September Brings Major Issues, Short Timeframe to Congress

September is a short month for legislative work—and the agenda is loaded with must-do (and time-consuming) legislation. The government must be funded by October 1^st. The debt limit must be addressed by “sometime in October.” President Biden’s Build Back Better agenda, reaction to Texas’s new abortion and voting procedures laws, defense authorization, and other issues are all vying for urgent Congressional attention this month. And Congress is in session for only about eight days total before these deadlines start to hit.

Of most interest to NAIFA members is the interaction between these “must” legislative priorities and the emerging Build Back Better reconciliation legislation. The reconciliation bill is currently in the process of being written and is subject to a self-imposed (by Congressional leadership) early October deadline for completion. But meeting that deadline means having to negotiate what supporters call a “transformative” $3.5 trillion package at the very same time lawmakers must tackle as-yet-unagreed-to government funding levels for fiscal year (FY) 2022, stave off a catastrophic default by the U.S. on its debt by addressing the statutory debt limit, reacting to high-profile issues like the new Texas laws, the U.S. withdrawal from Afghanistan, and other high-profile and time-sensitive issues like, defense authorization and the traditional infrastructure bill.

Lawmakers will try to deal with all these issues in the week or two they have available for doing so, but the task is daunting in the extreme, and few in Washington—on or off the Hill—think it is possible.

So, here’s where we are as of mid-September:

• House and Senate committees of jurisdiction are scrambling to meet a (largely artificial) September 15 deadline by which their respective pieces of the reconciliation bill must be submitted to the Budget Committees for packaging into a reconciliation bill. It’s a top priority, but it’s also a massive bill and a staggering undertaking. Chances of meeting the September 15 deadline are not zero, but those inclined to bet on the outcome are putting their stakes on the deadline slipping, perhaps badly. There’s simply too much to negotiate (and too much current disagreement), both in terms of specifics and in terms of the overall size of the package.
• The government shuts down at midnight September 30 unless Congress enacts FY 2022 funding legislation. Right now, there is no agreement on funding levels for FY 2022, so the high likelihood is that Congress will approve a “continuing resolution” (CR) that will fund the government at FY 2021 levels, probably through mid-December. However, leadership wants to add about $20 billion in new funding—for bipartisan priorities like disaster aid to the victims of Hurricane Ida and the wildfires in California, and no Democrat is satisfied with FY 2021 funding levels. This will be a battle, with little time for resolution.
• The U.S. will run out of cash and borrowing authority by some point in October, said Secretary Treasury Janet Yellen on September 8. To avoid default—something virtually every economist warns would be economically catastrophic—Congress will have to either suspend or raise the statutory limit beyond which Treasury cannot borrow. Republicans have already said they will not vote for a debt limit increase/suspension because it would “free” Democrats to enact the (potentially) $3.5 trillion in new spending in the reconciliation bill. Democrats say the debt limit is impacting spending and tax decisions made when Congress and Presidency were in GOP hands. Right now, it appears the debt limit issue will be included in the CR, adding to the controversy surrounding that must-pass bill.
• There are other issues that are high priority and time-sensitive that Congress must deal with in this short month, too—bills like the traditional infrastructure bill that the Senate has already passed, and the House must take up by September 27. Dealing with these bills will make it that much harder to carve out the time needed to deal with the reconciliation bill.

NAIFA has many issues in play in the reconciliation bill. Information on what those issues are and where they stand in the legislative process follows.

Prospects: So far, things are on track with the reconciliation bill, but soon lawmakers will have to vote on actual legislation rather than seek to shape it. Things will likely start to slip, timewise, sooner rather than later. Most Washington insiders believe that it will be well past October by the time the reconciliation bill is done—but they also acknowledge that the commitment to the bill, and to passing it as soon as possible, among Democrats is such that no one is willing to bet against President Biden and the Democratic Congressional leadership. At a minimum, though, we should know by the end of the month whether we are still on a break-neck speed pace to get the reconciliation bill to the President for signature into law, or if instead, we’re looking at more time needed to complete the process.

NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org; or Michael Hedge – Director – Government Relations, at mhedge@naifa.org

Reconciliation Bill May Include Almost $2 Trillion in New Taxes

House Ways & Means Committee Democrats met Sunday, September 12, to review a proposed package of tax increases aimed at offsetting the cost of the emerging $3.5 trillion reconciliation bill. The package—which is not final, nor has it yet been approved—raises about $1 trillion from “rich” individuals and about $900 billion from big corporations.

Among the proposed tax provisions that could impact NAIFA members, and their clients are:

• The top corporate rate would go up to 26.5 percent for businesses with more than $5 million in income; the rate would remain at 21 percent for businesses with income less than $5 million and would drop to 18 percent for corporations with income below $400,000. These new rules would raise $540 billion, according to preliminary estimates.
• The top individual tax rate would go up from 37 percent to 39.6 percent. Preliminary estimates suggest that this change in the tax law would raise $170 billion.
• The top capital gains tax rate (applicable only to those earning more than $400,000) would go up to 25 percent, raising $123 billion), the estimators say. This would apply to gains realized in the year after the date of introduction (so, 2022).
• The Section 199A 20 percent deduction for non-corporate income would be capped at $400,000 ($500,000 for joint filers). Preliminary estimates peg this as a $78 billion revenue raiser.
• The potential tax package would change IRA rules to shut down what some are calling “mega-IRAs.”  The rules changes would prohibit further contributions once IRA account levels and defined contribution account balances combined exceed $10 million.

The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). If an individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a taxable year, a minimum distribution would be required for the following year. This minimum distribution is only required if the taxpayer’s taxable income is above the thresholds described in the section above (e.g., $450,000 for a joint return). The minimum distribution generally is 50 percent of the amount by which the individual’s prior year aggregate traditional IRA, Roth IRA, and defined contribution account balance exceeds the $10 million limit.

In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Once the individual distributes the amount of any excess required under this 100 percent distribution rule, then the individual is allowed to determine the accounts from which to distribute to satisfy the 50 percent distribution rule above.

The legislation also adds a new annual reporting requirement for employer-defined contribution plans on aggregate account balances in excess of $2.5 million. The reporting would be to both the Internal Revenue Service, and the plan participant whose balance is being reported.

This proposal could raise some $4 billion. The effective date is tax years beginning after December 31, 2021.

• There is another new IRA proposal that restricts the ability to roll over traditional IRA amounts to Roth IRAs. The bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031. Furthermore, this section prohibits all employee after-tax contributions in qualified plans and prohibits after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.
• Additional new IRA restrictions include a rule that would prohibit conditioning an IRA investment on the investor’s education status or ownership interest in the asset. The new rules would also extend the statute of limitations for IRA rule noncompliance from three years to six years.
• The net investment tax would be expanded to cover net business income for single taxpayers earning more than $400,000 ($500,000/joint filers). This change would raise $252 billion.
• There would be a new three percent surtax on individual income in excess of $5 million (joint filers/$2.5 million for individual filers). This “wealth tax” would raise $127 billion.
• A temporary current law denial of a deduction for business losses in excess of the taxpayer’s business income would be permanently disallowed, raising $167 billion.
• The expiration of current law’s estate tax exemption ($24 million for married taxpayers) would be accelerated—currently, it expires at the end of 2025; the proposal moves the expiration date to the end of 2021. Thus, under this proposal, the estate and gift tax exemption would revert to its 2010 level of $5 million/individual (indexed). This change would raise $50 billion.
• This provision adds section 2901, which pulls grantor trusts into a decedent’s taxable estate when the decedent is the deemed owner of the trusts. The provision also treats sales between grantor trusts and their deemed owner as equivalent to sales between the owner and a third party. The amendments made by this section apply only to future trusts and future transfers. These rules changes could raise $7 billion, estimators said.
• Estate tax valuation rules applicable to passive assets would be changed. Generally, the proposal would clarify that when a taxpayer transfers nonbusiness assets, those assets should not be afforded a valuation discount for transfer tax purposes. Nonbusiness assets are passive assets that are held for the production of income, and not used in the active conduct of a trade or business. Exceptions are provided for assets used in hedging transactions or as working capital of a business. A look-through rule provides that when a passive asset consists of a ten percent interest in some other entity, the rule is applied by treating the holder as holding its ratable share of the assets of that other entity directly. The amendments made by this section apply to transfers after the date of the enactment of this Act. Revenue to be raised from these changes would amount to $20 billion.

Additional proposals may emerge over the course of this process. For example, the most recent package does not include changes to rules governing the deductibility of state and local taxes (SALT), and that is something a number of high-tax-state Democratic Members are insisting on in order to vote in favor of the bill. It is also possible that the industry-supported stabilization proposals (policy reserves and DAC) will in some form also make it into the final package.

Prospects: The Senate Finance Committee has not agreed to many of these changes, and so further (difficult) negotiations are expected, even if Ways & Means Democrats agree to this package. The Senate offset package is expected on or around September 15. Final Ways & Means Committee votes on the package are also expected on or around September 15.

NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Judi Carsrud – Assistant Vice President – Government Relations, at jcarsrud@naifa.org