True Insight: Election Results and the Biden Tax Agenda
Former Vice President Joe Biden was elected to serve as the forty-sixth President of the United States on November 3rd with over 80 million votes and 306 Electoral College votes. Senator Kamala Harris will be the new Vice President. President-elect Biden was declared the winner of the Presidential election on November 7th.
In a prior True Alert we detailed the differences between the Biden and Trump tax agendas on a range of business and individual tax issues. This True Alert will summarize the federal election results and look ahead to the Biden tax agenda for 2021.
We will focus on the issues that are likely to be addressed in the first 100 days of the Biden Administration, the procedures that may be used to advance tax legislation, and the politics that will be at play for the Biden team as they work to move ahead with their economic agenda in 2021.
In the next True Alert in this series, we will focus on specific tax proposals that are likely to be developed in the first 100 days of the Biden Administration.
Timeline to the Inauguration on January 20, 2021
All fifty states and the District of Columbia have now certified the results of the election. On December 14th, the Electoral College delegations met and voted in their respective states with President-elect Biden receiving 306 electoral votes and President Trump receiving 232 electoral votes.
On January 3, 2021, the 117th Congress will convene, and on January 6th, there will be a Joint Session of Congress to count electoral votes and declare the election results to be official.
President-elect Biden and Vice President-elect Harris will be inaugurated on January 20th with the transition to the new Administration taking place at noon on that day. During the interim transition period, several members of the Biden cabinet have been announced including the economic policy team.
The White House and The Biden Administration
Treasury and the IRS
President-Elect Biden has named Janet Yellen, the former Chair of the Federal Reserve Board of Governors and former Chair of the Council of Economic Advisers, to be the Secretary of Treasury with responsibility for the new Administration’s economic and national security agenda at an agency that plays a critical role in these policy areas. She will be the Administration’s key player on tax policy, which will be a priority issue area for the White House in 2021, since President-elect Biden included raising taxes on the wealthy and on corporations as a central party of his campaign. Treasury Secretary nominee Yellen will be in a position to manage regulatory work on tax issues at Treasury and the IRS, which could include reversing and/or revising regulations that have been issued related to the Tax Cuts and Jobs Act (TCJA), including those related to the new taxing regime that the TCJA enacted for multinational corporations.
The current IRS Commissioner, Charles Rettig, who was appointed in 2018, could be allowed to continue in his job at least for the foreseeable future in order to provide for a smooth transition through the next tax filing season and the complications that have arisen as a result of the pandemic. No announcement has been made about this position by the Biden transition team.
Other Members of the Biden Administration Economic Team
On December 1st, President-elect Biden also announced his nominees for other key economic posts. The new Administration’s economic team will include:
- Cecilia Rouse, Chair of the Council of Economic Advisors, with CEA members Jared Bernstein and Heather Boushey
- Neera Tanden, Director of the Office of Management and Budget
- Susan Rice, Director of the Domestic Policy Council
- Brian Deese, Director of the National Economic Council
Legislative Affairs Personnel and Public Engagement
In addition to the Treasury Department team, the personnel in the Legislative Affairs Office of the White House will be critical to achieving success on the Biden Administration legislative tax policy agenda. President-elect Biden has named several members of this team, all of whom have significant experience working on Capitol Hill.
Representative Cedric Richmond (D-LA) has been named to be the Director of the White House Office of Public Engagement (currently called the Office of Public Liaison) as well as a Senior Adviser to the President. Richmond, who will leave Congress after 10 years, has served on the House Ways and Means Committee, and he previously served as chairman of the Congressional Black Caucus. He will be able to act as a liaison to the House Democratic Caucus and to the Congressional Black Caucus, and he has worked closely in the past with House Minority Whip Steve Scalise (R-LA), which provides a link to the House Republican leadership.
Vice President-elect Harris will have useful relationships in the Senate due to her nearly 4 years of service in that chamber. Those contacts will complement Biden’s relationships from his 36 years of service in the Senate.
The Office of Legislative Affairs will be staffed with Hill veterans including Louisa Terrell, who will be the head of the office and who served as Biden’s deputy chief of staff in the Senate. Reema Dodin and Shuwanza Goff will join the Legislative Affairs Office as deputy directors. Dodin currently serves as Deputy Chief of Staff and Floor Director for Sen. Dick Durbin (D-Ill.), the Senate Democratic whip. Goff has worked for House Majority Leader Steny Hoyer (D-MD) in a number of positions, most recently as Floor Director for the House of Representatives.
Julie Rodriguez will become Director of the White House Office of Intergovernmental Affairs. She had been Deputy Campaign Manager and worked as traveling Chief of Staff for Vice President-elect Kamala Harris’ presidential campaign.
The House of Representatives – Control and Leadership
Democrats will retain control of the House of Representatives in 2021, although they lost some seats as a result of the election and their margin of control will be smaller. The Democrats currently are expected to hold 222 seats and the Republicans 211 with two races outstanding. Democratic members of the House who are selected to serve in the new Biden Administration will vacate their House seats, including Representative Richmond and Representatives Marcia Fudge and Deb Haaland, who are Cabinet nominees. This will further narrow the Democratic margin of control until an election is held for their seats.
The Rules Package for the 117th Congress: The Democratic Caucus drafts the House Rules Package for each Congress, which is then put to a vote in the full House and generally passed because of Democratic control of the House. Because of the narrow margin of control in the new Congress, changes to the current House rules are being considered in order to protect the ability of Democrats to move legislation successfully on the House Floor.
One of the tools that is often used by the minority party in the House is the “motion to recommit” (either with or without instructions). The motion is traditionally the right of the Minority and gives them one last opportunity to amend or kill the bill. There are two types of motions to recommit under the rules of the House:
- If the motion to recommit is without instructions, adoption of the motion has the practical effect of killing the bill without a final vote on its passage.
- If the motion to recommit is with instructions, the originating committee to which the bill is returned is bound to follow those instructions. This is the last opportunity for the Minority to make a germane change in the bill. If the bill is recommitted with such “forthwith” instructions, the bill is immediately reported back to the House with the amendment, the amendment is voted on, and the House proceeds to final passage of the bill.
The Republican Minority in the new Congress will likely try to use this procedural tool to block legislation by gaining a handful of Democratic votes, resulting in approval of the motion to recommit. With their narrow margin of control, Democratic leadership is considering either eliminating the motion to commit procedure or changing it so the tool is actually used to improve legislation, not just kill a bill because of partisan disagreements.
In addition, House Republicans will be looking ahead to the mid-term elections in 2022 with the goal of gaining control of the House, so they will likely consider other procedural tools to challenge the Democratic agenda and create disagreements within the Democratic caucus on policy issues.
The Ways & Means Committee: Current Committee Chairman Richard Neal (D-MA) will retain the chairmanship of the Committee. Congressman Kevin Brady (R-TX) is expected to continue in his role of Ranking Minority Member on the Committee.
The Senate – Control and Leadership
Control of the Senate is yet to be determined with the current split at 50 Republicans and 48 Democrats. Two races are headed for a run-off in Georgia on January 5th. In the two Georgia races, the Republican candidates led their opponent, but neither achieved 50% of the vote, which is required in Georgia in order to declare a winner.
Whichever party ultimately controls the Senate will do so with a very slim margin, which will make moderate Republicans important votes on issues in the new Congress, including for confirmation of Biden appointees as well as legislation. In addition, several members of the Senate will be looking ahead to the 2022 mid-term elections, when a total of 33 Senate seats will be on the ballot.
Role of Moderate Republicans
President-elect Biden will have challenges in advancing his ambitious tax policy agenda in the Senate, regardless of which party controls because the margin of control will be very narrow. Two political considerations will, therefore, be key – his relationship with current Senate Majority Leader McConnell (R-KY) and his ability to negotiate with moderate Senate Republicans.
The first challenge for President-elect Biden will be confirmation of his cabinet nominees in the Senate. Traditionally, a new Administration is accorded the right to pick cabinet nominees without them being blocked across the board based on political considerations rather than issues related to their qualification or based on ethical issues. In the current political climate, it is unclear whether this is a norm that will be followed, but moderate Senate Republicans may be the key to achieving support for Biden’s cabinet picks should any of them prove to be controversial.
During the Obama Administration, then Vice President Biden was the key Administration player who forged compromises with Senate Majority Leader McConnell, including deals on the expiration of the Bush tax cuts and an agreement to address the federal debt ceiling. Even if it is more difficult in the current political climate to repeat that kind of cooperation, the new Administration may still find ways to succeed on some legislation by working with moderate Republicans who agree to cross the aisle to support Democratic legislation.
Effect of the 2022 Mid-Term Elections
Despite the fact that control of the Senate in 2021 has yet to be determined, Senate Majority Leader McConnell is expected to already be looking ahead to the 2022 mid-term elections due to the fact that there are a number of Senate Republicans up for re-election that year. Senate Republicans will have to defend 20 seats, while Senate Democrats will be defending 13 seats.
Regardless of which party controls the Senate in 2021, it will be by a slim margin so the mid-term elections could swing control to the other party. This will have an effect on the types of deals McConnell may be willing to make with President-elect Biden and House Democrats with his consideration of advancing legislation that Republican members support and protecting them from the need to cast difficult votes.
The Senate Finance Committee
Current Senate Finance Committee (SFC) Chairman Charles Grassley (R-IA) is term limited as Chairman and will have to give up the position if the Republicans have control of the Senate after the Georgia run-off elections. He is expected to be replaced by Senator Mike Crapo (R-ID). If the Democrats have control of the Senate, the new Chairman of the Committee will likely be current Ranking Democrat Ron Wyden (D-OR).
If Senator Wyden becomes Chairman in a Democratic-controlled Senate, it is likely that he would actively pursue many of the issues included in the Biden tax agenda which was laid out in broad terms during the campaign. In a Republican-controlled Senate with Senator Crapo as Chairman, there would be more uncertainty about the tax agenda of the SFC. Senator Crapo has been chairman of the Senate Banking Committee and other than being viewed generally as conservative on tax issues, there is no clear track record for him on many tax issues.
The 2020 Lame Duck Session and COVID-19 Relief Legislation
Negotiations between House and Senate leadership and the White House are ongoing in an attempt to reach a deal on additional COVID-19 relief legislation prior to the adjournment of Congress for the year. If they do not reach a deal or they agree to a package that omits any key issues, pandemic relief legislation will likely be the first set of issues considered by the new Congress and the new Administration in January.
The First 100 Days – The Tax Issues
The First Biden Budget – Fiscal Year 2022
Under federal law, the Biden Administration would be required to submit its budget proposal for Fiscal Year 2022 by February 1, 2021, but it is likely that deadline will not be met, which is often the case in the first year of a new presidential administration. Past presidents in their first year in office have submitted their first budgets in the spring (i.e., April or May).
Administration budgets provide a fiscal blueprint for key policy issues for the White House agenda including on economic issues like tax policy. Typically, a document called the Green Book is released with the budget, and it provides a more detailed description of the administration’s revenue policies. The Trump Administration chose not to issue a Green Book with its budget, but the practice of doing so is considered to be the norm and is expected to be done in the new Administration.
The Biden Tax Agenda
President-elect Biden campaigned with a platform to address income inequality and ensure that corporations pay their fair share of taxes. Several of his proposals would raise significant revenue, which would be used to finance an agenda designed to help middle and lower income Americans. Many of the proposals would reverse benefits that were enacted in the TCJA to both corporations and wealthy taxpayers.
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.
With the challenges presented by the new Congress, the tax agenda will need to be less ambitious, especially in the face of the economic challenges from the pandemic that will be facing the new Administration. This does not mean, however, that it must be abandoned or that legislative gridlock is a certainty.
Divided government in the past has produced legislative activity and compromise, and the needs created by the pandemic and the related economic impact will require both parties to consider working together in a bipartisan way to address the most urgent of issues, including additional COVID-19 relief and stimulus legislation, retirement security legislation, and an infrastructure investment package. Due to the fact that some of the key provisions of the TCJA will expire over the next few years, the parties may find a way to work together on more ambitious tax legislation that could include some parts of the Biden tax agenda. For example, the Biden campaign suggested a number of proposals as part of their “Made in America” platform and a number of similar tax bills have been introduced by Congressional Republicans. These proposals are designed to make US manufacturing and jobs a priority, which is a goal shared by both parties, although the details of their respective positions may vary.
Thus, the reality for the Biden Administration on tax policy may be that incremental change is more achievable than broad sweeping tax reform.
In the next True Alert in this series on the Biden tax agenda in 2021, we will detail more information on key business tax issues, including which revenue raising provisions might be included to offset the cost of the legislation.
Looking ahead at the issue of revenue offsets for a Biden tax agenda as the new Administration develops its tax proposals and submits them to Congress for consideration, some of the more significant revenue raising Biden proposals from an analysis of the Biden tax plan done by the Tax Policy Center, which is a non-partisan Washington-based think tank, include the following items with estimates based on a 10-year window:
- Increase in the corporate tax rate to 28%: $727 billion
- Increase the GILTI effective rate to 21 percent and require GILTI to be calculated on a country-by-country basis: $705 billion
- Impose a 15% minimum tax on the book income of certain US firms: $109 billion
- Establish a financial risk fee on certain large financial institutions: $84 billion
- Eliminate tax preferences for the fossil fuel industry: $25 billion
- Restore pre-TCJA income tax rates and the Pease limitation on taxpayers with income of more than $400,000: $163 billion
- Tax capital gains and dividends at the same rate as ordinary income for taxpayers with income of more than $1 million and tax unrealized capital gains at death: $373 billion
- Limit the value of itemized deductions to 28%: $224 billion
- Phase out the 199A deduction on certain passthrough business income for taxpayers with income of more than $400,000: $143 billion
- Apply the 12.4% Social Security payroll tax to wages of more than $400,000: $740 billion
Budget Reconciliation and the Senate Filibuster
Which party controls the Senate will have a significant impact on one important procedural issue that could be critical with respect to advancing the Biden tax agenda in Congress – the Senate filibuster. If the Senate filibuster continues without change, the budget reconciliation procedure will then become an important tool for advancing tax legislation during Biden’s presidency.
If Republicans retain control of the Senate, it is unlikely that Senate Majority Leader McConnell will change the current filibuster rules. The Senate cloture rule, which is the rule that ends a filibuster, requires a three-fifths supermajority vote in the Senate (typically 60 votes) and is, therefore, a method by which legislation can be stopped from advancing in the Senate. Judicial nominations, however, are generally not subject to the filibuster rule, which is why McConnell has been successful in advancing an agenda of confirming conservative nominees to the bench including the Supreme Court. Democrats eliminated the use of the filibuster in 2013 for nominees for certain judicial and executive branch nominees, and the Republicans eliminated the use of the filibuster for Supreme Court nominees in 2017.
If Democrats control the Senate, there will likely be calls from some members of the party to either terminate the filibuster (known as the “nuclear option”) or change the rules so that a simple majority vote would be needed for most, if not all, legislation including tax bills. There is no consensus within the Senate Democratic caucus, however, on eliminating the filibuster, and President-elect Biden has not stated a clear position on the issue.
With the current filibuster rules in place, Democrats have utilized the process called budget reconciliation to move key tax legislation because budget reconciliation legislation is not subject to the filibuster. Budget reconciliation legislation is typically broad in scope, however, and is subject to a number of rules that may complicate both its approval and the long term effect of provisions enacted as part of the legislation. For example, the 2017 tax reform law was passed as part of budget reconciliation legislation, but several key provisions were enacted as temporary and not permanent in order to avoid budget points of order under the Byrd Rule. The Affordable Care Act was also passed as part of budget reconciliation legislation.
Waiving budget points of order under the Byrd Rule is another procedural tool that could be reexamined in a Democratic-controlled Senate since waiver also takes 60 votes. The purpose of a budget point of order being raised is to ensure that tax bills conform to the guidance in a budget resolution.
Regardless of which party controls the Senate, if the filibuster stays in place, budget reconciliation legislation is the most likely vehicle for both tax and health care legislation that is designed to advance the Biden agenda. The procedure could also be used for infrastructure and clean energy legislation.
House Speaker Pelosi has already declared that the House will be using the budget reconciliation tool in 2021 to advance legislation on important issues such as enhancements to the Affordable Care Act (ACA) and pandemic relief and stimulus. The Supreme Court recently heard arguments related to the ACA and the outcome of that case could result in legislative action in the House.
Regulatory Action – Will IRS Regulations Be Reversed?
What happens to tax guidance that is issued during a Presidential transition or guidance that is outstanding during that period and not finalized prior to January 20, 2021? Will the Trump Treasury Department decide to accelerate the issuance of guidance currently in the works? Does the Biden Administration have the ability to stop or reverse guidance issued during the transition period?
The General Services Administration has now officially made the ascertainment that Joe Biden is the apparent winner of the President election so that transition services have begun including consultation between the Biden team and government officials in the various agencies. During past transition periods including the 1992 transition from President George H. W. Bush to President Bill Clinton, a significant amount of tax guidance was issued. After Clinton’s inauguration, the new Office of Management and Budget Director ordered Treasury to withdraw 27 regulations projects that were awaiting publication in the Federal Register based on the position that new Clinton appointees should approve the regulations before release.
There are no clear rules on the promulgation of regulatory guidance during a transition period, and there are no clear rules indicating when such regulations can be withdrawn by the new executive team. It is likely that the Biden Treasury Department and the new Office of Management and Budget director will address the issue of any tax guidance that is released prior to January 20th. The 4th quarter update to the 2019-2020 priority guidance plan was released on October 1st, and it provides a list of issues to be reviewed by the Biden team. In addition, the Congressional Review Act allows Congress to overturn final regulations that are issued months before the end of an administration.
Democrats have been critical of the TCJA since its enactment based on their position that it benefited large corporations and the wealthy. In 2017, Republicans controlled both chambers of the Congress and the White House, and Democrats in the Congress were not involved in drafting the legislation.
Treasury and the IRS have issued reams of regulations detailing provisions in the TCJA since its enactment including on many of the international tax changes. With Democrats now in control of the Administration and the Treasury Department, they could move to reverse or restrict guidance that has been issued or is still outstanding, especially if it appears that new legislation will be difficult to move through Congress.
Taxpayers are advised to monitor developments with respect to tax regulatory guidance carefully in the next few months, including with respect to guidance related to tax provisions included in the COVID-19 relief legislation passed in 2020, which will impact tax returns for 2020 and prior years.
If you have any questions about the information in this True Alert, please contact a member of your TPC engagement team.