What will unified government mean for tax policy in 2021?

Although we continue through January with the uncertainty of the 2020 elections behind us and a unified government taking shape, tax changes under the Biden administration will likely still be difficult to predict. How will historically slim margins in Congress impact tax policy? Jim Alex, RSM’s national tax go-to-market leader, and Mathew Talcoff, national tax industry leader, examine those details and more with Public Affairs Leader Dan Ginsburg in RSM’s “Tax Policy Now.” Here’s a transcript of their conversation, edited for clarity:

Dan: Democrats will soon control Congress and the White House, though with historically small margins in both the House and, of course, the 50-50 split in the Senate. So, first question for you, Jim: Does a unified government mean full speed ahead for the tax plan that President-elect Biden proposed late last year?

Jim: No, not really. From what we understand, the Biden administration’s plan will be other priorities before turning to tax. Obviously, we’re seeing him already addressing COVID, we have his cabinet and many officials to be appointed and approved, Green New Deal legislation, social matters, a budget—so, priorities in front of that.

And on top that, large-scale tax increases will be viewed as divisive, and there is the potential for a desire to be more bipartisan coming into the new administration. So it seems it’s less likely to be a top priority coming right in.

Dan: Longer term, certainly we have pretty significant budget deficits. Won’t Biden’s ambitious spending plan need to be funded partly by increased tax revenue in the future?

Jim: Again, that’s not clear. A lot of it is going to depend on how the Senate operates. As you know, it’s a 50-50 split now with Vice President-elect Kamala Harris positioned to cast the tiebreaking vote. So, every time that the Democrats wish to do something, they have to keep a 50-seat majority in place. As I’ve said before in other settings, the challenge of a 50-50 Senate is the fact that it’s 50-50. All senators have to stay aligned with the party’s position on an issue in order to get it passed.

We saw this before one time, and that was in 2001 under President George W. Bush. And it only lasted about a little over six months. But the big lesson from that episode was that the legislative agenda was constrained. It didn’t have a wild swing to it because, again, you had to keep all senators aligned to the position that you were manifesting.

Dan: Any chance things could be a bit different this time around? Are there any things we should be looking for?

Jim: Well, in short, we need to watch the moderates at the middle of both parties. They will be the drivers since you need to keep them on board. For example, on the Democratic side, you need to watch Senator Manchin out of West Virginia, a very red state; Senator Synema out of Arizona, who tends to be a pro-business moderate senator. On the Republican side, several senators to watch: Senator Romney, Senator Murkowski out of Alaska, Senator Collins out of Maine. All of those will be influential. They’ve been influential in the past, and they’re going to be influential in the future, given this 50-50 split.

Now, it’s important to note that given the events of last week at the U.S. Capitol, there may be a desire to be more bipartisan, including with regard to taxes. But let’s keep in mind another observation: When you see extreme tax proposals grab headlines, as inevitably they will, actually getting something passed takes considerable compromise and in most cases will probably need some level of bipartisan support.

Dan: Let’s assume for a moment that some sort of tax policy does make it through.  What is the likelihood that it could be implemented retroactively to Jan. 1, 2021—say, a corporate rate increase or individual income tax on high earners, that type of thing?

Jim: We obviously get that question a lot, and we understand why we get that question. It’s probably less likely, as well, for two factors. One is we saw this before in modern history. President Clinton was the last president who undertook that in 1993, and there was a fair amount of backlash regarding retroactive taxes once his tax package passed in 1993.

The second is a factor which will dictate, maybe, thinking about all tax policy, and that is the state of the economy. Do you want to damage an economy that’s already in this situation it’s in with taxes and retroactive taxes? Both of those factors militate against a retroactive tax, but anything is possible this year and the years ahead.

Dan: Matt, turning to you for a second. Jim is suggesting that large-scale tax rate changes are less likely in the short term, though I’m assuming this doesn’t mean all will be quiet on the tax front for change in 2021. What do you think?

Matt: We should be clear in that some corporate or individual tax rate changes are more likely now that Biden figures to have Congressional support as well as Democratic control of the legislative agenda. However, really, as Jim notes, the actual changes may not be the significant headline-grabbing proposals that we’re going to likely read about, but that doesn’t mean they will be insignificant.

For example, according to the tax plan that he released before the election, President-elect Biden would like to enact a number of policies that would raise taxes on individuals with income above $400,000. That would include raising individual income, perhaps capital gains, as well as payroll taxes. Biden would also like to raise taxes on corporations by raising the corporate income tax rate and also imposing a corporate book minimum tax.

So, our advice to clients is that we need to monitor tax policy and legislative discussions very carefully, and we need to stay very flexible in our plan.

Dan: Also, what about so-called other wealth taxes like estate taxes, gift taxes? What should we expect?

Matt: During the campaign, President-elect Biden included a proposal which would expand the estate and gift tax, and it would do that by reducing the exemption amount, which currently is $11.5 million per individual down to $3.5 million. In addition, it would increase the top rate for the estate tax to 45% from the current 40%. Additionally, we know that the 2020 Democratic Party platform stated that “estate taxes should also be raised back to the historical norm.”

I think that, along with statements by President-elect Biden while he was vice president, as well as proposals made during the Obama administration, suggest that the Biden administration could eventually try to reduce the estate, gift and generation-skipping transfer (GST) tax exemptions to those that predate the Tax Cuts and Jobs Act of 2017.

However, the time frame on which Biden would pursue such changes is in question because of other priorities and the political viability of getting that done, as Jim noted, based on the narrow margin they have right now in Congress.

Dan: That’s extremely helpful insight, though still there seems to be a lot of uncertainty. In this environment, how are we suggesting that taxpayers should proceed?

Matt: Our main message is to stay informed and be flexible.

There are really a number of options to think through. We certainly would recommend considering a filing of an income tax extension for the 2020 tax returns. This would create more time in order to model out scenarios that you could come up with during 2021 based on what we might be hearing in the press and what we might be hearing right out of Washington.

That also could involve strategic planning about whether to accelerate tax depreciation, as well as adopting unique accounting methods to accelerate income for tax, and how to think through future itemized deductions. Those would be a few things that we would want to consider in a lot of that modeling and planning.

And I think while continuing to monitor for developments involving tax increases on the wealthy, a moderate corporate rate increase and a minimum tax on corporations, taxpayers can formulate a plan to minimize that impact of those items and get ready for them. So the main message here is stay informed, but stay focused as well. There will be time to consider changes that ultimately will occur.

Finally, I’d say keep your eye for upcoming political and tax policy events over the next several years. We’re going to see the sunsetting of various Tax Cuts and Jobs Act provisions in 2021 and 2022. We’re going to see the next midterm elections—it’s only a couple years away in 2022. And, of course, we have another presidential election; coming off this one here, there’s another one in 2024. And then the major sunsetting of some of the Tax Cuts and Jobs Act provisions that will occur in 2025. All of these are potential catalysts for tax policy and legislative change.

Dan: Thanks, Matt. That’s sound advice. Monitor or keep your eye on your strategy. Stay as flexible as you can, recognizing that despite unified control, Washington will continue to be unpredictable. And, Jim, thanks to you as well. Great insights.

For more, visit RSM’s Tax Policy Resource Center for deeper explanation of the issues, and you can sign up for our tax alerts to stay up to date on the latest policy and regulatory developments.