The Senate passed its bipartisan infrastructure bill (H.R. 3864
) on Aug. 10, and then quickly cleared a budget resolution that would allow Democrats to pursue their more transformative tax agenda with only 50 Senate votes.
The infrastructure deal carries only a handful of modest tax changes, including provisions to expand broker reporting to cover cryptocurrency transactions and end the employee retention credit on Sept. 30, 2021, for all but recovery start-up businesses. The reconciliation bill is the vehicle Democrats are hoping will carry their more significant tax proposals.
Democratic leaders have tied the two bills together on a two-track plan. The infrastructure bill represents a bipartisan compromise and passed the Senate in a 69-to-30 vote. But House Speaker Nancy Pelosi, D-Calif., has pledged she will not allow the House to vote on the measure until Senate Democrats also pass a $3.5 trillion reconciliation bill.
After the bipartisan bill passed the Senate, Democrats managed to work through their budget resolution before leaving for the August recess, passing the resolution in a 50-to-49 partisan vote. The resolution includes reconciliation instructions that will would allow Democrats to bypass the 60-vote procedural hurdles in the Senate on an underlying tax and spending bill. The budget resolution is meant to accommodate a $3.5 trillion package that Democrats have outlined in broad strokes, but the reconciliation instructions themselves provide considerable flexibility.
The instructions would allow 11 Senate committees to pass up to $1.75 trillion in spending that reduces the deficit. Democrats then envision the Senate Finance Committee adding $1.8 trillion in tax cuts and health care spending, before using tax increases and other offsets to cover much of the total $3.5 trillion package. This is not actually required by the reconciliation instructions, however.
The reconciliation instructions include only a nominal placeholder requiring the Senate Finance Committee to provide just $1 billion in deficit reduction. This essentially gives the committee a very low minimum and an unlimited cap on any tax or spending changes that raise at least $1 billion in net revenue. The Senate Finance Committee could fulfill its instructions by passing a much smaller or larger package of tax increases than envisioned under the $3.5 trillion outline.
Senate Democrats have already indicated they do not plan on covering the entire cost of the bill, saying some of it will be offset by economic growth. In addition to tax increases, health care savings, and a carbon polluter import fee are also planned as offsets. Senate Democrats outlined their tax priorities for the reconciliation bill in releases accompanying the budget. The priorities are consistent with the tax proposals Democrats have been laying out for months, and include:
- “Relief” from the cap on state and local tax deductions
- Clean energy, manufacturing and transportation tax incentives
- Corporate and international tax reform
- Tax “fairness” for high-income individuals
- IRS tax enforcement
None of those priorities are binding, and tax writers will have significant leeway to craft a tax package as negotiations dictate. Top targets for Democratic lawmakers include (see our previous story
for a full discussion of Democratic tax increase proposals):
- 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
- 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
The budget resolution and follow-up reconciliation bill still face challenges. Sen. Kyrsten Sinema, D-Ariz., recently stated that while she would support moving the budget forward to start the process, she cannot back the $3.5 trillion in spending that other Democrats have put forward and will work to reduce it.
Moderates have also pushed back against Pelosi’s plan to hold the infrastructure bill until the reconciliation bill is ready, though House Majority Leader Steny Hoyer, D-Md., recently indicated willingness to expedite the process on the House side by instructing House members and staffers to return to Washington to consider the budget resolution the week of Aug. 23—ending the House’s recess roughly one month earlier than initially planned.
House progressives, on the other hand, fear that if they pass the bipartisan infrastructure bill before the reconciliation bill, Senate moderates will have little incentive to enact the broader reconciliation bill and its potentially more substantial tax increases.
Some House Democrats have also insisted on the chance to amend the bipartisan infrastructure bill, though this would risk upsetting the delicate bipartisan compromise and possibly endanger its chances. Senate Republicans may not want to re-approve the infrastructure bill if it is accompanied by the reconciliation bill. There are tax provisions, however that the Senate might be open to amending.
The infrastructure bill raises $50 billion in net revenue from a handful of both favorable and unfavorable tax changes, which include:
- Expanding information reporting to cover digital assets like cryptocurrency
- Ending the employee retention credit on Sept. 30, 2021 except for recovery start-up businesses
- Extending the transportation excise taxes that fund highway spending
- Reinstating Superfund taxes
- Extending pension funding relief
- Carving out certain utility water and sewer property from the exclusion from contribution to capital treatment under Section 118
- Increasing the private activity bond cap for transportation projects and expanding private activity bond eligibility to include qualified broadband projects and carbon dioxide sequestration facilities
- Expanding required IRS administrative relief for disasters
A proposal for a new $8 billion allocation to the Section 48C tax credit was included in earlier drafts of the legislation but was ultimately removed before the bill was filed and replaced by a smaller grant program.
The bulk of the revenue in the bipartisan infrastructure bill comes from the $28 billion proposal to expand information reporting requirements on digital assets. These changes would expand broker reporting requirement to digital assets like cryptocurrency and add digital assets to current rules requiring businesses to report cash payments over $10,000. Senators proposed multiple amendments to try an clarify that the broker reporting is not meant to apply to miners, stakers, note operators, sellers of digital hardware or software, or others who validate transactions. An agreement on language eluded negotiators before Senate passage, but the issue could be revisited before potential enactment
Employee retention credit
The infrastructure bill would also eliminate the employee retention credit effective Sept. 30, 2021, for all employers except recovery startup businesses. The credit had recently been enhanced and extended though the end of 2022 in the American Rescue Plan Act of 2021, which was enacted on March 11. The potential for the House to wait to act on the underlying bill could complicate this provision.
The bill would renew the Section 4661 excise tax on Superfund chemicals (the Superfund tax). The Superfund tax was in effect from 1980 to 1995. It generally imposed tax on 42 chemicals (e.g., methane, ammonia, chlorine, and phosphorus) sold in or imported into the United States. The Senate’s bill would reinstate the Superfund tax from July 1, 2022, through Dec. 31, 2031, and would generally double the rate of tax imposed in 1995.
In addition, the bill would extend a large number of transportation-related taxes, including:
- The Section 4041 tax on fuel and kerosene used in diesel-powered highway vehicles or diesel-powered trains to Sept. 30, 2028
- The Section 4081 tax imposed on certain fuels being removed from refineries or terminals or certain fuels entering into the U.S. for consumption, use, or warehousing to Sept. 30, 2028
- The Section 4051 tax on heavy trucks and trailers sold at retail to Oct. 1, 2028
- The Section 4071 tax on certain tires to Oct. 1, 2028
- The Section 4481 tax on the use of any highway motor vehicle which has a taxable gross weight of at least 55,000 pounds to Oct. 1, 2029
The budget resolution provides Democrats an opportunity to enact transformational tax changes without Republican votes. Although success is not guaranteed and proposals will continue to evolve, 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 the potential 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:
Washington National Tax Office
Grant Thornton LLP
+1 202 861 4144
Washington National Tax Office
Grant Thornton LLP
+1 202 521 1559
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