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Budget passage speeds up timeline for tax bill

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Aerial view of motorway junction The House voted 220-212 on Aug. 24 to pass a budget resolution clearing the way for Democrats to immediately begin writing a reconciliation tax bill. While the budget resolution has already passed the Senate, resistance from moderate Democrats and a tentative deadline may present challenges for the forthcoming reconciliation bill.

The budget resolution includes flexible reconciliation instructions that could allow Democrats to pursue their transformative tax agenda with only 50 Senate votes, however certain moderate House Democrats agreed to approve the budget only in exchange for major concessions from House leadership, complicating reconciliation’s outlook for enactment.

Most notably, the rule the House used to advance the budget resolution includes language stating the House “shall consider” the bipartisan infrastructure bill by Sept. 27 if not already voted upon—however the language does not require the bill to be passed by that date. Even so, Sept. 27 could act as a key deadline for a reconciliation bill as Democratic leaders have tied the infrastructure and budget bills together on a two-track plan and House Speaker Nancy Pelosi, D-Calif., recently noted she is “committing to pass the infrastructure bill by Sept. 27.”

The infrastructure bill represents a bipartisan compromise and passed the Senate in a 69-to-30 vote, but Democratic leadership has planned to hold the infrastructure bill until the reconciliation bill is completed. Progressive Democrats have warned that once the reconciliation bill passes, Senate moderates will have little incentive to enact the broader reconciliation bill and its more substantial tax increases.

Certain moderate House Democrats, on the other hand, have objected to delaying the infrastructure bill. Most notably, a group of 10 moderate House Democrats agreed to approve the budget only after language was added promising consideration of the infrastructure bill by Sept. 27. And while the language of the rule does not technically mandate passage by that date, delaying passage would likely threaten moderate support for budget reconciliation. The existence of the deadline also may ease pressure on moderates and sap some momentum for reconciliation. Deep divisions remain over the scope and content of the reconciliation package.

Tax writers will begin work immediately on writing the tax provisions for the reconciliation bill, but a one-month deadline is very aggressive. Previously, it seemed more likely that the reconciliation process would stretch into November or December. Nevertheless, Chairman of the House Committee on Ways and Means Richard Neal, D-Mass., recently stated his committee will be holding markup of the reconciliation bill the week of Sept. 6.

While the budget resolution is meant to accommodate a $3.5 trillion reconciliation bill, moderates such as Sens. Kyrsten Sinema, D-Ariz., and Joe Manchin, D-W.V., have indicated they will not support a bill that large. The reconciliation instructions themselves provide considerable flexibility on both the size of the package and how much is actually offset. The instructions include only a nominal placeholder requiring the tax writing committees to provide just $1 billion in deficit reduction. This means the committees are not actually required to offset anything outside of their jurisdiction—and they have no cap on any tax or spending changes that raise at least $1 billion in net revenue. The committees could fulfill their instructions by passing a much smaller or larger package of tax increases than envisioned under the $3.5 trillion outline.

Despite the divisions between moderate and progressive Democrats, there is broad support in the party for key aspects of President Joe Biden’s tax agenda. Democrats are likely to focus on several key tax provisions as the core of any reconciliation tax package:

  • Raising the corporate rate to 25% or higher
  • Raising the individual marginal rate to 39.6%
  • Raising the capital gains rate to 28% or higher
  • Providing relief from the $10,000 cap on the state and local tax (SALT) deduction
  • Extending and enhancing low-and-middle-income tax credits
  • Reforming the global intangible low-taxed income (GILTI) tax and raising its rate
  • Repealing the foreign derived intangible income (FDII)
  • Replacing the base erosion and anti-abuse tax (BEAT) with a stronger regime

Democrats could also pursue many more narrowly targeted revenue offsets, and have also specifically discussed enhancing alternative energy incentives while repealing fossil fuel incentives (see our previous story for a full discussion of Democratic tax proposals).

Committees could begin releasing draft tax provisions in early September, representing an early potential effective date for capital gains rate changes, though this timetable could slip.

Next steps The budget resolution provides Democrats an opportunity to enact transformational tax changes without any Republican votes. Although major hurdles remain and the ultimate outlook is not certain, some taxpayers may benefit from pre-emptive tax planning. Democrats are largely considering prospective effective dates, meaning there is a potential window of opportunity to plan in front of changes, seizing rate arbitrage opportunities and blunting the impact of unfavorable proposals. It is critical to understand the whole picture, modeling potential outcomes and weighing risks on both sides. Taxpayers should remember that rates may not change when expected—or go as high as expected—and that liquidity and the time value of money can still make deferral valuable.

For more information, contact:
Dustin Stamper
Managing Director
Washington National Tax Office
Grant Thornton LLP
T +1 202 861 4144
Joey Connor
Manager
Washington National Tax Office
Grant Thornton LLP
T  +1 202 521 1559

To learn more visit gt.com/tax

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