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Congressional Rules and ‘UFOs’ May Complicate Biden’s Tax Hopes

Posted on Oct. 22, 2020

If Democratic presidential candidate Joe Biden wins the November election, he’ll have procedural hoops and an unstable economic situation to contend with before he can pivot to his tax reform wish list.

“Campaign proposals are important, but they often get either modified or sublimated by other events,” according to Jon Talisman of Capitol Tax Partners. “We like to call those events unforeseen occurrences — or UFOs.”

Former President Obama ran into the same issue in 2008, Talisman said during an October 21 webinar hosted by Tax Notes. Obama had lots of ambitious proposals during the campaign, but they had to be set aside because the financial crisis forced him to focus on the recovery bill. A few of his priorities were included in the bill, including the temporary Making Work Pay tax credit, but others, like raising taxes on the wealthy, had to be deferred until the fiscal cliff negotiations in 2012, Talisman said.

“That was a four-year period before campaign proposals were in play,” Talisman noted.

Still, there's nothing quite like an economic crisis to focus the minds of lawmakers and move big legislation, according to Mark Prater of PwC. But how that recovery bill shapes up remains to be seen.

Bombs Away

If Biden wins and Democrats take control of Congress, Democrats won't be off to the races on tax reform, thanks in large part to the Senate.

Biden would first have to assemble a Cabinet, and the nominees for many key posts would then have to be confirmed by the Senate. “Personnel are really important . . . he doesn’t just set up a government right away; he has to get people through,” Prater said.

A Biden administration may look to use the budget reconciliation process to sidestep a filibuster and push its tax proposals through a Democrat-controlled Congress with a simple majority, but that process is fraught with pitfalls, according to Prater.

“People from the outside that aren’t Senate geeks tend to think of it as ‘OK, this is the way the majority gets something done.’ And that’s true, in the sense that it necessitates a majority vote, but it comes with lots of costs,” Prater said.

The biggest obstacle is the Byrd rule, which prohibits the inclusion of “extraneous” provisions in a reconciliation bill if they fail any of its six tests. Talisman noted that two of those tests are particularly challenging: one prohibits increasing the deficit beyond the budget window — which is what led Republicans to sunset many provisions of the Tax Cuts and Jobs Act — and another prohibits provisions that would affect the Social Security Trust Fund.

That means Biden’s proposal to apply Social Security taxes to taxpayers with annual incomes above $400,000 would either have to be tabled and saved for a bill that could get 60 votes in the Senate, or Democrats would have to eliminate the filibuster, Talisman said.

Prater said the remedies to the Byrd rule tests vary. If a point of order is raised by a senator alleging that a provision in a reconciliation bill violates one of the tests, the provision is excised from the bill.

Regarding the Social Security-related test, however, “we always called it ‘the bomb,’” Prater said. If a point of order on that test is raised and lawmakers can’t muster 60 votes to waive it, the entire bill loses its reconciliation protection, which “destroys the unique status of the bill,” he explained.

However, Prater noted that Biden is a “creature of the Senate,” having worked for over 40 years as a senator and then vice president. “That may provide some opportunities,” he said.

For example, Biden may try to put together a bipartisan stimulus bill upfront that includes some of his priorities that have bipartisan pull, while saving reconciliation for more purely Democratic Party-related issues, Prater said. “The order of issues really is important — what becomes a priority, and then how tax fits into all that,” he said.

Making a List, Checking It Twice

Biden has already made it clear that he wants to revisit the TCJA, but it remains to be seen which provisions would stay, which would go, and which would merely be tweaked.

Talisman speculated that if the Senate flips, Democrats will focus first on tweaking the individual tax rates, bringing back the state and local tax deduction, and raising the corporate tax rate.

Although Biden has said he wants to boost the corporate rate from 21 percent to 28 percent, Talisman said he suspects that lawmakers might settle in the middle at 25 percent. When state corporate tax rates are added to a 25 percent rate, that would put them in the middle of the pack among developed countries, he said.

Biden would also likely seek to enhance the estate and gift tax to address income inequality concerns, which would be “relatively straightforward and easier” than proposals like a wealth tax, Talisman said.

Whatever Biden may try to do if elected, the path won’t be easy: “Tax cuts were hard enough; raising taxes would likely be even harder,” Talisman said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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