The potential for significant changes to U.S. tax policy under a prospective Biden administration will largely hinge on the makeup of the Senate, which will not become clear until a January runoff election for both of Georgia’s seats. That unknown—and the prospect of a Senate split 50-50 between Republicans and Democrats—was a key point Monday during the keynote address of the RSM Tax Summit 2020: Seeking Solid Ground.
“It’s very hard with momentous change to keep 50 senators aligned in favor of a proposition,” RSM National Tax Go-to-Market Leader Jim Alex said. “Because it’s so close, it’s going to be difficult to get sweeping matters done.”
An evenly divided Senate, Alex said, would also raise the stakes for members on either side who might want to break ranks with their party on certain issues. And if Republicans keep their majority following the January runoff for Georgia’s seats, it would be difficult for Biden to advance his entire tax plan, which proposes various rate hikes for corporations and high-income earners.
Biden, however, might be able to garner support at least for portions of his plan by tying any rate increases to the nation’s response to COVID-19 and the corresponding economic impairment.
“Raising rates on the upper tier and on corporations may hold if he couples it with stimulus spending,” said Alex, who joined RSM in 2019 from the U.S. Treasury. “That might be more likely to get through a very narrowly defined Senate compared to some of the other changes. But given that it’s close, it probably won’t be the broad stroke that we see in the Biden plan.”
Monday’s panel discussed the widely held question about the likelihood that any tax increases under a Biden administration would be retroactive to their enactment, perhaps to Jan. 1, 2021. Alex cited President Clinton’s tax cut rollbacks in 1993 as precedent for a retroactive enforcement, but he also noted President Obama in 2009 delayed advancing his tax plan out of concern for the economic challenges of the Great Recession. Obama’s increases were passed on Jan. 1, 2013, so there was no possibility of retroactivity.
While RSM leaders are hearing that Biden’s tax plan is a lower priority for him than combatting the pandemic, tying any tax increases to stimulus funding could hasten enactment of the tax plan, Alex said. Then again, the divided Senate might be a significant speedbump.
“Because the Senate will be closely divided, he could take it into a later year,” Alex said. “In 2022, there are mid-term elections. Surprisingly, there are actually more Republicans up for re-election again. So Biden might want to wait past that and then go into … year three of his administration to address those tax increases if it’s still part of the political mandate.”
After the disruption and uncertainty wrought by 2020, businesses in the United States and Canada are looking eagerly to 2021 for potential signs of relief on the horizon. As the weeklong tax summit kicked off, RSM professionals discussed whether the immediate future may bring more economic and regulatory stability.
Biden’s plan calls for increasing the corporate income tax rate from 21% to 28% and reinstituting a 39.6% maximum tax rate for high-income individuals, among other changes. But how much of that will ultimately be enacted remains unknown. It is also unclear what may happen between now and Biden’s January inauguration in terms of further economic stimulus under President Trump. And whatever may happen in the future between potentially divided branches of government, decisions made under Biden’s Treasury Department regarding tax regulations and enforcement will be important for taxpayers in the years ahead, said Patti Burquest, RSM’s Washington National Tax Leader.
Corporate leaders have much to brace for, including the enduring labor market shocks from the pandemic and the long road to recovery. But there are also several positive themes that may rise to the fore, such as a surge in innovation, including efforts already underway related to COVID-19 vaccine development.
With significant budget shortfalls in localities and states around the country, we can expect significant local and state tax increases, though the timing remains unclear. In Canada, potential tax changes include provincial rate increases, higher taxation of capital gains and a carbon tax increase, and a continued focus on aggressive tax planning will be crucial.
On a macroeconomic level in the United States, RSM Deputy Chief Economist Kevin Depew said he expects the much-discussed “K-shaped recovery” will ultimately lead to a K-shaped economy, with the growth segment largely driven by technology advancements and businesses that can facilitate a remote workforce while businesses that rely more on face-to-face interaction will remain impaired.