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Senate Democrats develop broad spending deal

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo and Michael Wronsky

On July 13, 2021, Senate Democrats announced a broad agreement on a framework for a $3.5 trillion spending deal to fund President Joe Biden’s infrastructure proposals. This agreement appears to encompass much of the administration’s two proposals, the American Jobs Plan and the American Families Plan, announced earlier this year. No legislative text currently exists as details, especially the tax provisions intended to pay for the bill, are still being negotiated.

This package is separate and distinct from the almost $1 trillion bipartisan physical infrastructure bill being negotiated between a group of 22 Republican and Democrat senators and the White House. The bipartisan package includes funding for roads, bridges, waterways and airports as well as broadband, electricity and electric vehicle charging stations.

Prospects for passage

Since there is already a bipartisan infrastructure proposal in the works, it is unlikely there will be any Republican support for this larger spending deal. Generally, legislation requires 60 votes to pass in the Senate while using the budget reconciliation process requires only 50 votes (plus that of the vice president to break the tie). As a result, Senate Majority Leader Chuck Schumer has indicated his intention to pass this deal using the budget reconciliation process for the fiscal year beginning Oct. 1, 2021. However, it remains unclear whether the proposed plan will garner support from moderate Democrats or if it would meet the Senate parliamentarian’s budget criteria.

Consequently, we expect significant negotiations among Democrats to forge a passable compromise. Sen. Schumer stated his wish to bring a final bill for a vote on the Senate floor before the Aug. 9 summer recess. Given the scarcity of details of both the spending proposals and the funding mechanisms, the White House fact sheets remain the best source to identify the spending priorities and potential tax changes.

Spending priorities

The $3.5 trillion includes funds for Medicare expansion and for policy initiatives in child care and college education. Moreover, renewable energy priorities, such as clean energy technology and research projects and jobs, appear to be a significant beneficiary in the plan. According to the White House, elder care services and housing, electric automobiles and nationwide charging stations, lead pipe replacement, water infrastructure, public school upgrades, workforce trainings and modernizing veteran hospitals will also be highlighted.

Revenue considerations

Business proposals

One of the possible funding sources of the spending deal could be an increase to the corporate tax rate. Reduced to 21% from 35% in the Tax Cuts and Jobs Act (TCJA), discussion is centering on an increase to either 25% or 28%. Furthermore, the administration has proposed a global minimum tax on multinational corporations. In addition, there are plans to reallocate previously appropriated but unspent funds from earlier legislation as well as an issuance of private activity bonds. Finally, eliminating tax deductions for U.S. companies that offshore jobs is also being considered. Revenue raisers enacted as part of the TCJA, including the business interest expense deduction limitation and the excess business loss limitation, appear likely to remain intact.

Individual proposals

The president and Senate Democrats have stated they do not intend to increase taxes on individuals earning under $400,000. Again, while no details have been released, proposals advanced earlier this year include:

  • Increase the top individual rate to 39.6% from the current 37%, effective for tax years beginning after Dec. 31, 2021.
  • Tax long-term capital gains and qualified dividends of taxpayers with adjusted gross income over $1 million at ordinary rates. Combined with the proposed increase in the top marginal rate and the 3.8% net investment income (NII) tax, capital gains would be subject to a maximum federal rate of 43.4%.
  • Subject all trade or business income of high-income taxpayers to the 3.8% Medicare tax, through either the NII tax or the self-employment tax. For taxpayers with adjusted gross income in excess of $400,000, the definition of NII would be amended to include gross income and gain from any trades or businesses not otherwise subject to employment taxes. Effective for taxable years beginning after Dec. 31, 2021.
  • Assess self-employment tax on income from flow-through entities, including certain limited partners, limited liability company members and S corporation shareholders, effective for taxable years beginning after Dec. 31, 2021.
  • End like-kind exchange tax deferrals for real estate gains in excess of $500,000 ($1 million for married taxpayers filing a joint return), effective for exchanges completed in taxable years beginning after Dec. 31, 2021.
  • Tax carried interests as ordinary income, effective for taxable years beginning after Dec. 31, 2021.

Further, Democratic lawmakers recently suggested they may include a modification to the TCJA-imposed $10,000 limitation ($5,000 for nonjoint filers) on the deductibility of state and local taxes (SALT deduction). However, a full repeal or partial increase in the cap could significantly decrease federal revenues over the 10-year budget window used in the reconciliation process. Unfortunately, we have no further details about this change at this time.

For additional information about these proposed provisions, please see our previous tax alert. Again, it is critical to note the above are based strictly on previous proposals and likely being subject to extensive negotiations and debate as this process continues.

We encourage you to connect with your Baker Tilly adviser regarding how any of the above may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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