On Monday, September 13th, 2021, the House Ways and Means Committee released proposed legislation focused on raising funds to support the proposed $3.5 trillion infrastructure plan. The legislation is part of a significant bill that includes expenditures for traditional infrastructure as well as healthcare, child care, and renewable energy priorities. The Committee is scheduled to continue its markup process in the coming days and plans to vote on the proposals this week.
The bill includes a number of tax increases that are primarily focused on corporations and high-income individuals. The current version of the bill would increase the top rate on capital gains and qualified dividends from 20 percent to 25 percent. This is a significant shift from President Biden’s original proposal to tax capital gains at the same rates as ordinary income. The bill also proposes raising the top individual tax rate from 37 percent to 39.6 percent and imposing a 3 percent surtax on individual income above $5 million.
With only a slim Democratic majority, the politics of what may actually happen are uncertain. Republicans are expected to raise unanimous opposition to the overall proposal, which contains provisions that reverse many of the tax cuts enacted in 2017. Final legislation will have to be agreed upon by both House and Senate Democrats and the White House. Several key Senate Democrats have released tax proposals that differ from the Ways and Means Committee’s legislation.
The current version of the text includes a return to a graduated corporate rate structure in place of the current flat rate of 21%. Some compromise is evident in the process already, with a proposed top corporate tax rate of 26.5%, which is higher than the 25% rate advocated by Senator Manchin, but lower than President Biden’s original 28% proposal.
The Ways and Means Committee has not proposed to change the rules that allow unrealized gains to go untaxed at death (the “step-up in basis”). However, the committee does propose to accelerate the reversal of the estate and gift tax exemption created in 2017, which doubled the prior law. This exemption was scheduled to revert to prior levels in 2025, but would instead end after 2021, reducing it from the current $11.7 million to $5.6 million per person. Significant limitations to current estate planning techniques are also proposed, including the use of valuation discounts and transfers using certain grantor trusts.
As of right now, the bill does not address the $10,000 cap on the state and local tax deduction created by the 2017 tax law. A number of lawmakers from high-tax states are advocating for a repeal of the cap, but progressives argue that the primary beneficiaries of this deduction are the same high-income households that they believe should pay more in tax.
The Committee’s proposal also includes a number of international tax changes, higher taxes on corporate executive compensation and on tobacco products, as well as changes to Individual Retirement Accounts for high-income households. Lastly, the bill would provide the IRS with nearly $80 billion for updates to technology and increased tax enforcement efforts.
Most provisions are scheduled to take effect in 2022 if the legislation is passed by Congress, but a few of the changes are included in the bill for implementation as of 9/13/21. The capital gains rate change is one of those early implementation items, which would result in applying two different rates to capital gains for 2021 tax returns, depending on the date of the transaction.
GBQ’s team continues to closely monitor these proposed changes in the tax law. For bi-weekly updates on the business news that matters most, subscribe to our Bottomline newsletter, and visit our website for current information.