Amid a chaotic week in Washington D.C., final election results came in that determined the composition of the Senate. Both Georgia Senate seats went to the Democratic candidates, which tipped the balance of power in the Senate to the Democratic party, with Vice President-Elect Kamala Harris presiding as the presumed tie-breaking vote in a chamber evenly split 50-50. This assumes that the Senate Democrats vote along party lines, which is far from certain.

That being said, the outcome of the Georgia run-off makes the path ahead a little easier for a Biden administration agenda. The following are some items to watch that could affect tax planning and COVID-19 stimulus programs.

An End to the Filibuster?

One of the largest obstacles to passing a presidential administration’s legislative agenda rests in the filibuster. In 2017, the Republican-controlled Senate passed the landmark tax reform law known as the Tax Cuts and Jobs Act (TCJA) by using the Byrd Rule, which requires that no change increase the deficit beyond a 10-year budget window and that no change would affect the Social Security Trust Fund. In exchange, the legislation would need only a simple majority to pass.

With the Georgia Senate seats plus Harris as the tie-breaking vote, Democrats may have the voting block they need to either use the Byrd Rule. They could also choose to eliminate the filibuster from legislation with a simple-majority procedural vote, commonly referred to as the “nuclear option.” Eliminating filibusters has precedent – the Republicans eliminated it for Supreme Court nominees in 2017 and Democrats ended filibusters for executive branch nominations in 2013. But for the filibuster to be ended for tax legislation, that would assume the tax legislation increases the deficit; if the legislation is an overall tax increase the Senate can pass it with a simple majority using the Byrd Rule.

Additional Individual Stimulus Rebates

President-elect Biden has expressed dismay that the Consolidated Appropriations Act (the Act) only provided individuals with a $600 rebate check when there had been more support, particularly among his party, for a larger $2,000 rebate to assist with the ongoing ramifications from the COVID-19 pandemic disruption. The end of a filibuster may pave the way for additional stimulus relief such as larger individual stimulus rebates checks, which had faced opposition from Republicans during negotiations over the Act because of the rebate check impact on the federal deficit.

Further Adjustments to Tax Reform Measures

Less certain than the COVID-19 relief measures is whether additional business tax changes would be forthcoming under the Biden-Harris administration. During the campaign, Biden supported increasing the corporate tax rate from 21% (where the TCJA had placed it) to 28%, with minimum taxes for corporations with book profits over $100 million. He also favors several measures to reduce potential profit shifting and offshoring for international businesses, including:

  • Elimination of repatriation benefits for multi-nationals
  • Doubling the Global Intangible Low-Taxed Income (GILTI) tax from 10.5% to 21%
  • Creating a new 10% surtax on corporations that offshore manufacturing and service jobs in order to sell goods back to the American market, that would raise the effective corporate tax rate on such activity to 30.8%

Analysts are predicting broader measures will be difficult to get through Congress due to the closely divided Senate and the slim majority Democrats hold in the house (222-211). This also means that some of the individual tax reform measures that Biden had earmarked for change during the campaign may also have difficulty passing into legislation. These include:

  • Increasing the maximum tax rate from 37% to 39.6% for taxpayers with income over $400,000
  • Increasing capital gains rate to 39.6% for taxpayers with income over $1 million, which would result in an effective tax rate of 43.4% with the net investment income tax (NIIT)
  • Restoring the “Pease” limitation on itemized deductions for taxpayers with income over $400,000, and limiting the benefit of itemized deductions to 28%
  • Eliminating the step-up in basis for capital assets held at death
  • Increasing the top estate and gift tax rate to 45%
  • Eliminating Section 1031 like-kind exchange benefits for taxpayers with over $400,000 in income

Tax Credit Agenda

Biden also supported alternative energy credits during the campaign, such as the tax credit for electric car purchases and an end to credits tied to fossil fuel use. Areas of interest for potentially new tax credits involved support for the manufacturing sector to promote revitalizing, renovating, or retooling existing or recently shuttered manufacturing facilities. The 10% credit could be used for those facilities as well as for projects that expand U.S. facilities to grow domestic headcount or for companies that are seeking to grow manufacturing wages above the pre-COVID-19 baseline ($100,000).

For individuals, he supports expanding the earned income tax credit (EITC) to include workers over 65 and workers without children. He also advocated for expanding the dependent care credit to include an $8,000 credit for caregivers or individuals with physical or cognitive impairments.

He supports a refundable child care tax credit for up to $8,000 for one child and $16,000 for two or more (current limit is $2,000).

Next Steps

There are no shortage of needs and priorities for the Biden-Harris administration and the 117th Congressional session. Our team will keep you up to-date, through our quarterly Eye on Washington webinars as well as notices about additional rule changes and legislation developments.

For more information, please contact a member of our tax team.

Published on January 13, 2021