will determine which party controls the Senate when he takes office just 15 days later.
If Democrats capture the two Senate seats, they will control both the House and Senate (albeit by the narrowest of margins), as well as the influential tax-writing committees in both chambers. This will give Biden a path to pass some substantial tax policy changes, including a number of potential tax increases that would have a significant impact on corporations and certain high-income individuals. But the narrow majorities in both chambers would leave him with little room for error as he navigates the sometimes conflicting priorities of lawmakers in the progressive and moderate wings of the party.
If Republicans win either of those Georgia seats, however, they will retain control of the Senate, and the ambitious plans that Biden promoted during his campaign—and the more progressive ideas that some Democrats hope to advance during his administration—likely will be tempered by the realities of a divided government.
No matter how the two Georgia races are resolved, Biden is hoping his deep experience and relationships on Capitol Hill—cultivated over his 36 years in the Senate and eight years as Barack Obama’s vice president—will allow him to forge cross-party compromises. His deal-making experience will be particularly relevant if the run-off contests leave Republicans in control of the Senate.
An early test of Biden’s tax policies and his ability to bridge the partisan divide in Congress may come if he follows through on his plan to seek another coronavirus relief package. Biden has called the plan that is under debate in the current Congress “at best a down payment” and has pledged to pursue more comprehensive relief after he takes office. But there will be a natural tension in early 2021 between the Biden administration’s desire to stabilize the economy and increasing concern among Republicans about the size and scope of the deficit.
Broad Strokes Now, Details Later
Biden’s tax policy agenda is grounded on his belief that the benefits from the 2017 Tax Cuts and Jobs Act were skewed too heavily to large corporations and wealthy individuals and that the federal income tax system needs to be reshaped to ensure that these taxpayers are contributing “their fair share.” That reshaping would come through higher top income tax rates, along with “base-broadeners” that would limit or eliminate various incentives currently available to these taxpayers.
Biden thus far has presented his tax policy vision largely in broad strokes. His plans include proposals such as a higher (28%) corporate tax rate and a 15% minimum tax on the book income of companies that report net income of more than $100 million but owe no U.S. income tax. On the individual side of the tax code, he has proposed changes such as raising the tax rate on ordinary income as well as on capital gains and dividends, phasing out the deduction for pass-through business income for certain taxpayers, and increasing the impact of the estate tax. But he has not released detailed tax policy papers or delivered a substantial, tax-focused economic address, either as a candidate or as president-elect. As a result, we don’t know enough specific details to develop precise estimates of the impact of his proposals on federal revenues or project their implications for specific industry sectors or companies. We likely will see more details around some of Biden’s proposals when he sends his first budget blueprint to Congress later in 2021.
Preparing for Tax Changes
Despite the uncertainties outlined here—plus the fact that Congress will have its own ideas on how to shape the tax code—significant tax law changes over the next few years remain a real possibility.
In the near-term, businesses should pay close attention to tax extenders and temporary tax provisions, several of which are expiring at the end of 2020, although Congress’s ability to deal with the tax extenders will depend largely on where the Covid relief package stands, as the Biden administration will prioritize supporting individuals facing pandemic-related economic hardships over tax provisions for large corporations.
Over the longer term, Biden’s campaign proposals on policy issues such as climate change, healthcare, infrastructure, and college affordability almost surely will require additional federal spending, which he insists he will offset by additional revenue collections from large corporations and wealthy individuals.
Moreover, no matter which party controls Congress, we can expect the Biden administration to rely heavily on its regulatory authority to write rules to implement existing laws in ways consistent with his agenda. While agencies have wide latitude in interpreting the laws, they can’t rewrite them, so absent action by Congress the corporate rate won’t rise from its current level. Still, the power of agencies to write impactful rules will be key in the coming years and should garner the attention of tax executives.
With all this in mind, it is not too early to start evaluating the proposals being put forward, modeling potential outcomes, and planning the appropriate actions to take if and when these proposals go from high-level plans and talking points to fully framed legislation with substance, effective dates, and, possibly, carveouts and anti-abuse rules.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Steve Gallucci is National Managing Partner, Deloitte U.S. CFO Program, and Banks Edwards is Managing Partner, Washington National Tax Practice, Deloitte Tax LLP.