The 2020 Presidential Election: Tax Proposals of Biden & Trump
Election Day is November 3rd, and there are a number of policy debates dominating this Presidential election cycle including the COVID-19 pandemic and the federal response to it, the Supreme Court and the current vacancy created by the death of Justice Ruth Bader Ginsburg, racial and ethnic equality, healthcare and the future of the Affordable Care Act (ACA), and climate change. Tax policy issues are also on the ballot for this election with stark differences between the policy agendas of the two Presidential candidates – President Trump with the Tax Cuts and Jobs Act (TCJA) enacted in 2017 during his first term and former Vice President Biden, who has criticized the TCJA and offered a number of policy proposals that would reverse policies in the TCJA.
There was minimal discussion of tax policy in the first presidential debate, and neither candidate has released detailed legislative proposals to explain their ideas. Their comments on tax policy thus far were intended to send messages to voters about their tax priorities. The “message proposals” that have been released by both candidates, however, make it clear that there are significant differences between the two candidate’s tax policy agendas with Biden making it clear that he would reverse much of the TCJA.
With a month to go before Election Day and with voting having already started in many parts of the country, there is still uncertainty surrounding the likely outcome of this Presidential election. Taxpayers are thus advised not to make future tax decisions based on what changes might be enacted in or after 2021 before knowing the election results. They are well advised, however, to pay close attention to the politics and substance of the tax debate throughout this pre-election period and then, of course, post-election once control of the Congress and the White House has been determined.
This True Alert will summarize key aspects of each candidate’s proposals, the tax agenda for 2021, and the potential for future changes to certain provisions of the TCJA. The Alert will primarily focus on business-related proposals but will touch on key issues affecting individuals as well.
The Biden Tax Agenda
Biden believes that the TCJA provided benefits to wealthy individuals and big corporations, and some of his proposals are intended to address his belief that these taxpayers should “pay their fair share.” He has called for higher corporate tax rates, a broad roll-back of the TCJA, and penalties for offshore operations in order to fund other priorities which include providing tax relief for lower- and middle-income taxpayers as well as spending on priorities such as infrastructure, alternative energy development, and the US manufacturing sector.
The 2020 Democratic Party Platform included the following excerpt:
Democrats will take action to reverse the Trump Administration’s tax cuts benefiting the wealthiest Americans and rewarding corporations for shipping American jobs overseas. We will crack down on overseas tax havens and close loopholes that are exploited by the wealthiest Americans and biggest corporations. We will make sure the wealthy pay their fair share in taxes. We will make sure investors pay the same tax rates as workers and bring an end to expensive and unproductive tax loopholes, including the carried interest loophole. Corporate tax rates, which were cut sharply by the 2017 Republican tax cut, must be raised, and “trickle-down” tax cuts must be rejected. Estate taxes should also be raised back to the historical norm.
A Biden win would likely result in the appointment of a new Secretary of the Treasury, and there are several potential nominees who have been reported by the press (without confirmation from the Biden campaign). Those names include Senator Elizabeth Warren, Jamie Dimon (Chair and CEO of JPMorgan Chase & Co.); Richard Cordray (former director of the Consumer Financial Protection Bureau, 2013-2017), Lael Brainard (Member of the Federal Reserve Board of Governors), and Neel Kashkara (president of the Federal Reserve Bank of Minneapolis). Tax policy in a new administration would also generally be influenced by personnel at the Council of Economic Advisors and the National Economic Council.
The Trump Tax Agenda
The Trump White House sees the enactment of the TCJA as the signature legislative achievement of his first term, and the overarching goal of a possible second term would be to preserve and expand upon the policies included in the legislation. In order to fast-track the TCJA into law without support from Democrats, Republicans passed the legislation through “reconciliation” procedures that allow revenue and spending bills to be enacted with a simple majority vote instead of the 60 votes necessary to avoid filibusters.
Using the reconciliation process also meant the TCJA was subject to the “Byrd rule” which limits the amount that the legislation can increase the budget deficit beyond fiscal years covered by the legislation. For this reason, a number of the TCJA’s deductions contained “sunset provisions” that are set to expire in the next few years, which would result in tax increases unless the provisions are extended. It’s worth noting that Trump’s budget proposals since the TCJA was enacted have all assumed the extension of these sunset provisions, which likely indicates that he wants to extend those provisions, although he has not explicitly stated that proposal.
Some of the key business-related sunset provisions that will change over the next few years (unless legislation is passed to extend them) that would result in tax increases include expanded limits on business interest deductions, the phasing-out of bonus depreciation, an increase in the effective rate on global low-income taxed income (GILTI), and changes to the timing for deducting R&D expenses.
The Congressional Agenda
Although the focus of this True Alert is the tax policy agendas of the two Presidential candidates, it is important to acknowledge that the Congress plays a key role in the development of tax policy and in enacting tax legislation – the constitution grants the House of Representatives the sole power to originate tax legislation.
Thus, the Congressional elections will play a key role in determining the road ahead for tax policy in 2021 and beyond, since control of the House and the Senate will be a major factor in whether and how tax legislation advances during the next 4 years. At this time, it appears likely that control of the House – and the Ways & Means Committee – will stay with the Democrats, but control of the Senate – and the Senate Finance Committee — is up for grabs in this election cycle.
Unless one party controls both the White House and both bodies of the Congress, the new President will have to contend with the challenges that come from divided government and the goal of passing legislation that enacts a President’s agenda on tax policy issues. The TCJA was approved by a Republican-controlled House and Senate and signed into law by a Republican President with Democrats effectively shut out of the process, but that is unlikely to happen again since the Democrats seem likely to maintain their majority in the House.
If there is Democratic control of the White House and/or Congress in 2021, one of the key issues for Congress will be whether to use the reconciliation process which could require offsets if the legislation would otherwise increase the federal deficit, similar to the TCJA’s sunset provisions. The Congressional Budget Office recently released projections indicating that the federal deficit will be approximately $3.7 trillion in 2020 and $2.1 trillion in FY 2021. If a new COVID-19-related stimulus package is needed early in 2021, it is possible that Democratic leadership could proceed on that legislation without revenue or spending offsets, but with other future legislation, it is expected that Democratic leaders in Congress and the Administration would pay for federal deficit increases. In fact, at some point, they may decide to address the issue of the federal deficit and enact revenue raising legislation solely for that purpose.
TCJA Sunset Provisions
One of the key issues that must be addressed in 2021 and beyond, regardless of which party controls the White House, relates to the status of several key sunset provisions of the TCJA that are scheduled to expire through 2025. Several of these provisions relate taxes on individuals, and generally, Biden and his fellow Democrats agree with Trump that these should be extended beyond 2025.
There are key business provisions that also expire or are modified in the next several years including:
- The 30% limitation on interest expense deductions will be calculated without depreciation and amortization starting in 2022
- Bonus depreciation will begin getting phased down by 20% per year in 2023
- Amortization of R&D expense beginning in 2022
- Reduced 250 deduction for GILTI and foreign-derived intangible income beginning in 2026
It is unclear how a Biden Administration would address these provisions, although they would likely be considered as part of a comprehensive tax proposal.
Key Tax Issues for Businesses
Corporate Tax Rates
The current corporate tax rate is 21%.
Biden has proposed increasing the corporate tax rate to 28%. He would also impose a new 15% minimum tax on book income of companies reporting US net income greater than $100 million but which owe no US income tax. This minimum book profits tax would appear to effectively reinstate the corporate alternative minimum tax, but based on book income. NOLs and foreign tax credits would continue to be allowed.
Trump has suggested he would like to lower the rate to 20%, but he has not formally proposed a change to the corporate tax rate.
Offshoring, Relocation of US Jobs, and Domestic Manufacturing
Biden has released a package of new proposals to discourage offshoring and encourage domestic production and job creation, consisting of a combination of penalties and incentives, including the following:
- Impose a 10% “offshoring tax penalty” on profits derived from foreign production (including call centers and services) that are intended for sale back into the US which would apply on top of the proposed 28% corporate tax rate for a combined tax rate of 30.8% on any such profits. It also aims to deny deductions associated with moving jobs offshore and to strengthen anti-inversion regulations and penalties.
- Create advanceable “Made in America” credit for 10% of qualifying expenses related to returning production to the US, revitalizing existing closed or closing manufacturing facilities, incrementally increasing wages paid to US manufacturing workers, and retooling facilities to “advance manufacturing competitiveness and employment”
- Establish a “claw-back” provision requiring a company to return public investments and deny all tax benefits when they move US jobs overseas that could have been offered to Americans
- Eliminate incentives for pharmaceutical and other companies to move production overseas in order to encourage US production.
With respect to the pharmaceutical industry, Biden has also proposed imposing a tax penalty on companies that raise drug costs by more than the rate of inflation and repealing the deduction for certain advertising expenses.
Trump has proposed the following:
- Create “Made in America” tax credits
- Create a new credit for US companies that “bring jobs back from China”
- Impose “tariffs on companies that leave America to produce jobs overseas”
- Allow 100% expensing “for essential industries like pharmaceuticals and robotics who bring back their manufacturing to the United States”
Base Erosion Anti-Abuse Tax (BEAT)
Under current law, the Base Erosion Anti-Abuse Tax (BEAT) limits the ability of large multinationals to shift profits away from the United States by making deductible payments to their affiliates in low-tax countries.
Biden would reduce incentives for “tax havens, evasion, and outsourcing”, but he has not provided any specific details about his proposals.
Trump would retain current law.
Global Intangible Low-Taxed Income
Under current law, US-based multinationals may receive a 50% deduction against their GILTI (making the effective tax rate 10.5%) through 2025, and a 37.5% deduction (effective tax rate of 13.125%) thereafter. GILTI currently applies on an aggregate basis for controlled groups.
Biden would raise the minimum GILTI effective tax rate to 21% and calculate GILTI on a country-by-country basis, which would prevent the offsetting of GILTI amounts between high-tax and low-tax countries. Along with other Democrats, he believes that the GILTI regime needs to be strengthened in order to prevent US companies from taking undue advantage of other taxpayer favorable changes that were included in the TCJA, which partially eliminated US tax on foreign-source earnings.
Trump would make no changes to current law.
Under current law, an inversion transaction involves the transfer of stock of a corporation by one or more shareholders to a wholly or partly owned subsidiary of that corporation in exchange for newly issued shares of the subsidiary’s stock. Under §7874 generally, if the domestic corporation’s shareholders own at least 80% of the new foreign parent corporation’s stock after the inversion transaction (whether by stock or asset transfer, or any combination of the two), the new foreign parent corporation is treated as a domestic corporation for all federal tax purposes for a period of 10 years.
Biden would strengthen the anti-inversion rules.
Trump would make no changes to current law.
Under current law, taxpayers may take 100% immediate expensing for qualified property through 2022, which is then phased down each year by 20% through 2026 (expiring after 2026). Special rules apply for longer-production-period property and certain aircraft.
Biden has not proposed any specific changes to current law.
Trump has suggested that he may consider proposals to extend and/or expand bonus depreciation and to allow “full expensing” for structures. He has also suggested allowing 100% expensing “for essential industries like pharmaceuticals and robotics who bring back their manufacturing to the US.”
Real Estate Issues
Under current law, rules for “like-kind exchanges” allow for gain/loss recognition deferral on the disposals of certain real property and acquisitions of similar replacement property. Accelerated depreciation rules apply to rental housing, and there is a $25,000 exemption from the passive loss rules for rental losses.
Biden has suggested that he would eliminate tax breaks for real estate investors with incomes over $400,000, which has been interpreted as targeting the rules for like-kind exchanges. He would repeal the qualified business income deduction on income from pass-through entities for real estate investors and prevent investors from using real-estate losses to lower their income tax bills.
He would create a new refundable, advanceable tax credit of up to $15,000 to assist buying a first home, with the credit paid upon purchase (not when tax return is filed). He would also create the Neighborhood Home Credit as part of the general business credits, which could be used to renovate distressed properties in distressed communities. Finally, he has proposed a renter’s tax credit for low-income taxpayers.
Trump has not suggested any changes to the tax laws in this area.
Opportunity Zones (OZ)
Under current law, the Opportunity Zone (OZ) program allows tax-free capital gains for investments in property located in designated areas and held at least 10 years, basis increase for investments held at least five years, and temporary deferral of capital gains on existing assets placed in OZ funds. Final OZ designations were certified in June of 2018, and the election to invest capital gains in an OZ expires December 31, 2026. See our True Alert on OZs for more information on this topic.
Biden has suggested several reforms to the OZ program including: (1) requiring the Treasury Department to review OZ projects to ensure benefits are only directed to projects providing “clear economic, social, and environmental benefits to a community;” (2) requiring recipients of OZ tax benefits to publicly disclose their investments and the impact on local residents, and (3) providing
incentives for Opportunity Funds to partner with nonprofit or community-oriented organizations and jointly produce a community-benefit plan for each investment.
Trump has recommended extending and expanding the OZ program, but he has not provided detail for this proposal.
Low-Income Housing Tax Credit & New Markets Tax Credit
The Low-Income Housing Tax Credit is available to incentivize the development and improvement of affordable rental housing. The New Markets Tax Credit is available for up to 39% of a project’s cost for investors in low-income-community businesses through 2020.
Biden would expand the Low-Income House Tax Credit through an additional federal investment of $10 billion, and he also include rules that ensure that urban, suburban, and rural areas all benefit from the credit. He would expand the New Markets Tax Credit and make it permanent.
Trump has no proposal related to the Low-Income Housing Tax Credit or the New Markets Tax Credit.
Fossil Fuel Subsidies
The tax code includes several preferences for fossil fuel companies including deductions for intangible drilling costs (100% in the first year for independent producers and 70% for integrated producers) and depletion.
Biden would repeal fossil fuel subsidies.
Trump has proposed no changes to current law.
Alternative energy issues
Under current law, there are a limited number of incentives for taxpayers involved in the alternative energy industry. A 26% investment tax credit (ITC) for businesses installing solar systems is scheduled to phase down to 20% in 2022. Accelerated depreciation (5-year) is available for renewable energy property, and a tax credit is available to home builders of up to $2000 per new energy-efficient home through 2020. There also several tax code provisions related to alternative energy benefits for individual taxpayers, including an electric vehicle tax credit, residential energy efficiency (through 2020), and ITC for home owners who install renewable energy systems (phasing out in 2021).
Biden has proposed several ideas in this area including restoring the full electric-vehicle tax credit; reinstating tax credits for residential energy efficiency; expanding tax deductions for energy retrofits, smart metering systems, and other emissions-reducing investments in commercial buildings; restoring and making permanent the solar ITC; and tax benefits for carbon capture, use and storage.
Trump’s federal budgets in past years have proposed the repeal of energy ITCs and accelerated depreciation for renewable energy property as well as repeal of the individual taxpayer benefits.
Key Tax Issues for Individuals
Tax rates: Currently, there are 7 tax brackets ranging from 10% to 37%, with this provision expiring on December 31, 2025.
Biden: He would increase the top rate to 39.6%, and would also impose the 12.4% Social Security payroll tax (paid by employers and employees) on wage and self-employment income earned above $400,000. Thus, individuals would be taxed on wages up to $137,700 and also on wages over $400,000.
Trump: He would extend the current rates permanently and has proposed a 10% middle class tax rate.
Capital Gains Rates: Under current law, the top rate is 20% for long-term capital gains and qualified dividends. A 3.8% net investment income tax is added for joint filers ($250,000) and other taxpayers ($200,000).
Biden: He would tax capital gains and dividends as ordinary income for taxpayers with incomes over $1 million.
Trump: He would consider indexing capital gains to inflation or providing capital gains tax relief, but he has not provided any specific proposals.
Pass-through Income: The TCJA introduced §199A to give pass-through businesses a business tax rate cut equivalent to the decrease in the corporate tax rate. Taxpayers are generally allowed to deduct 20% of qualified business income (QBI) from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified REIT dividends and qualified publicly traded partnership income. This rule expires after December 31, 2025.
Biden: He would phase out the §199A deduction for filers with incomes over $400,000.
Trump: He has not proposed changes to current law and has not indicated whether he would propose making §199A permanent.
Credits & Deductions: Under current law, a taxpayer may deduct the greater of (1) the standard deduction, or (2) the sum of the itemized deductions with no cap (the “Pease limitation” of prior law) through 2025. The itemized deduction cap for state and local taxes (SALT) is $10,000, which is scheduled to expire after 2025.
Biden: He would cap the value of itemized deductions at 28%, repeal the SALT cap, and restore the Pease limitation on itemized deductions for taxpayers with incomes over $400,000.
Trump: He would make the current law rules permanent after 2025.
Estate Tax Exemption: Under current law, the estate, gift, and generation-skipping tax is 40% with an exemption of $10 million per taxpayer, adjusted for inflation ($11.58 million for 2020). The increased exemption amount expires on December 31, 2025. Assets passed through at death get a basis step-up to fair market value for the recipient.
Biden: He would eliminate the stepped-up basis rule that allows taxpayers to pass capital gains to heirs without tax after death. He has also suggested that the estate tax should return to 2009 levels, which would mean a maximum tax rate of 45% and an exemption of $3.4 million indexed annually for inflation.
Trump: His budget proposals have included a permanent extension of current law.
Carried Interest Income: Under current law, carried interest income is taxed at the capital gains rates with a 3-year holding period requirement for long-term capital gain treatment.
Biden: He would tax carried interest income at ordinary income rates.
Trump: He would tax carried interest income at ordinary income rates.
Financial Transaction Tax: There is no current tax on entering into a financial transaction such as buying or selling stocks, bonds, and/or derivatives.
Biden: He supports a financial transaction tax.
Trump: He has proposed no changes to current law.
Looking Forward to Tax Policy in the Post-Election Period
Additional tax policy proposals may be issued by both candidates in the remaining weeks leading up the election, including during the next two Presidential debates. We will continue to keep you updated on these issues through our Alerts and future issues of the TPC Washington Tax Insight.
Due to the complications of voting during the COVID-pandemic, there is a general view that the results of the elections – both Presidential and Congress – may not be known immediately after election day. Once the results are clear, we expect to provide you with ongoing coverage of plans for the tax policy agenda of the next Administration and Congress.
If you have questions about any of the information in this True Alert, please contact a member of your TPC engagement team. Don’t forget to VOTE!