Budget bill delay, changes offer potential tax increase reprieve
But delayed action could trigger retroactive tax increases
Some of the biggest new taxes in House Democrats’ $2.2 trillion budget reconciliation bill could be delayed or even scrapped as deliberations on the package slip into next year and pressure to cut spending persists, likely leaving room for fewer offsets.
Sen. Joe Manchin III’s announcement Sunday that he opposes the package as-is means the bill will likely take longer to finish and see major changes to spending on social safety net and climate provisions if lawmakers hope the salvage the measure. The West Virginia Democrat’s demands could leave lawmakers with $250 billion or more in room to delay, loosen or drop tax increases in the bill.
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The House-passed version of the filibuster-proof bill included more than $2 trillion in offsets, according to the Joint Committee on Taxation and Congressional Budget Office.
That figure includes $1.5 trillion in tax increases on businesses and individuals, and a little over $200 billion in extra revenue generated from more funding for stepped-up IRS tax enforcement. The remainder comes from nearly $300 billion in savings from reining in prescription drug costs.
Manchin has said he won’t support more than $1.75 trillion in spending, which would leave Democrats room to scrap about $250 billion in offsets. Manchin backs the prescription drug savings but has expressed concerns about keeping the U.S. tax code competitive internationally, suggesting there may be room to trim some of the tax increases that party leaders won't need if they trim the bill’s overall cost.
Some of the biggest taxes would kick in right away on Jan. 1, 2022, under the bill. And now that passage is delayed until sometime next year, that would mean the type of retroactive tax increases that policymakers typically frown on.
Delaying those taxes to 2023 — including a new “surcharge” on multimillionaires’ income and a new tax on owners of “pass-through” businesses, including partnerships and S corporations — could cost somewhere in the $100 billion ballpark. Even then, lawmakers would still be flush with cash to lighten the reconciliation bill’s tax load.
Dean Zerbe of tax consulting firm Alliantgroup said he expects a bigger lobbying push from companies in the new year because of that potential. Zerbe, a former Republican Senate Finance Committee aide, said he’d expect efforts to focus on carve-outs from the bill’s 15 percent minimum tax on corporate income reported to shareholders or dropping it entirely, along with delaying higher taxes on multinationals’ foreign earnings set for 2023.
While it would be manageable to have tax increases take effect in the 2022 tax year if the bill becomes law in January, retroactive hikes would get more difficult as the year wears on and especially if it slips into the spring, according to tax experts.
House Democrats are hoping to keep the effective dates in the bill intact because they feel taxpayers have had sufficient notice about the timing of potential changes, and any shift would complicate revenue projections needed to comply with budget rules, one K Street tax policy expert who asked for anonymity said.
But it takes just a single Senate Democrat to oppose retroactive tax increases, this person pointed out, and a longer timeline leaves more room for concerns to manifest themselves.
Zerbe said for lawmakers already uncomfortable with some of the revenue raisers in the bill, making them retroactive would be “just making misery on top of misery,” and he wouldn’t expect enough support in the Senate to do so. He noted that Democrats facing a difficult vote already likely won’t want to create new reasons for members to take issue or face political attacks.
While lawmakers often make anti-abuse provisions retroactive, Zerbe and other experts said, most of the taxes that are supposed to begin in 2022 under the bill wouldn’t meet that mark.
'Very, very, very nervous'
Senators’ reactions to the delay were mixed before the Senate recessed for the year. Sen. Mark Warner, D-Va., said it will be more difficult to have some tax increases and programs begin in the 2022 tax year with the package delayed.
“It’s awful hard to proceed on certain things,” said Warner, a member of the tax-writing Finance Committee. “I’m very, very, very nervous when they talk about retroactivity in the tax code.”
Sen. Chris Van Hollen, D-Md., said effective dates for tax offsets in the bill could remain unchanged if it passes in January or even later, but that senators will have to consider the issue.
“Look, we have to get this done in the first couple months,” Van Hollen said. “And I think, you know, we’d want to talk about that piece of it, but I think we can keep that intact.”
Senate Finance Chair Ron Wyden, D-Ore., didn’t indicate how he’d handle the issue, telling reporters he would say more down the line and that Democrats are working through the bill.
Significant retroactive tax increases wouldn’t be unprecedented.
President Bill Clinton signed a major deficit reduction bill into law in August 1993 that raised the top individual income tax rate from 31 percent to 39.6 percent and the corporate income tax rate from 34 percent to 35 percent retroactive to the beginning of that year.
A Democratic-controlled Congress passed that legislation as a filibuster-proof reconciliation bill. But unlike in the current Congress, the party in 1993 had large enough margins that they could lose many more votes on their side and still pass the measure without GOP support.
Stock buybacks, cryptocurrency trades
Some the biggest revenue generators in the current budget bill would kick in on Jan. 1, 2022. The JCT estimates the surcharges on income above $10 million annually would generate $228 billion over a decade, and the pass-through business income tax would raise $252 billion. A separate 1 percent excise tax on corporate stock buybacks is expected to bring in $124 billion.
Other tax provisions that would also take effect at the beginning of the year under the current text include the application of “wash sale” rules, which block investors from dumping and repurchasing assets for tax benefits to cryptocurrency trades; limits on the amount of foreign taxes that offset what multinationals owe in the U.S., which would largely impact oil and gas companies; and some changes to tax provisions meant to stop multinationals from offshoring profits.
An official score wasn’t yet available, but so far the Senate Finance Committee’s revisions to the House text don’t appear to have many big revenue-losing changes, other than dropping a new $9 billion tax on nicotine and vaping products.
Several of the big tax increases set to begin in the 2022 tax year, such as the surcharge for millionaires, would apply to wealthy people who have the resources to absorb the hit, offsetting some concerns about retroactivity.
“Those taxpayers have the means to plan, and they’re making decisions, and you know, they’re calculating in the risk — does it apply for 2022 or … will it have another year?” said Nina Olson, executive director of the Center for Taxpayer Rights.
Still, Edward Karl, vice president of taxation with the American Institute of CPAs, said raising these taxes retroactively causes confusion for advisers and raises questions of fairness. Karl said he’s concerned lawmakers may not delay effective dates because of the numerous challenges in passing the bill, which he noted could make unintended consequences more likely.
Alexander Reid, a partner at law firm BakerHostetler and former JCT counsel, said the new rules for cryptocurrency trades would be difficult to do retroactively because it would apply to economic decisions made under the old rules. He said the buybacks tax could also pose legal challenges if it’s retroactive. But he said whether there’s a transition to the new taxes will depend on pressures lawmakers face.
“The more pressure there is on keeping the score down, the less transition relief there will be because every penny is going to count,” Reid said. “And the trade-off is administrability versus revenue raised.”
The surcharge for millionaires, meanwhile, applies to income from sales of assets, layered on top of existing capital gains taxes. Lawmakers sometimes make those changes retroactive to avoid surges of early asset sales to get ahead of higher taxes, but Democrats had already provided a window of time between the bill's introduction and when the surtax was set to take effect.
“The individual provisions may be easier or have ... fewer consequences being retroactive than say business proposals,” said Kyle Pomerleau, senior fellow at the American Enterprise Institute who studies tax policy.