June 15, 2021
Two “Infrastructure” Bills Begin to Take Shape, One with Tax Increases
There is a bipartisan agreement on a framework for a traditional infrastructure bill that does not include any tax increases. There is also a separate-track Democrat-only (probably) “human infrastructure” reconciliation bill that will likely contain a slew of probably adverse tax increase provisions. Congress plans to tackle both later this month.
Traditional Infrastructure: A group of 20 Senators, evenly split between Democrats and Republicans, has agreed to a framework of $1.2 trillion (over eight years) in traditional (roads, bridges, rail, etc.) spending. The package is offset without any tax increases, although observers warn that some of the proposed offsets are “illusory,” and/or some are already triggering concern, if not outright opposition. President Biden supports the framework.
The framework is currently in drafting to put its provisions into legislative language. It is expected to be ready for discussion and voting as early as July 19. It is already drawing opposition from both the right and the left, but the real test of whether it can win enough votes to pass will come after detailed legislative language is released.
One key issue among lawmakers is whether acceptance of the bipartisan plan will ease passage of the second reconciliation bill (that will contain tax increases) or hurt the odds for approving it. There is also concern about the size and scope of the legislation.
Reconciliation/“Human” Infrastructure: The second bill in this two-track, but inter-related, process is a reconciliation bill that will address “human infrastructure” issues like federal paid leave, free community college, child care assistance, climate change, etc. That bill’s size has not yet been determined, but could be as big as $6 trillion or as small as $1.5-$2 trillion, with about half of that offset. And the offsets are virtually certain to come in the form of tax increases.
The second reconciliation bill is still in its formative stages, but is on something of an accelerated track. Congressional leaders hope to have something ready to propose by the end of July, although Hill insiders predict it could be August, or even after Labor Day before this legislation is ready for committee and floor action.
The reconciliation bill process will start with a budget resolution for fiscal year (FY) 2022 which will contain authorization for use of the reconciliation process. Reconciliation legislation bypasses the Senate’s filibuster rules, and thus a reconciliation bill becomes enactable with a simple majority (51 votes), but also must comply with a series of tricky rules (including, for example, a rule that requires that each provision in the bill must have more than an incidental impact of federal outlays or receipts). But as a reconciliation bill, the measure could pass without any Republican votes. That means Democrats will have to agree among themselves, without losing a single Democratic vote in the Senate and with only three or fewer Democrats voting “no” votes in the House.
It is not yet known what tax increases will be proposed, but all signs point to:
- An increase in the corporate tax rate, possibly to 25 percent.
- An increase in the top individual tax rate, potentially to 39.6 percent.
- An increase in capital gains tax liability for taxpayers with annual earnings of $400,000 or more—this could be via a rate increase, or it could come in the form of tax liability on gains each year, even if the taxpayer’s assets are not sold—the latter could adversely impact permanent life insurance.
- Changes in trust rules, especially in estate planning contexts.
- Changes in international tax rules.
Other tax change proposals that are more controversial (among Democrats), but still have a better than even chance of being included in the package include modification or even elimination of the Section 199A 20 percent deduction for non-corporate business income, a switch from step-up to carryover basis in estate tax rules (with exceptions for surviving spouses and family-owned-and-operated businesses), wealth taxes (that could be a tax surcharge on ultra-rich taxpayers’ income and/or assets), and a financial transaction tax (FTT). There are other, unrelated-to-financial planning, tax proposals in the mix, too.
The tax committees (House Ways & Means and Senate Finance) are currently working on the offset package, with discussions happening between House and Senate tax writers. But until a decision is made on how big the tax package must be, the scope of the tax increase proposals will remain unknown. But tax writers are braced for the potential of having to write a tax increase package that could go as high as $1 trillion.
Specific details are unlikely prior to Labor Day, although it is possible the process will accelerate.
There is also an outside chance that the reconciliation bill could contain provisions that might ultimately have to be dropped because they cannot pass muster under the reconciliation process rules. These provisions—which will have to be lobbied intensely to prevent them from being enacted into law—include the labor union reform bill, the PRO Act, which contains the adverse worker classification “ABC test” provision. Another possible provision that would likely ultimately have to be dropped from a reconciliation bill is an increase in the federal minimum wage to $15/hour.
Prospects: Winning near-unanimous agreement among Congressional Democrats, particularly in the midst of concerted opposition by Republicans, will be a tall order. But this reconciliation bill is the top priority for the Biden Administration and for most, if not all Democrats. The bill’s new spending programs (especially federal paid leave, childcare assistance, and climate change) are strongly supported by most Democrats. Thus, it would be unwise to bet against it, even as it appears to be an extraordinarily difficult task. And, it is highly likely that NAIFA members will be called on to defend against adverse provisions that could hurt the ability of Americans to provide financial security for their families and businesses.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org, or Michael Hedge – Director – Government Relations, at mhedge@naifa.org |