Tax Analysts Chief Content Officer Jeremy Scott reviews U.S. tax legislation passed in 2020 and speculates about what lies ahead in 2021.
This post has been edited for length and clarity.
David Stewart: Happy New Year from Tax Notes.
Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: 2020 hindsight. We'll continue our New Year's tradition of looking back at what happened in U.S. tax policy in the past year and then look ahead to what we can expect in the coming year.
Here to recap the tax highlights of 2020 and discuss what might be in store for 2021 is Tax Analysts Chief Content Officer Jeremy Scott. Jeremy, welcome back to the podcast.
Jeremy Scott: Thank you. It's always nice to be here.
David Stewart: 2020 was quite a year. When you joined us on the podcast last year, you predicted that we would see very little in the way of tax legislation in 2020. But since no one could have anticipated how 2020 was going to go, how did your prediction fair? What did we see in terms of tax legislation?
Jeremy Scott: My prediction didn't fare very well. I predicted that because of divided government and an election year, there would be very little action on tax. Then, of course, the pandemic hit and the stimulus response from Congress was basically unprecedented. We had an enormous amount of tax activity in the spring and early summer as lawmakers passed a series of stimulus measures designed to keep the economy afloat during the shutdowns to control the spread of COVID-19. It was amazing because essentially these passed with almost no opposition. They were unprecedented legislative margins, particularly in the last few years for major tax legislation.
We saw an enormous amount of activity on tax. We saw legislative activity, followed by guidance, followed by calls for more legislative activity. We saw rebate checks similar to what had been used during the second Bush administration: $1,200 for individuals and $2,400 for taxpayers filing jointly. They did phase out certain income levels, so they weren't as all-encompassing as the Bush rebates, but it was still a massive amount of stimulus injected straight into taxpayers' hands organized by the IRS.
In addition to the rebate checks, which were the headline of the COVID-19 recovery for individuals, there were an enormous amount of things designed to stimulate businesses. This included programs to loan to employers to discourage them from laying off employees, delays of payroll taxes in order to keep cash in the hands of employers, and changes to charitable contributions to keep people giving.
We saw an employee retention credit, which has been something that had been talked about in past crises and never implemented. This time they put it together and threw it out there. It was essentially a tax credit designed to discourage layoffs.
You had provisions within the PPP, which is the Paycheck Protection Program — these are the loans I referred to earlier, which were designed to basically make the loans go away. They were forgiven if you didn't lay employees off.
Again, it was just unprecedented activity. Trillions of dollars in stimulus agreed to by both Democrats and Republicans to guide us through the COVID-19 crisis.
2020 ended up being an incredibly busy year for tax when we thought it would be kind of stagnant.
David Stewart: The busyness of tax continued right up until the end. Can you tell us a little bit about the latest round of stimulus?
Jeremy Scott: Yes. Somewhat unexpectedly, after rejecting the idea of additional stimulus leading up to the election, Congress — primarily the Republicans — came back into the lame-duck session and it became a high priority.
It didn't look like a compromise was going to be possible because of the differences in the plans. The Democrats wanted around $2 trillion to $3 trillion in additional stimulus, and they held out for that all through the late summer and fall. But when they dropped their demand for large amounts of aid to state and local governments, suddenly there came to be the opportunity for a compromise.
There was a compromise right at the last minute: a $900 billion stimulus package. Tacked on to the normal appropriations bills to prevent a government shutdown, it contained a little bit more tax. It included another $600 per person in rebates phasing out between $75,000 and $99,000 in income and another extension of the PPP program. I think it's about $284 billion in additional loans to protect jobs. These are the major tax provisions that were in there. The meals deduction was also in there.
This did come together in the lame-duck session. It was yet another stimulus package that passed with overwhelming support from lawmakers in both parties.
It was a busy year right up until the very end legislatively, in a year that most people thought would feature very little major tax legislation.
David Stewart: Was there any legislation that happened outside of the coronavirus context or was that pretty much it for tax policy?
Jeremy Scott: That was basically it for tax policy. Between the impeachment proceedings at the beginning of the year and the election at the end, there wasn't a lot of time to do anything else. We didn't get anything prior to the COVID-19 outbreak and we did not get anything other than stimulus once the COVID-19 outbreak hit us.
The biggest activity in tax outside of COVID-19 was in additional Tax Cuts and Jobs Act guidance, which the IRS and chief counsel continued to put out. Even they got a little bit set back because of the need to issue guidance on the COVID-19 stimulus things. But we did get some pretty major pieces of TCJA guidance all the way up until the end of the year, including a large package on revenue recognition and some other things on the international side. We finished up the guidance process there, which IRS Chief Counsel Michael Desmond said he expected to be finished by the end of 2020.
David Stewart: In addition to turning the page on a year, we're about to turn the page on a presidency. Looking back, how consequential has President Trump's administration been for tax policy?
Jeremy Scott: I think it ended up being more consequential for tax policy than many people thought. Most people thought that he might just do a tax cut. The TCJA was a lot more than that. It dramatically changed how we tax corporate income both by slashing the rate and changing the international rules. I think those rules are going to be with us for some time, despite Democratic promises.
Whether the lower corporate rate stays exactly where it is today at 21 percent or creeps back up — maybe closer to 25 percent in a new administration or as a result of compromises — I think the gist of is that the low rate is going to stay. I don't think you're going to see a return to a corporate system where the tax rate is up in the high thirties, but there's a lot of rules that let you slash the effective rate down.
I think the Trump administration is going to mark a major turning point for tax policy and I think the TCJA is going to be the starting point for negotiations for a long time. I think once you get a piece of legislation in place that's that big and all-encompassing, it's very difficult to start fresh, even though that was a campaign promise made by the incoming president.
I think it's going to be something that defines the tax system for a while.
David Stewart: Outside of tax policy, there's a lingering question from the Trump administration: the status of the congressional requests for President Trump's tax returns. What, if anything, do you expect will happen with that dispute?
Jeremy Scott: That's an interesting question because it went on so long that he's not going to be in the White House anymore when you might get a resolution. I don't think anyone knows how this is going to turn out. Many people in Congress have pledged to continue their investigations.
The incoming Biden administration has implied that this will not be a high priority for them. They're not going to seek to continue to go after Trump as one of their top priorities. They have other things to kind of focus on, so I'm not sure how that will turn out.
I would not be surprised though, if sometime in the next four years, maybe sometime the next two years, depending on President Trump's status as a potential 2024 candidate, if you didn't see some movement towards legislation to require a president to disclose their tax returns.
I think deep down everyone would like to see this not be an issue, even those on the Republican side. Prior to Trump, this was an issue of consensus: Presidential candidates released their tax returns. I wonder if maybe there'll be an attempt to take this out of the realm of voluntary to keep it from being a question in the future and you might see some type of legislation.
But in terms of will we get Trump's tax returns? And who will get Trump's tax returns? I don't think we know. I think the most likely people to get a look at Trump's tax returns continues to be some of the prosecutions and investigations going on in the state of New York.
You might see the House Ways and Means Committee move on and not care about it much anymore, but they might. They might get them and release them, or they might continue their investigations. It's still a Democratic House of Representatives, although much narrower majority. We'll see. I think that is an open question that's going to continue to be open next year unless something happens in New York.
David Stewart: That brings us to the change in administration. President-elect Joe Biden will be taking office in just a few weeks. What do you anticipate will be his first tax priorities upon taking office?
Jeremy Scott: Biden, like most Democratic candidates, did emphasize some degree of tax policy during his campaign. It was mostly things to make the tax system more equitable, to stop the continuing accumulation of wealth at the top, to enforce tax policies against the finance industry, and things like that.
But I don't think any of that's going to happen in the next two years. I don't even think that's going to be his focus for quite some time. I think the reason is the ongoing economic problems caused by the COVID-19 outbreak. I believe Biden is going to focus almost exclusively on stimulus when he takes office. I think the $900 billion that was passed at the end of the Trump administration is viewed by most Democrats as a down payment. I think they have more priorities for getting aid out there, particularly to lower-income individuals and state and local governments.
I think getting aid to state and local governments will be a high priority of the Biden administration. I think that COVID-19-related stimulus and health expenses are going to consume the administration. I think that's going to be the area of tax policy where you see the most action.
It's going to be attempts to get more stimulus into the economy, to attempt to prevent a prolonged recession, attempts to jump-start a recovery for which the new administration would like to take credit for as it heads into midterms or into 2024. I think that, more so than an attack on the corporate tax rate or an attack on taxes on the wealthy, is going to be their focus.
That's not to say that you won't see some tax provisions be talked about as pay-fors for some of these spending priorities. I definitely think you could hear some talk about swapping some tax priorities with Republicans and Democrats for a higher corporate tax rate. I think Biden has indicated that he viewed the 25 percent rate that had been talked about during the Obama administration as a good compromise point.
I think he might be overly optimistic that Republicans are willing to come up to 25 percent in exchange for some other things. But I would not be surprised if he at least talks about that. I think you may hear the estate tax talked about a little bit. I think you may hear Biden use that again as a pay-for for some other smaller priorities.
But I don't think you're going to see this complete reconfiguring of the tax system that he spoke about during his campaign and that was a priority for progressive Democrats. There aren't the numbers in Congress to get it through. They don't have the majority in the House of Representatives that will allow them to do expansive legislation. That's not even to talk about the Senate.
I don't think you're going to see the massive tax program that he may have talked about, but I do think you're going to see an emphasis on stimulus. I do think taxes are going to get talked about early, just in a smaller scale than you've heard in the campaign.
David Stewart: To follow up on your talk about Congress, as we know right now, the Democrats will be retaining control of the House, and as the administration keeps appointing people to its cabinet, a diminishing majority in the house. The Senate as of now is up in the air. There's a runoff in Georgia about a few days after this episode will appear.
What does the current makeup of Capitol Hill signal for the potential for tax legislation in the coming year?
Jeremy Scott: Everyone is assuming that the Republicans are going to hold on to the Senate because both of the Senate seats in Georgia that are out for runoffs probably lean GOP. Let's assume the Republicans win at least one of those seats to give them 51 in the Senate, which means that they would have a 51 to 49 majority, even with the vice president's potential tie-breaking vote.
If you have a divided Congress, you are not going to see major Democratic priorities make it through. The House of Representatives' majority is so small and so dependent on a lot of Democrats who won red-leaning districts. I don't think you would have seen it even if they get to a 50-50 Senate where the vice president can break ties. It's just not a majority conducive to doing sweeping tax legislation the way they talked about in the campaign.
There isn't a consensus for it on the Democratic side. The Democrats did very well in the House of Representatives in Trump's midterm, because they were able to combine a progressive, mainstream Democrat in a centrist Democratic bloc into a strategy to win suburban seats and to win seats that have traditionally been Republican. That is not a blueprint for passing major progressive tax legislation.
We're looking at a divided Congress, a White House focused on stimulus, and a president whose reputation has primarily been made as a compromiser, particularly when he was in the Senate and when he was the vice president working with President Obama and a Republican Congress.
I just think you're not going to see major tax legislation. I think you're going to see a focus on keeping the economy from collapsing. I think you're going to see a focus on other administration priorities outside the area of tax, things that they can do through executive action.
I just think that a lot of 2021 is going to be consumed by talk of COVID-19, which is not necessarily an environment that's conducive to major legislation, whether tax or otherwise.
David Stewart: The other question about the potential for major legislation is a thing that we haven't heard a whole lot of talk about, but that would be the deficit. Is that going to rear its head again as an issue going forward?
Jeremy Scott: Well, the deficit is always the issue in the minority party. Once Republicans, if they are able to secure a Senate majority, start configuring their strategy for the midterm elections, you'll hear a lot about the deficit from them. Whereas they weren't necessarily all that concerned with it during the Trump administration, they will probably use that as a major issue for combating certain Democratic stimulus priorities, for combating certain democratic spending priorities.
The deficit will be talked about quite a bit. Is it going to be a major priority for the Biden administration or for Democrats in Congress? I think they will pay lip service to it. I think they will talk about it. I think that the Democrats are always a little bit more committed to finding pay-fors for some of their priorities than Republicans and that puts things like I've mentioned earlier, the estate tax rate or corporate tax rate, in play. The deficit will be talked about by Republicans as a campaign issue. It will be talked about in the mainstream press as an issue as the economy starts to recover, as the COVID-19 crisis recedes.
But is it going to be a major priority for President Biden early on? I don't think so. I think it'll be a thorn in his side, but I think his priority is going to be stimulus.
David Stewart: All right, Jeremy, thank you very much for being here.
Jeremy Scott: Thank you very much for having me.