An initial draft of tax changes to be considered by the House of Representatives recently became public. It is almost certain that the final version of the legislation will differ from this outline (and that the Senate’s version will look different), but as this is the first concrete indication of what may be considered in the budget reconciliation process, it is useful as insight into the mindset of legislators crafting the plan.
All told the plan is estimated to create about $2.9 trillion in available spending over the next 10 years. From there, lawmakers rely on estimates that increased Federal spending will drive an additional $600 billion in tax revenue in order to reach the $3.5 trillion in proposed spending. Here are some details about the proposals and how they could affect individuals, families and corporations:
Individuals and Families
- Increase the top marginal tax rate on individuals from 37% to 39.6%. This would apply to unmarried individuals with taxable income over $400,000, to heads of households with income over $425,000 and to joint filers with income over $450,000. This is a lower threshold than the current income levels for the top tax rate, so more households would pay the higher rate.
- Increase the top capital gains rate from 20% to 25% for those with more than $400,000 in taxable income. With the 3.8% net investment income tax, this would mean an effective capital gains rate of 28.8% for those taxpayers. No effective date is mentioned in the plan so the possibility of retroactive taxation remains in place. The document also does not mention an increase in the dividend tax rate, but many analysts expect that will accompany the capital gains increase in the full version.
- Expand the 3.8% net investment income tax to cover net income in the ordinary course of trade or business for taxpayers making more than $400,000 in taxable income.
- Permanently extend the provision in the American Rescue Plan to disallow business losses beyond the taxpayer’s business income. This provision is currently set to expire after 2027.
- Impose a surtax of 3% on individuals with adjusted gross income in excess of $5,000,000.
- Cut the lifetime gift/estate tax exemption to $6,000,000 effective January 1, 2022. This is four years ahead of the current expiration of the increase in the exemption that was part of the Tax Cuts and Jobs Act of 2017. The plan also changes valuation rules to eliminate discounts due to partial ownership or lack of control in an asset for passive assets (so actively managed family farms and businesses could still receive a deduction). While President Joe Biden’s initial proposal in the American Families Plan included provisions to end step-up in cost basis at death and tax unrealized capital gains at death, neither of these provisions is part of the House plan.
- Fund enhanced IRS enforcement for wealthy individuals. The Congressional Budget Office estimates this will generate $200 billion in additional revenue over the period (though does not include that in its official scoring).
- Increase taxes on tobacco products and impose a tax on nicotine not used in tobacco products.
Corporations
- Increase the top corporate tax rate from 21% to 26.5% but only for businesses with income above $5,000,000. Businesses with less than $400,000 in income would actually see a cut to 18% while those with income between the two figures would continue to pay the 21% rate.
- Increase tax on foreign income of U.S. multinationals. There are several provisions that target this including increases in the Global Intangible Low Tax Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) rates. GILTI would move from 10.5% to 16.5% and see several changes regarding calculation methods and deductions. BEAT would accelerate a planned increase from 10% to 12.5% and also see substantial changes in calculation methodology.
- Authorize Medicare to negotiate certain drug prices with pharmaceutical companies and require rebates if companies raise the price of drugs above the rate of inflation in Medicare prescription drug programs. This is not directly a tax, but accounts for about $700 billion of the $2.9 trillion total.
It's worth reiterating that the congressional budget reconciliation process is just beginning, and this legislation could contain significant differences by the time it’s passed by both houses of Congress and signed into law. Whatever the outcome, the Hancock Whitney Asset Management team is ready to help advise you about how these changes may apply to your personal financial situation.
Sources: Strategas Research, The Washington Post, Axios
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