Last night in his first address to a joint session of Congress, that was also televised to America, President Biden unveiled a $1.8 trillion spending proposal envisioned to further boost the economy while helping the lower and middle class. The American Families Plan (AFP) is his 3rd spending plan released in his first 100 days in office.
The first, the American Rescue Plan signed into law in March, was an emergency pandemic aid bill that mostly focused on direct financial infusions to individuals and state and local governments along with funding for the vaccine rollout and other healthcare provisions.
The second package, the American Jobs Plan (including the Made in America Tax Plan), released earlier in April during an appearance in Pittsburgh, is designed to invest in improving traditional physical infrastructure, broadband, R&D and other less non-traditional infrastructure such as home and community-based care for the elderly and disabled. These programs are to be funded through tax law changes targeted at corporations. A comprehensive bill is still being developed and negotiated. See our article from April 1 (Introduction to The American Jobs Plan and The Made in America Tax Plan) for further details.
The AFP is the 3rd plan released. Coupled with the American Jobs Plan, together these two spending and tax proposals are being promoted by the White House “as once-in-a-generation investments in our nation’s future.” A White House fact sheet notes so that to “grow the middle class, expand the benefits of economic growth to all Americans, and leave the United States more competitive, President Biden’s American Families Plan is designed to:
Add at least four years of free education by providing 2 years of universal preschool to three- and four-year-olds at the front-end of learning with 2 years of free community college at the higher end of learning.
Provide direct support to children and families by subsidizing child-care, creating a national comprehensive paid family and medical leave program, and providing additional nutritional assistance to families in need.
Extend tax cuts for families with children and American workers by extending and increasing key tax provisions in the American Rescue Plan including the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Tax Credit while also extending expanded health insurance tax credits.
Additional details on each category above can be found in the White House fact sheet (see below for link).
President Biden proposes to pay for this increased federal spending by proposing changes in the current tax law affecting individuals. The proposed changes include:
Increasing the top individual income tax rate to 39.6% from 37%;
Doubling the individual capital gain tax rate to 40% for taxpayers making over $1 million;
Eliminating the “stepped-up” basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) with limited exceptions provided for family-owned businesses and farms;
Eliminating the “carried interest” provisions available to hedge fund partners;
Eliminating the like-kind exchange provisions for real property for gains greater than $500,000;
Permanently extending the excess business loss rules limiting the deduction of business losses exceeding $500,000 annually;
Changing the Medicare tax rules so they apply “consistently to those making over $400,000 ensuring that all high-income Americans pay the same Medicare taxes.
Calling for “financial institutions to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages”;
Increasing IRS enforcement on wealthy individuals.
It’s important to keep a sense of calm when considering this proposal. What are the chances of a tax hike in 2021? No one really knows. But some things to consider:
There may be some Democratic senators who are not completely on board with this proposal (Senator Manchin from West Virginia for example). Given the current 50/50 split in the Senate, this could cause problems for President Biden and Democratic Party leaders in trying to get this proposed spending and tax plan passed as currently envisioned.
Tax increases have generally not been retroactive so there may still be time to plan in 2021 once more details become available.
A 40% capital gains tax rate is outside the normal range based over the past 40 years. Since 1981, the capital gains rate has been between 15% and 28%. We may see proposals for an increase in the capital gains tax rate to 40% to help pay for the deficits generated over the past 20 years (due in part to the global COVID-19 pandemic) and to pay for the additional programs being proposed. However, it’s just as possible that, through political negotiation between the two parties, a capital gain rate could be agreed to that falls in between the current 20% rate and the proposed 40% rate (excluding the impact of the NII Tax).
The proposed bill language has not been released yet. Many different proposals will likely be offered by both Republicans and Democrats over the next few months. Note that if the 2017 Tax Cuts and Jobs Act legislative process is any indication of the process that lies ahead for this proposal, this release is likely the first volley in a drawn-out battle for yet another major tax law change. Recall that the Republicans controlled the House and Senate in 2017, but it took most of the year to get the legislation enacted on December 23, 2017.
In the meantime, continue to stay tuned to Schneider Downs as we continue to monitor the proposals coming from Congress and develop insights and ideas for responding to proposed changes. If you have any questions or need additional insights about President Biden’s proposals and their impact on you or your business, please reach to your Schneider Downs advisor.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.