09/15/2021: President Biden’s $3.5 trillion economic package is the biggest and most ambitious legislation on his economic agenda to date. The 10-year program, which Biden has termed “Human Infrastructure,” seeks government investments in childcare, education, health care and green energy. If approved, the plan would dwarf the $1.9 trillion fiscal stimulus passed earlier this year and the $1.2 trillion infrastructure bill working its way through Congress.Paying for the both expansive and expensive package has been a closely guarded secret controlled by Chairman of the House Ways and Means Committee, Democrat Richard Neal of Massachusetts. The recently leaked 881-page legislative proposal seeks to raise roughly $2.9 trillion to defray the cost of the President’s social safety net program. The draft bill includes $2 trillion of tax increases, including $200 billion from tax enforcement and $700 billion from drug price savings.
- Democrats expect to raise $127 billion over the next 10 years on an income surtax on wealthy households. Included in the proposal is a 3 per cent income surtax on households’ earnings over $5 million.
- Probably most important to investors, lawmakers are budgeting an additional $123 billion by increasing the top capital gains tax rate to 28.8 per cent from 23.8 per cent.
- Democrats are penciling in an additional $540 billion by raising the corporate tax rate to 26.5 per cent, up from 21 per cent, for companies with incomes over $5 million, reflecting lawmakers’ desire to shield small businesses from higher taxes. Companies with incomes less than $400,000, for example, will see their tax rate drop to 18 per cent.
- Investment fund general partners would see a reduction in the favorable tax treatment of carried interest. The proposal requires a five-year holding period for favorable carried interest treatment, up from three years.
- The proposal also includes cutting in half the lifetime exemption – the amount that can be passed on without triggering the 40 per cent estate tax – to $5.5 million per spouse, down from $23.4 million per married couple. The measure accelerates the reduction that was already due to take place in 2025.
Two areas of the tax code were not mentioned in the draft. First, the document does not mention any changes to the state and local tax deduction (SALT), which limited the tax deductibility of state and local taxes to $10,000. This has been a hot button issue for many Democrats from high-tax states. SALT puts the party in a bind, because raising the deduction would reduce federal revenue. Second, the dividend tax rate, which is currently set at 20 per cent, was not addressed either.
The effective date for the 28.8 per cent capital gains rate could possibly and unfortunately be as early as last Monday, coinciding with the date of its introduction. History suggests a retroactive effective date is a likely possibility. Looking back on the seven capital gains tax rate changes back to 1978, all four rate reductions had effective dates earlier than the dates the measures were signed into law. Of the three rate increases, however, none carried effective dates that were more than one day earlier than their enactment. Using history as a guide suggests the higher capital gains tax rate would become effective January 1, 2022.
How likely is passage of the bill? Given the slim majorities Democrats enjoy in both houses of Congress, timing will be a challenge, and several deep divisions would need to be resolved in the coming weeks. Democrats set passage of the reconciliation package, which can be achieved without Republican votes, by September 15. Other party insiders are shooting for passage by the end of the month. From our vantage point, the likelihood pf passage by the end of the month is slim.