Dan Ginsburg: Jim, give us a little perspective on the current state of play in Washington. What is, for instance, the latest on President Biden’s infrastructure plan?
Jim Alex: My overall observation is that we’re in the midst of the political battle. There are a lot of mixed messages coming out of the Hill: The spending bill will be achieved, won’t be achieved. Taxes will go up, won’t go up, or somewhere in between.
It’s not fully clear on top of that how much the White House is engaged in pushing for tax increases as compared to on the spending side. We need to see concrete developments soon if the White House and House and Senate Democratic leadership are going to get this done this year.
I’ll give you one example. Last week, a Treasury official spoke with a pretty strong voice as to the increases that the president wants to get done. But as you know from our Hill conversations, we’re not getting that same message. So, in short, everything remains fluid right now.
Specific to your questions regarding a spending bill, what we’re hearing now is more of a skinny spending bill. Not the $2 trillion type of number, but maybe something closer in the range of $900 billion that focuses more on the traditional roads-and-bridges type of spending.
But all of this, again, has to get done in fairly short order if it’s going to be in place by the fall when, obviously, the budget needs to be developed and put in place with regard to Oct. 1. So whether or not they use budget reconciliation to get that done and then, maybe later, budget reconciliation with regard to taxes, we’re going to have to see. There’s still a lot to unfold.
Dan: Yeah, let’s follow up on that. $900 billion is still a lot of money; less than the $1 trillion that was talked about in earlier proposals. But talk a little bit further about exactly what this means for taxes.
Jim: Again, I think what we have to keep in mind, as you and Matt and I talk to staff people up on the Hill, we’re getting mixed messages. Some Democrats want, for policy reasons, to increase taxes because they didn’t agree with what was accomplished under tax reform and President Trump. Others believe they need to go up because they want to be fiscally responsible if we’re going to have major spending bills.
Then, importantly, there’s probably a third segment that is concerned about raising taxes at all because of the 2022 midterms. So how big the resolution of that group is—it’s not clear yet. If we don’t raise taxes, then obviously it’s going to be more borrowing.
It really comes down to something I learned about probably 30 years ago when I was an official in state government: political will. How much political will does the White House have, and Senate and House Democratic leadership have, to push through tax increases? We’ll have to see. That’s going to have to unfold in fairly short order.
Dan: Let’s break it down and look a little bit more at specific taxes. Start with corporate rates. The president proposed increasing the corporate rate from 21% to 28%. What do you see happening there?
Jim: Great question. As you know, there’s almost zero chance that a Republican is going to sign up for increasing the corporate rate to 28%, if at all, any increase. That said, there is the current thinking that is reported a lot that the possibility is that it could be somewhere in between.
Why do we say that? Because we have seen the president, recently and importantly, begin to equivocate as to whether or not we’ll stay with the 28% or something less. And as we’ve talked about before, Dan, we have Senator Joe Manchin (D-W.Va.), representative of the moderates, saying we could vote in favor of an increase but not at 28%—maybe something in between.
Dan: Let’s keep going. What about capital gains? What do we think is going to happen on that front?
Jim: I’d say that’s a corollary to the corporate side. There’s a belief among some Democrats that we should tax capital gains at the same level that we tax ordinary income. That would mean effectively doubling the rate for the upper-end folks. We’ll have to see. Again, it could be zero increase; it could be the full doubling, effectively over 40%; or somewhere in between. Again, analogous to what you and I are hearing with regard to the corporate rate up on the Hill.
Dan: You’ve mentioned the possibility of tying capital gains rates to individual rates. Let’s keep going there, and let’s bring in Matt. Matt, what do you see happening with individual tax rates? And maybe also share your thoughts on what you’re telling your business clients potentially impacted by any changes to individual rates.
Matt Talcoff: Thanks, Dan. Let’s start with what the president has been saying. The president, even when he was a candidate, has been very clear that he does not want to raise taxes on anyone that makes less than $400,000 a year. So, the possibility of individual rates changing has to be looked at from the standpoint of those making more than $400,000.
He did propose an increase in the individual rate from 37% to 39.6%. Quite frankly, we haven’t heard a lot of criticism of that. It’s not a significant increase. It certainly may impact many. But I think the focus has most been on what you and Jim just spoke about—long-term capital gains rate going from 20% to potentially 39.6%, although we don’t think it’s going to get that high.
From the business client side, I think they’re mostly focused on that pass-through rate. Will there be a change in that Section 199 qualified business income? That’s has been the major focus for business owners.
Dan: What about gas tax? We’ve been hearing a good deal about that. Also, we’ve heard vehicles miles traveled—or that VMT tax—to get all those new Tesla drivers in on the mix. What are we hearing?
Matt: Sure—and we love Tesla drivers. I have friends that drive Teslas.
I would say what we’re hearing is that certainly an increase in the gas tax makes somewhat logical sense, right? It’s directly related to infrastructure spending that you and Jim spoke about. In fact, we haven’t seen any increase in, I think, 28 years for the gas tax. We also have truckers that support this. Not all, but many truckers say that we need that desperate fixing of our infrastructure. So we’ll have to watch where that goes. But it’s political, and, again, it would impact those making less than $400,000, so that’s complicated. I’m not sure we’re going to see that move anywhere.
The vehicle miles tax, though; it’s been interesting. We spoke with staffers on Capitol Hill, and certainly over the last three weeks, we’ve heard that spoken about several times. I wouldn’t be surprised if we see a pilot program come out on vehicle miles tax. Again, it’s complicated. How do they track it? Concerns about privacy and so forth. We’ll watch that closely.
Dan: Last, let’s talk about SALT (state and local taxes). We know this one is a little tricky. A number of Democrats from high-tax states support a repeal or possibly an increase in the $10,000 deduction. What are you hearing?
Matt: We’re hearing lots of different things. It’s complicated. There are solid arguments on both sides. Those that are in high-tax states that are considering moving to Florida or Texas or elsewhere are saying they need more state tax deductions. Others are saying it just costs the federal government too much to change that. Ultimately, it is political.
We’re going to have to watch what House Speaker (Nancy) Pelosi does. She’s certainly from a state, California, in which many are in favor of changing the SALT cap. We’re going to have to watch it. The president has not proposed any changes on it. We are hearing in our discussions with staff members lots of different thoughts.
In fact, one interesting thing was one staff member said to us: If the states figure out workarounds—and many states are—maybe Congress doesn’t have to do anything with it. We’ll have to wait and see what happens. But certainly our clients care about this immensely.
