Potential Tax Implications of $3.5 Trillion Reconciliation Package

ACEC News / Advocacy

September 7, 2021

Potential Tax Implications of $3.5 Trillion Reconciliation Package

By Katharine Mottley

Last week the House of Representatives came back to DC and in a very close vote approved the Senate resolution that allows the budget reconciliation process to move forward.  The upside of reconciliation is that it only requires a simple majority of 50 votes (plus the Vice President as tiebreaker if needed) to approve the legislation, instead of the typical 60 votes to move legislation forward.  The downside is that there are restrictions on what can go in a budget reconciliation bill.

Now House and Senate committees will put together their pieces of the reconciliation bill.  House committees are going first because the rules require the House to approve a budget reconciliation bill before the Senate acts.  Although the budget resolution allows for as much as $3.5 trillion in spending offset by a combination of tax increases and deficit spending, several moderate Democrats in the House and Senate have already made it clear they will not vote for a package that large.

The House Ways and Means Committee will meet on September 9 and 10, and again on September 14 and 15, to approve a range of policies — such as paid leave and extension of the expanded child tax credit — and tax increases to pay for those policies.  The spending provisions will be considered next week and the revenue provisions the following week.  Although it has been reported that the draft text will be made available on September 6, I will not be surprised if we don’t see the tax provisions until later in the week, especially if they need to modify them in order to raise additional revenue.

We haven’t yet seen legislative language but there are some educated assumptions about the revenue provisions we could see in the package:

• An increase in the corporate tax rate: although the House bill could go as high as 28%, most expect it to be 25% or 26%, and key Senators have already indicated they won’t support anything higher than 25%.
• International tax: an increase in the GILTI rate as well as changing how GILTI is calculated (country-by-country instead of the current blended approach).  Senate Finance Committee Chairman Wyden just released a discussion draft of a more extensive international tax overhaul but it is unclear if the House will go along.  I’m told that House Ways and Means Committee Chairman Neal does not want to include proposals that have not already been well vetted by his committee.
• An increase in the top individual tax rate: this is expected to rise from 37% to 39.6%.
• Section 199A: Senate Finance Committee Chairman Wyden wants to phase out the passthrough deduction starting at incomes over $400,000 and eliminate it completely above $500,000.  We don’t know yet if House Ways and Means Committee Chairman Neal will go along with this plan.  I’ve also been hearing in several Hill meetings that the phaseout threshold could be raised to $1 million.
• Net investment income tax/SECA: the President’s budget includes a proposal to apply the 3.8% NIIT or the SECA tax to all passthrough business income for taxpayers earning more than $400,000, and this could be part of the layered approach to raising taxes on those taxpayers.
• Capital gains: the President’s budget proposes taxing capital gains at ordinary income rates for taxpayers with income over $1 million.  This proposal is complicated by the fact that taxing capital gains at 39.6% would not actually raise revenue because a rate that high creates an incentive to hold onto appreciated assets and pass them on to heirs.  That problem is only fixed if changes are also made to the estate tax (such as eliminating stepped-up basis for heirs) and those changes are opposed by many Members of Congress because of the impacts on family-owned farms and businesses.  The top revenue-maximizing rate that does not appear to create an incentive to pass appreciated assets to heirs is 28%.
• Tax enforcement: various provisions from the President’s budget, notably requiring banks and other financial institutions to share information with the IRS on deposits to and withdrawals from individual and business bank accounts.

The process is moving quickly at this point but I expect it to slow down once the Senate starts its work.  There are so many open questions, and Congress also needs to address funding for federal agencies, the expiration of authorization for highway programs, and the debt ceiling in September.

Katharine Mottley is ACEC Vice President for Tax and Regulatory Affairs.

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