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Top 5 takeaways about federal tax changes from RSM's Tax Summit

Enactment is likely but depends on Senate, scoring and other factors

INSIGHT ARTICLE  | 

Dave Kautter expects Congress will enact wide-ranging tax changes on businesses and high-income individuals before the end of 2021, but the amount of political work still required to reach that milestone equates to significant uncertainty about which existing proposals will be included in final legislation.

Kautter, RSM’s federal specialty tax leader, assessed the simmering federal tax policy situation Monday during the opening keynote presentation at RSM’s Tax Summit Week 2021—Tax in Motion.

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By applying his experience as the former assistant secretary for tax policy at the Department of the Treasury and former acting commissioner of the IRS, Kautter clarified the path forward just four days after a flurry of policy activity. On Oct. 28, the Biden administration published a framework for its economic, social and climate change initiative, and the House Rules Committee followed by publishing text of a budget reconciliation bill in accordance with that framework.

Kautter spent much of his 60-minute presentation comparing tax provisions in the latest bill with the tax plan approved by the House Ways and Means Committee Sept. 15, using those comparisons as a compass in looking toward enactment.

Here are five main takeaways from Kautter’s presentation:

1. Expect final legislation to be some combination of the two existing bills—and additional provisions.

Just because the Rules Committee’s bill left out many key tax changes that were approved by the Ways and Means Committee does not necessarily mean that the Ways and Means Committee’s proposals are gone for good.

“These bills are useful as benchmarks, and the provisions are very likely to be included in a final tax bill,” Kautter said. “There may be provisions dropped, and I think there will clearly be provisions added.”

Kautter emphasized that both proposals have come out of the House, while the Senate has not taken any formal action. To this point, meaningful Senate negotiations have occurred behind the scenes and have featured four senators—Majority Leader Chuck Schumer, Senate Finance Committee Chairman Ron Wyden, and moderates Joe Manchin of West Virginia and Kyrsten Sinema of Arizona.

“It is exceedingly difficult to get the other 46 Democratic senators to agree that whatever is negotiated by those four senators is OK with them and that … they don’t need to have a say,” Kautter said.

2. How the Joint Committee on Taxation scores the Rules Committee bill will be pivotal.

Democrats are committed to paying for the initiatives in the so-called Build Back Better plan with offsets included in the legislation, as opposed to funding them with debt. How the Joint Committee on Taxation scores the bill, then, will enable a closer look at how spending initiatives match up with offsets and what adjustments may be needed to garner sufficient support for final legislation.

The Biden administration on Oct. 28 published revenue estimates as part of its framework; those are estimates by economists in the Treasury Department. “Capitol Hill doesn’t often agree with those numbers,” Kautter said.

Kautter is particularly interested in how the committee scores the bill’s proposals related to enhanced IRS enforcement. The bill proposes spending $45 billion to strengthen IRS enforcement capabilities, while the administration estimates generating $400 billion from those initiatives.

“The rule of thumb for the IRS, which is pretty reliable, is for every dollar spent on enforcement and collections, federal receipts go up by five dollars,” Kautter said.

By that 5-to-1 multiplier, the spending would generate $225 billion, or $175 billion less than the administration’s estimate. “I can’t imagine that the congressional scorers are going to score this at $400 billion,” Kautter said.

That exemplifies how the congressional scoring could compel lawmakers to change final legislation from the Rules Committee’s bill. Perhaps they would add provisions to raise more revenue, cut spending levels or offer some combination as part of broader negotiations.

3. Tax changes probably will be enacted between mid-November and the end of the calendar year.

Kautter forecasts enactment in the coming weeks, largely because of some December deadlines incentivizing action by congressional Democrats.

“The longer a proposal sits in front of the public, the easier it is for opposition to that proposal to gather,” he said.

Dec. 3 is a “pressure point,” Kautter said, because the recently signed extension of government funding expires that day. Then, sometime in mid-December, the government would reach its debt limit. And on Dec. 31, the expanded child tax credit is scheduled to expire, along with several other tax changes.

“There is desire on the part of Democrats to go into next calendar year with some significant legislative accomplishments under their belt,” Kautter said. “They’re viewing the infrastructure bill and this Build Back Better plan—the so-called reconciliation bill—as the ways in which they can achieve those. So, I can’t guarantee it—no one can—but I think it is a virtual certainty there will be tax legislation this year.”

4. Changes affecting estate and gift planning could resurface in final legislation.

When Kautter advised not to discount the Ways and Means Committee’s proposals that were left out of the Rules Committee’s bill, he highlighted estate and gift taxes and exemptions.

“There is so much focus here in Washington on individuals who have accumulated substantial wealth that it is difficult to believe the final legislation is not going to include anything that affects individuals who have accumulated substantial wealth over their lifetime,” he said.

Kautter pointed to the Ways and Means Committee’s proposal to accelerate the expiration of the current $12 million lifetime estate and gift tax exemption. It is scheduled to expire after 2025.

“Just dropping the exemption amount early is really easy to do,” Kautter said. “I don’t know if they will tinker with the rate, but I do think some of the Ways and Means Committee’s provisions, which are popular with Democrats on Capitol Hill for the most part, would be the leading candidates if I were to guess what could show up in the final bill.”

5. The limit on the state and local tax (SALT) deduction is still at play.

Neither the Ways and Means Committee bill nor the Rules Committee bill proposes a change to the limit on the SALT deduction. However, the viability of a change remains a function of political will, and such support exists.

“It’s clear that to pass the House, some accommodation is going to have to be made to the SALT deduction,” Kautter said.

Suspending the limitation would cost approximately $90 billion per year, according to Kautter. The potential change garnering the most attention is removal of the limitation in 2022 and 2023, followed by reinstating it for 2024 and 2025, and extending it to 2026 and 2027.

“If you’re trying to keep the tax increases minimized, this is an easy way to do it,” Kautter said. “It’s revenue-neutral within the 10-year budget window. You get the two years, and you live to fight another day and see what happens.”

The SALT issue is one of many making headlines as the legislative cycle churns. To that point, Kautter finished his presentation by underscoring the unpredictability of congressional negotiations and the importance of a patient, reasoned outlook.

“You will drive yourself crazy if you read everything over the next couple of weeks about what’s in this bill and what’s out of this bill,” he said. “I would encourage you to rely on your tax advisor as an interpreter to help you sift through all the noise and confusion that you’re going to hear.”

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