It’s summertime, and people are eager to enjoy time spent outside. From picnics and cookouts to parades and water balloons, this summer already looks different than this time last year. To put it in perspective, as it relates to tax legislation, this article provides a snapshot of where we are now as proposed tax legislation slowly moves forward. Unlike the speed in which we saw Congress enact legislation last year, the House and Senate are currently a long way from firing up the grill.
Following the passage of the American Rescue Plan (ARP), the Administration outlined its recommendations for business and individual tax changes as part of the American Jobs Plan and American Families Plan. These initiatives offered general tax policy themes but were short on specifics. Congressional leaders have been working hard behind the scenes ever since to put the legislation together. Here’s where we stand:
The legislation is following a different path than normal, beginning in the Senate rather than in the House. It is divided into two packages: (1) a bipartisan infrastructure bill; and (2) a partisan reconciliation bill. Each has different provisions, amounts and rules for passage while still being linked, and Congressional leaders are planning to pass both. The bills include:
1. Bipartisan Infrastructure Package.
This legislation offers about $1.2 trillion in spending on various infrastructure projects, from highways and bridges to other transit areas, energy and technology. Approximately half (or $550 billion) represents new spending over the next five years. With a bipartisan group of 22 senators working on this proposal, there is a lot in the bill – nonetheless, on July 28, 2021, the group reached an agreement. (Please click to view the Summary (from Politico) of various infrastructure provisions, as well as a White House Fact Sheet). The Senate still needs to complete the statutory text of the bill, but the members have agreed on all major provisions.
**Update as of 8/2/2021: The Senate released the statutory text on August 1. Visit https://www.congress.gov/bill/117th-congress/house-bill/3684 to view. Refer to SA 2137 for full text.
One stumbling block for the bipartisan group was how to fund the $1.2 trillion infrastructure package. Several of the key funding items agreed on are as follows:
- $205 billion from repurposing of certain unused COVID relief;
- Undetermined funding from recouping fraudulently paid benefits from enhanced federal unemployment supplement;
- $49 billion from delaying Medicare (Part D) rebate rule;
- $53 billion from certain states returning unused enhanced federal unemployment supplement;
- $20 billion from the sale of future spectrum auctions;
- $67 billion from the sale proceeds of February 2021 “c-band auction;”
- $56 billion in economic growth resulting from a 33% return on investments in these long-term infrastructure projects;
- $28 billion from applying information reporting requirements to cryptocurrency transactions;
- $21 billion from extending fees on Government-sponsored Enterprises (GSEs);
- $13 billion from reinstating certain Superfund fees;
- $8.7 billion from mandatory sequester;
- $6 billion from extending customs user fees;
- $6 billion in sales from Strategic Petroleum Reserve;
- $3 billion in savings from reducing Medicare spending on discarded medications from large, single-use drug vials; and
- $2.9 billion from extending available interest rate smoothing options for defined benefit pension plans.
- No amounts were attributed to additional revenue collected from enhanced IRS audits and compliance efforts.
- There are no major business or individual income tax changes included as part of the infrastructure financing plan.
The key with this infrastructure plan is that it requires 60 votes (out of 100) to pass in the Senate. The vote to move forward with the infrastructure plan passed with 67 votes on July 28, but the bill is not final yet – and additional work and votes are planned.
Even if the infrastructure bill passes in the Senate, the House has stated it will not take up the bill unless the separate reconciliation bill (discussed next) also passes in the Senate. If a final agreement is not passed, the infrastructure spending bill is not doomed. There is a backup plan to add this infrastructure spending to the separate reconciliation bill. A confusing process to say the least, and we are not done yet.
2. Partisan Reconciliation Bill.
This is a spending package of $3.5 to $4 trillion and could swell to $5 trillion if the infrastructure proposal discussed above cannot be agreed to and is added to this reconciliation bill. This package focuses more on “individual infrastructure” items, such as education, child care, health care, climate change and much more. The reconciliation bill is where most of the tax changes will be found. Some of the tax changes likely to be baked into the reconciliation bill are:
- Higher corporate taxes;
- Higher individual tax rates;
- An increase in capital gains taxes;
- A hike in estate taxes;
- Reduction in the 20% small business deduction for higher income taxpayers;
- A curb in “like-kind exchanges” of real estate;
- IRS enforcement measures that were scrubbed from the infrastructure package (see above);
- One possible tax savings provision involves relaxing the limitation on the deduction for state and local taxes (SALT) now capped at $10,000. Look for this limit to be raised or perhaps repealed. There are many House members looking for this change, but there is less support in the Senate.
- And various other changes.
The tax provisions to be included in the reconciliation bill are being kept under wraps for now, but will soon be unveiled.
What is being done now is preparing the complicated instructions or outline of this $3.5 reconciliation bill. This is being drafted by Senate Budget Committee Chairman Bernie Sanders along with Senate Majority Leader Chuck Schumer. Once this step is completed, the specific details and tax increases in the $3.5 trillion spending plan will be ironed out. While it may be fully funded with $3.5 trillion in additional taxes, it could also involve fewer additional taxes but more deficit funding. A key aspect of this reconciliation bill is that it can be passed with only a simple majority in the Senate (or just 50 votes); not the normal 60 votes, as is being done with the infrastructure bill.
There will be no input at all from Republicans in the reconciliation bill; the process will be drafted and controlled by the Senate Democrats. Schumer must get all 50 Democrats to support the reconciliation bill, or it will most likely not pass. This is what Sanders and Schumer are working on now – trying to secure the support of all 50 Democrat Senators. On the day the infrastructure bill passed its first hurdle (see above), Senator Kyrsten Sinema from Arizona announced she would not support a reconciliation package of $3.5 trillion, stating it was too high. This will create more drama in the coming days, and the bill will likely not come up for a vote until Sanders and Schumer have secured the support of all their Democrat colleagues in the Senate. Schumer would like to have this initial reconciliation vote completed before their upcoming August recess and may delay the recess until the initial reconciliation vote passes. The details of the bill will then be drafted and final votes probably taking place in September or October.
House.
Finally, if and when the Senate passes both the infrastructure and reconciliation bills, the bills will move to the House. As noted above, they plan to not take action until both bills pass in the Senate. The House is narrowly divided, and it is likely key House leaders will offer input to their colleagues as the bill is being crafted in the Senate. While the House could change the bill passed by the Senate, they will likely accept it as-is and have an up or down vote on final passage. It would be surprising if any bill that passes the Senate would then be voted down in the House.
President.
The Administration is offering its input to key congressional leaders as these bills move along. The president is likely to sign any bill that reaches his desk even if it doesn’t include everything he would like.
It would appear that the legislative process is even more complex this year. We invite you to stay tuned as new updates are released. Please contact your Sikich advisor with any questions in the meantime.
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About our authors
Jim Brandenburg
Jim Brandenburg, CPA, has extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Tom Bayer
Thomas E. Bayer, CPA, CExP, has more than 25 years of experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich offices. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. He puts his business succession planning abilities and knowledge to work firm-wide, serving clients in advisory services across the country.
