Dan Ginsburg: The administration released its first budget and corresponding Greenbook, providing a blueprint for Congress as they now look to increase their focus on actually drafting legislation. While, on one hand, we do need to remember it’s just a proposal, it is a tangible starting point and needs to be taken seriously. The million-dollar question—or, really, the trillion-dollar question—is whether any of this will actually make its way through the legislative process and become law?
The good news is I do believe we’re actually getting closer to a few answers with respect to timing and whether or not a bipartisan deal is viable.
Transportation Secretary (Pete) Buttigieg commented May 30 that time isn’t unlimited and we’re approaching a “fish-or-cut-bait moment.” And while anything is possible, and there are a few in the administration that see bipartisanship as advantageous for Biden and the Democrats, clearly a bipartisan deal will be an uphill battle.
Despite most Republicans expressing genuine support for traditional infrastructure spending, we continue to hear from our friends on the Hill that the two sides do remain pretty far apart. And the likelihood of any Republican supporting an infrastructure package including significant tax increases at this point? Minimal.
Even if they can’t agree and (Democrats) do move toward a reconciliation approach, there is still fairly significant disagreement within the Democratic Party itself—so no guarantee that anything actually progresses there. But for a variety of calendar and political reasons, it’s highly unlikely that anything is going to get done before the September/October time frame. So we’re going to have to be talking about this for the next several months.
Jim, now that we’ve set the stage, based on your Treasury background, give us your thoughts on what we’re seeing. What are your key takeaways?
Jim Alex: Right before Memorial Day, Treasury released what’s called the Greenbook, which is essentially their blueprint for what they want to accomplish from a tax legislative perspective. It’s quite large; it’s over 100 pages long, a lot of detail. But let me call out a couple highlights from that document.
First, they settled the issue of what they would propose for an effective date for long-term capital gains rate increases for certain taxpayers. We’ve talked about different scenarios, and they sort of picked the one in between. That is, they picked a date during 2021 that they’re calling the date of announcement of that tax increase. It’s a bit ambiguous as to what that means. Some are thinking it’s April. Some are thinking it might be May. We’ll have to see. But, nevertheless, they marked it as being an intra-2021 date for raising the capital gains rate on certain taxpayers.
Second, we now have information with regard to this step-up in basis, this gift and estate tax question that we’ve also talked about. We’ve learned that Treasury is proposing that when you gift certain property or property passes via your estate, that’s a taxable moment with regard to that property regarding the appreciated value of that property.
Third, we continue to see a lot of focus in the international space, which is a bit of a surprise as compared to candidate Biden. Particularly, we see a lot of detail concerning GILTI and what they hope to accomplish there with regard to tax legislation.
Dan: What should we expect moving forward?
Jim: Now that we have this blueprint out, we should start seeing—and we’ll start hearing from our conversations up on the Hill—a lot more engagement from the administration and from the White House and Treasury with regard to House Ways and Means and Senate Finance (Committees) to start pushing this plan. We should start hearing that.
For example, this issue of retroactivity or partial retroactivity for long-term capital gains continues to be a difficult political challenge. And so there has to be a lot of engagement from the White House and Treasury with regard to doing something like that. It would require, like we’ve talked about before, a lot of political will to push that through Congress.
Dan: Thank you, Jim. Matt, let’s turn to you. Give us the perspective of what you are hearing from clients, middle market businesses out there. What, if anything, surprised them about what they saw in the president’s budget? What are you hearing? Give us your top three.
Matt Talcoff: Why don’t we start with things that we saw inside the Greenbook? No. 1 is long-term capital gains. As Jim said, that’s a major concern for a lot of business owners and investors. Some deals have already closed during this year. Some are under letters of intent. And some, quite frankly, are being negotiated. So business owners are very concerned about, will the rates go up? And then, what date will the rate go up?
No. 2, let’s go with that appreciated assets scenario. A lot of individuals have done estate planning, or they’re in the middle of doing estate planning. And they’re very concerned about the idea that appreciated assets—that unrealized gain—would be taxed upon a potential gift or at death.
And the third one—I agree with Jim—international tax, is being discussed a lot. But I’m going to throw you a bonus one, Dan: the net investment income tax, as well as the self-employment tax. That’s an additional 3.8% additional tax on many, many individuals. Currently, that does not apply to certain members of limited liability companies or S corporation shareholders. So if you are one of them, it’s possible that you might see an additional 3.8% tax on your income in the future. Those would be the items I would focus on.
Dan: Were you surprised by anything that they didn’t include?
Matt: Absolutely, and these are conversations we’re having every day with our clients. The three things that were not included in the budget that are still being discussed—and, as we’ve said before, these might come back as Congress negotiates: No. 1 is research and development expenses. No. 2, the state and local tax deduction. And No. 3, what’s known as the qualified business income deduction, or section 199A.
On the R&D side, the ability to currently expense R&D costs is about to expire. They’re going to have to be capitalized. But there is bipartisan support for a bill to potentially continue expensing R&D costs. That’s a big deal for corporate taxpayers.
The second one—state and local tax. As we discussed before, there’s a whole caucus of folks up on the Hill that want to have that cap of $10,000 increased or eliminated. We have to watch that. High-tax states like New York and California, the folks that are on Capitol Hill from those states, they are pushing it big-time. We have to follow that.
The last one—that qualified business income deduction—if you are a pass-through business owner and you have income coming to you of more than $400,000, you may be in for a surprise. There is a push by Ron Wyden, the Senate Finance Committee chairman, to either adjust or eliminate that deduction. That would be a really big deal for pass-through businesses, Dan.
Dan: To sum up, it’s feeling like we’re getting a bit closer to clarity on exactly what tax changes will be included in the infrastructure package and when we might see conclusive action, although we’re still not quite there yet.
