President Biden has officially announced his plans to make major changes to the existing tax laws. The original proposals left the timing of these proposed changes unclear, and taxpayers had to guess when Congress would vote on the new laws and, perhaps more importantly, when these new laws might come into effect. This lack of clarity is affecting tax planning across the country as many individuals and companies take steps to anticipate changes that could occur in 2022 while others wonder if it is already too late.
The Biden government announced the majority of its tax proposals through the introduction of two separate plans. First, the American Jobs Plan, launched on March 30, 2021, proposed changes to corporate tax, such as a higher corporate tax rate, a new minimum book income tax, and a higher global minimum tax for US multinational corporations. These increased taxes are intended to finance infrastructure improvements in the United States. The Biden government then released the American Families Plan on April 28, 2021, calling for changes to individual and inheritance taxes, such as a higher individual tax rate for high-income taxpayers and a higher tax rate on capital gains and qualifying dividends for taxpayers with taxpayers Income over $ 1,000,000. These tax increases are designed to support education, health care, and other family-centered programs.
It is unclear if and when Congress will vote on either of the two proposals. Because of the strong split in the Senate, there is a significant likelihood that President Biden’s tax plans will only be passed under the Senate’s budget balancing rules. In the past, reliance on the budget reconciliation rules has resulted in delays as the process can only be used under limited circumstances. US Senate MP Elizabeth MacDonough recently pointed out that the budget reconciliation process that was used to pass the US bailout plan to COVID-19 relief in March 2021 can be used to make additional changes to the US employment plan and US Make family plan. This interpretation of the Senate rules can accelerate the adoption of the plans. However, even if only 50 percent of the Senate is required to pass the proposals, it seems unlikely that either the American Jobs Plan or the American Families Plan will become law in its current form. The Senators of the Centrist Democrats have rolled back some of the proposed changes, as evidenced by Senator Manchin’s call for a less dramatic increase in the corporate tax rate. Many Democratic senators have also raised concerns about large increases in the capital gains tax rate. Without Republican support, the Biden government must secure the vote of every Democratic senator, which allows the senators to defend their own interests. For example, President Biden recently stated that the corporate tax rate could be raised to a rate between 25 and 28 percent, a less aggressive position than its original rate of 28 percent. We expect these negotiations to continue, which is likely to delay the timing of Congressional action.
Recently, the Biden administration announced details of when these proposed changes could take effect. On May 28, 2021, the administration published its “Green Paper” in which the planned changes to the tax laws and their intended implementation are explained in detail. Before the Green Paper was published, there were major fears that the Biden government would attempt to apply these changes retrospectively to early 2021. Congress can make tax increases retrospectively, and the US Supreme Court has retroactive dates for tax legislation. For example, on August 10, 1993, President Clinton enacted the Omnibus Budget Reconciliation Act of 1993, which retrospectively increased the highest corporate and individual tax rate from January 1, 1993, enacted the legislation as well as the inauguration of President Clinton as President.
The Green Paper indicates that most Biden tax proposals would take effect in 2022 or in tax years beginning after December 31, 2021. One very important exception, however, is the proposed date for an increase in the capital gains rate to go into effect for taxpayers with incomes over $ 1,000,000. This change is scheduled to go into effect on April 28, the date the American Families Plan is announced. The concern behind a proposed entry into force in 2022 was that prior knowledge of a hike in capital gains tax rates would lead investors to sell stocks in bulk, which would put pressure on the markets. A sharp fall in the stock market would be politically negative and negatively affect consumer confidence, which in turn could hinder economic recovery. Politicians are always ready for these issues, and 2022 is an election year. The proposed change in the capital gains tax rate has not had any discernible impact on the stock market to date, but there is still a long way to go.
Despite the publication of the Green Paper, much is still unknown about upcoming tax law changes. It is unclear which version of these proposals can reach Congress, when Congress will vote on these proposals, and, if at all, when these proposals will come into force. The lack of clarity creates a significant burden for taxpayers. Day Pitney is closely monitoring the situation and will issue future warnings as the Biden government’s tax agenda and its chances of implementation become clearer.