Biden Administration's FY 2022 Budget and Its Tax Increases for Corporations, Wealthy

By way of background, the budget that the president submits to Congress contains estimates of federal government income and spending for the upcoming fiscal year and also recommends funding levels for the federal government. Congress then considers and passes appropriation bills. If Congress does not pass all appropriation measures by the start of the fiscal year (October 1), it has to enact a continuing resolution to keep the government running. The committees of jurisdiction are responsible for considering revenue proposals and any changes to the Internal Revenue Code.

As relevant to this discussion, the Biden Administration fiscal year (FY) 2022 budget incorporates the administration's American Jobs Plan infrastructure proposal (and accompanying Made in America Tax Plan) and its American Families Plan and adds details on the Administration's request for annual operating expenditures for government agencies. It focuses on wealth redistribution and not growth. (See Holland & Knight's previous alerts, "Biden Administration's Made in America Tax Plan: Procedural Aspects," April 8, 2021; "Biden Administration's Made in America Tax Plan: Interaction with OECD Inclusive Framework," April 15, 2021; and "Biden's American Families Plan Proposes Income Tax Hikes," April 29, 2021.)

The administration's budget, which reflects the administration's tax and policy priorities, is an opening bid in negotiations with Congress and is likely to change as it winds its way through Congress, particularly because of the close margins by which the Democrats control the House and Senate and also because of the views of the more moderate Democratic members in the Senate.

The General Explanations of the Administration's Fiscal Year 2022 Revenue Proposals (the so-called Green Book) prepared by the U.S. Department of the Treasury, accompanies the administration's budget and provides an explanation and revenue estimates for the administration's revenue proposals. The 2021 Green Book is the first Green Book since the Obama Administration, and provides details (current law, reasons for change, explanation of proposal and effective date) as well as revenue estimates for the American Jobs Plan and the American Families Plan.

The tax reforms proposed in general are intended to modernize the U.S. tax system to respond to current fiscal challenges, including to raise revenue, to improve tax administration and to make the tax system more equitable and efficient.

A high-level overview of the corporate and individual income tax changes is reflected in tabular form.¹

American Jobs Plan: Reform Corporate Taxation

Plan intended to collect sufficient revenue, build a fairer tax system and reduce incentives that encourage profit shifting and offshoring.

Comments

• The above chart identifies the proposal and provides an overview of its application. For details, see the full description in the Green Book.
• The Biden campaign previewed many of the proposals, to include Nos. 1, 2, 4, 5, 6, 7 (partially), 10 and 11.
• The Made in America Tax Plan expanded on the proposals referred to above but did not explicitly deal with No. 11.
• New proposals include Nos. 3, 8 and 9.
• Several Democratic senators have expressed concerns over a 28 percent corporate rate and have suggested a rate of 25 percent; in addition, they have expressed concerns with other corporate provisions. The Republicans view modification of the favorable Tax Cuts and Jobs Act (TCJA) provisions as a "red line" that cannot be crossed.
• The Treasury Department characterizes most of the Green Book's international provisions as incremental (apart from the SHIELD and select others), as not changing the basic U.S. international tax architecture.
• As to the interaction of the U.S. 21 percent global minimum tax and the OECD Inclusive Framework Pillar 2, the U.S. recently suggested a 15 percent minimum tax. The design of the SHIELD to conform generally to the Pillar 2 IIR reflects the close coordination the U.S. is giving to achieving its domestic priority of a 21 percent GILTI inclusion with conformance to the objectives of the Inclusive Framework to have a robust minimum tax. To achieve agreement, all members of the Inclusive Framework do not need to agree to the Pillar 2 minimum tax (e.g., the Cayman Islands that has a zero rate, but may require substance); rather, there has to be a critical mass, such as the G-7 and G-20 (which may be achieved in G-7 and G-20 meetings in the next few weeks).

American Families Plan

Plan is intended to collect more revenues from high-income taxpayers by increasing income tax rates and closing loopholes; reforming the taxation of capital income by equalizing the income taxation of income from labor and income from investment; eliminating the stepped-up basis provision that the Biden Administration asserts enables capital gains to escape taxation, and providing the IRS with resources, information (through new legislation) and technology to 1)  improve taxpayer service, 2) improve taxpayer compliance and 3) enhance enforcement to close the tax gap, so as to build a fairer and more efficient tax administration system. (Another part of the American Families Plan that expands tax credits for low- and middle-income workers and families is not discussed herein).

Comments

• The above chart identifies each proposal and provides an overview of its application. For details, see the full description in the Green Book.
• Items in Biden campaign proposals not included in Green Book:
  • The estate and gift tax modifications rolling back the Tax Cuts and Jobs Act (TCJA) enhanced estate and gift tax lifetime exemptions; these items also were not included when the American Families Plan was introduced.
  • Phasing out the Section 199A qualified business income deduction. Ostensibly, this provision was not included because of its anti-small business optics (even though it has been reported that more than half of the benefit targets taxpayers making more than $1 million per year). Most small businesses operate in pass-through form and many of these businesses have been hardest hit by the COVID-19 pandemic.
  • Eliminate the TCJA SALT cap on the itemized deduction for state and local taxes (SALT) paid or accrued (not in connection with a trade or business). More than 20 Democrats and a number of Republicans have joined a bipartisan caucus that has pledged not to vote for any legislation that does not include a repeal of the SALT cap.
  • Limit itemized deductions by restoring the phase out of deductions for AGI of more than $400,000, and limit the overall benefit to 28 percent for those in the top brackets.
  • Impose 12.4 percent Social Security payroll tax for wages above $400,000.
• Among the most controversial items not only is the proposed tax increase, but also the apparent April 28, 2021, retroactive effective date for the imposition of the increased rate of tax on long-term capital gains and qualified dividends, which effective date would prevent wealthy taxpayers from selling off their appreciated assets prior to yearend to avoid a potential tax increase.² In contrast, in the run up to the introduction of the American Jobs Plan and the American Families Plan, Treasury Department officials stated publicly that retroactive tax legislation is not their preferred option.³ For those taxpayers subject to the "Medicare Tax," the addition of the 3.8 percent tax increases the federal rate of tax to 43.4 percent compared to 23.8 percent under current law. This proposal is anticipated to face stiff opposition, not only by Republicans, but also by a number of Democratic senators.
• Another controversial proposal is to end the wealth planning technique of stepped-up basis at death and to treat gifts and death as recognition events. The proposal, as described, is complex and costly (provided the top rate for capital gains is increased to 39.6 percent) and will require careful analysis. It also has cross-border consequences because, for example, under current law, a U.S. beneficiary of a foreign decedent generally can take a step-up in basis.
• The increase in the ordinary income tax rate from 37 percent to 39.6 percent will impact only 1 percent of taxpayers.
• The proposed effective dates need to be carefully considered; for example, the Section 1031 proposal is effective for exchanges completed in taxable years beginning after Dec. 31, 2021. Query how this interacts with the 180-day rule, which requires that the total transaction must be completed in six months or no more than 180 days? What happens if the transaction is initiated in 2021 but completed in 2022?

Enhance IRS Resources, Information and Technology

This aspect of the American Families Plan is a key portion of the plan. The Green Book estimates that improved compliance resulting from the additional investment to enhance resources, update outdated technology and introduce a comprehensive financial account reporting will net $779 billion over the 2022-2031 budgetary period. The Green Book provides that the increased focus on compliance and enforcement is targeted at those taxpayers with the highest incomes rather than taxpayers with actual income of less than $400,000.

Two of the highlights are a new comprehensive financial institution annual information reporting and the expansion of broker information reporting with respect to crypto assets.

New Financial Institution Reporting. The Biden Administration proposes a new comprehensive financial institution annual information report of the inflows and outflows of financial accounts to increase the visibility of gross receipts and deductible expenses reportable to the IRS, thereby enhancing the effectiveness of IRS enforcement measures and encourage voluntary compliance. The annual information report prepared by the financial institution would report gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner. Reporting of this information would apply to all business and personal accounts by financial institutions, including bank, loan and investment accounts, with exceptions for de minimis gross flow threshold of $600 or fair market value of $600. Other accounts with characteristics similar to financial institution accounts would also be required to report, as would crypto asset exchanges and custodians. Separately, there would be crypto reporting requirements in cases in which taxpayers purchase crypto assets from one broker and then transfer the crypto assets to another broker, and for businesses that receive crypto assets in transactions with a fair market value of more than $10,000. This financial reporting proposal would be effective for tax years beginning after Dec. 31, 2022.

Broker Crypto Reporting. The Green Book acknowledges that using crypto assets is a rapidly growing problem and presents opportunities for U.S. taxpayers to conceal assets and taxable income by using offshore crypto exchanges and wallet providers, as well as by creating entities through which they can act. To combat this abuse, third-party information reporting is critical. The proposal would expand the scope of information reporting by brokers who report on crypto assets to include reporting on certain beneficial owners of entities holding accounts with the broker. The proposal would require brokers, including entities such as U.S. crypto asset exchanges and hosted wallet providers, to report information relating to certain passive entities and their substantial foreign owners when reporting with respect to crypto assets held by those entities in an account with the broker. The proposal, if adopted and combined with existing law, would require a broker to report gross proceeds and such other information as the Treasury Secretary may require with respect to sales of crypto assets to customers, and, in the case of certain passive entities, their substantial foreign owners. The proposal also would enable the U.S. to share such information on an automatic basis with appropriate treaty partners to reciprocate for information received from its treaty partners. The proposal would be effective for returns required to be filed after Dec. 31, 2022.

Additional proposals to improve tax administration include 1) increased oversight of paid tax return preparers, 2) enhanced filing of electronic returns, 3) proposals to enhance compliance with listed transactions, and 4) modification of the centralized partnership audit regime.

Prospects for Enactment

There are several possibilities for passage of the American Jobs Plan and the American Families Plan, some of which are linked to the American Jobs Plan and some of which are not. The first is a bipartisan agreement with Republicans on a scaled-down version of the American Jobs Plan, as proposed by the GOP (and potentially without the corporate tax increases that the GOP do not favor). A resolution of whether bipartisan agreement is viable may be determined by early June. If not, then a legislative pathway for the American Jobs Plan and the American Family Plan would be through the budget reconciliation process; in that case, query whether there would be one bill or more than one bill?

For more information and questions on the Biden Administration's FY 2022 budget request and its impact on taxpayers, contact the authors.

Notes

¹ This overview does not include details relating to the American Jobs Plan initiatives related to Support Housing and Infrastructure and Prioritizing Clean Energy and the American Jobs Plan initiatives entitled Support Workers, Families and Economic Security.

² The Green Book Revenue Estimates reflects a revenue pick-up of $1.241 billion in 2021. A Treasury Department official justified the retroactive aspect of that provision by arguing that the Treasury Department was trying to prevent taxpayers from accelerating their gains into the temporary low-tax period before the rate increase took effect. See Jonathan Curry, "Stepped-Up Basis Repeal Gets Tamer Treatment." Tax Notes, June 1, 2021.

³ Retroactive taxation is allowed because taxation is neither a penalty imposed on the taxpayer nor a liability which the taxpayer assumes by contract, but rather a method of apportioning the cost of government among those who enjoy its benefits and who must bear the resulting burdens. In addition, some limited retroactivity may be necessary as a practical matter to prevent the revenue loss that would result if taxpayers, aware of a likely impending change in the law, were permitted to order their affairs to avoid the effect of change. See Mertens § 4.15 Retroactivity (case citations omitted).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.