Government Is Funded, Debt Limit Is Raised, but Only Until Early December
Congress has passed, and the President has signed into law legislation to fund the government until December 3 and to raise the debt limit by $480 billion, enough for the government to continue paying its bills for about three months. Thus, the risk of a government shutdown and/or a default by the U.S. on its debt has been averted, at least for now.
However, the legislation was hard-fought and left many lawmakers feeling bruised and battered, and many also contemplating revenge for what they viewed as hardball tactics that unnecessarily hurt the system and the economy.
Prospects: Both of these issues will come to a head again by early December. There is even less trust and goodwill among lawmakers now, and thus more bruising battles over both funding the government and increasing the debt limit are likely.
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
Negotiations on Reconciliation Bill Deal with Many Tax Increase Proposals
Against a background of time-sensitive needs to fund the government and increase the debt limit, Administration and Congressional negotiators are working to hammer out a deal on President Biden’s Build Back Better “human infrastructure” reconciliation bill. In-play is a wide range of adverse issues of concern to NAIFA.
On September 25, the House Budget Committee combined into one big reconciliation bill $3.5 trillion worth of “Build Back Better” provisions approved by 12 House committees of jurisdiction. The bill includes many provisions of concern to NAIFA members, but the entire bill is subject to negotiation between House and Senate Democrats (and between progressive and moderate Democrats in both the House and the Senate).
Congressional and Administration negotiators are working towards a bicameral, but all-Democratic, agreement that can pass with all 50 Democratic votes in the Senate, and all but three Democratic votes in the House. Every Republican says he/she will vote against the bill. Further action in both chambers is on hold pending a successful conclusion to efforts to reach that bicameral agreement.
At the top of the long list of controversies is the size of the bill. Moderate Democrats say they cannot support a $3.5 trillion package (even though it is, at least on paper, fully offset). So, negotiators are working furiously towards shrinking the package while still retaining sufficient support for a slimmed-down version. So far, there is no agreement on how big the package should be. One key Senate moderate, Sen. Joe Manchin (D-WV), says he can support a fully paid-for package of around $1.5 trillion. A key progressive, Sen. Bernie Sanders (I-VT), says $3.5 trillion is already a compromise down from the $6 trillion he had advocated, and so he wants the final number to be as close to $3.5 trillion as possible. Both Senators have supporters of their positions.
Most Washington insiders, on and off the Hill, think at the end of the day, the package will come in at around $2 trillion—but it could be higher or lower. And, as the spending side of the package shrinks, the tax increases needed to offset it also diminish. So, every provision and every issue are currently in flux.
The House reconciliation bill provides new programs and increases in funding for “human infrastructure” issues that include low-income housing assistance, a federal paid leave program, health care support (expanded Medicare benefits and enhanced Affordable Care Act (ACA) subsidies and Medicaid expansion), climate change provisions, education initiatives, elder and childcare support, and the tax increases that pay for these efforts to bolster the middle class.
Below is a partial list of the House bill’s tax increases that could impact NAIFA members and their clients, along with a summary of where negotiations on those provisions are at this point. It is important to keep in mind that the situation is extraordinarily fluid. Each of these provisions has changed multiple times during the ongoing negotiations, and will without doubt change again before a final agreement is reached.
Corporate Tax Rate: The top corporate tax rate—the House bill puts the top corporate rate at 26.5 percent, up from current law’s 21. Key Senate Democrats want the rate no higher than 25 percent, and there are reports that one or more want it even lower than that.
Individual Tax Rate: The House bill increases the top individual tax rate to 39.6 percent, up from the current law’s top rate of 37 percent. There is some discussion about whether to modify or eliminate this tax rate increase, but generally, the 39.6 percent rate seems acceptable to most Democrats and something that its objectors can be persuaded to accept.
Capital Gains: Under the House bill, the top capital gains tax rate (applicable only to those earning more than $400,000) would go up to 25 percent. This would apply to gains realized in the year after the date of introduction (so, likely in 2022). Negotiators are looking at a 28 percent capital gains rate, but no decision on this (or any other provision) has yet been made.
Non-corporate Business Income Deduction: The House bill would cap the Section 199A deduction for non-corporate income at $400,000 ($500,000 for joint filers). A Senate proposal would expand the number of pass-through businesses eligible for the deduction but would lower the amount of income eligible for the deduction to $400,000. Influencing a final decision will be where the top corporate rate winds up—negotiators are aware that Section 199A was enacted as a way to equalize the 2017 tax cut law’s benefits between C-corporations and pass-through entity businesses.
Mega-IRAs: Seemingly mostly not controversial is the potential changes to IRA rules to shut down what some are calling “mega-IRAs.” The rule changes would prohibit further contributions once IRA account levels and defined contribution account balances combined exceed $10 million. They would also force taxable distributions from mega-IRAs and defined contribution plan account balances once those balances exceed $2.5 billion. These provisions were fashioned jointly by House and Senate tax writers and do not at this point seem to be among the provisions most likely to change. However, there has been considerable push-back on the provision that restricts the kinds of assets an IRA can hold, and so changes to that provision may emerge.
Estate Tax: The expiration of the current law’s estate tax exemption ($24 million for married taxpayers) would be accelerated by the House bill—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 is a key issue for progressive Democrats, but one that gives some moderate Democrats heartburn. It may change.
Grantor Trusts: There are grantor trust law changes that could gut the use of these trusts in estate planning situations by resulting in life insurance and other trust assets being included in the decedent’s taxable estate. Of particular concern is the provision that would apply the rule to new contributions to existing trusts (existing trusts that do not get new contributions would be grandfathered). The rules would adversely impact many irrevocable life insurance trusts, including existing trusts that contemplate continuing premium payments for the life insurance contained in the trusts. So far, there have been no reports of discussions among negotiators on these provisions. Likely, such discussion awaits the resolution of some of the bigger-ticket issues.
Wealth Taxes: The net investment tax would be expanded to cover net business income for single taxpayers earning more than $400,000 ($500,000/joint filers). There is also a provision in the House bill that would impose a three percent surtax on individual income in excess of $5 million/married. While these provisions have not generated much of any controversy, they are among several “tax the rich” provisions, and there is discussion underway about whether the combined total of these “tax the rich” provisions might have gone too far. Consequently, there may be changes to these provisions.
There are other major tax increase provisions that do not directly impact NAIFA members that are also under negotiation. These include climate change provisions, international tax rules, and others. All contribute to the total of just about $2 billion in new taxes contained in the House reconciliation bill, and all are subject to change as the negotiations progress.
Prospects: As the size of the reconciliation bill decreases, so too will the tax increase provisions that provide the offsets to the bill’s costs. However, at this stage of the process, it is too soon to tell which tax increases will be dropped or modified, although early indications are that negotiators are looking first at the individual tax provisions. NAIFA’s Advocacy Action Center has a letter discussing a few of the most problematic provisions of the reconciliation bill that you can send to your lawmakers if you would like to engage. We will keep you informed.
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 Could Contain Spending Programs that Impact NAIFA
The reconciliation “Build Back Better” bill currently in negotiation among Administration and Congressional Democrats could contain a number of spending programs that impact NAIFA members and their clients. They include:
Retirement Savings: The House bill contains two new retirement savings programs—a refundable Saver’s Tax Credit, and a mandate that almost all employers offer a retirement program and automatically enroll their workers in either a 401(k)-type plan or a payroll deduction IRA. Employees could opt-out of the program. Employers would not be required to contribute to the employees’ retirement savings. There is also a rule that would require (subject to employee opt-out) automatic escalation of the percentage of compensation the employee defers/contributes. There would be a tax penalty for failure to offer an automatic enrollment/escalation plan. Negotiators may be eyeing these provisions as among those that could be dropped from the final package due to the need to shrink the reconciliation bill’s size.
Federal Paid Leave: The House bill contains a federal paid leave program that would provide a federal payment for sick and parental leave for up to 12 weeks. The amount of the payment is on a sliding scale based on the recipient’s income level. This proposal is very controversial. There are many issues surrounding how the program is constructed, whether it would incentivize private employers to drop most, if not all, of their paid leave benefits programs, and a lot of concern about the program’s projected $550+ billion cost. There are also “Byrd Rule” problems—issues about whether this paid leave program would pass muster under the reconciliation bill’s procedural rules. So, at this point, this program is at significant risk.
Medicare Expansion/ACA Subsidies: Health care issues are also in play—the House bill expands Medicare to include vision, hearing, and dental benefits; expands subsidies for Affordable Care Act (ACA) health insurance; and provides health coverage support for low-income individuals in states that did not expand their Medicaid programs under the ACA. There is intense controversy over these issues, due largely to their cost. These issues are a big part of the ongoing negotiations.
Worker Classification: Worker classification is also an issue due to progressive Democrats’ support for including the PRO Act’s union-friendly provisions in the reconciliation bill, including the “ABC test” for determining when a worker is an employee rather than an independent contractor. The issues are part of the negotiations, but most insiders believe they ultimately will be left out of a final agreement. This is because these provisions cannot comply with the procedural rules of a reconciliation bill and, also due to the fact that not all Democrats support the PRO Act—and the reconciliation bill requires near-unanimous Democratic support in order to pass.
Negotiators want to craft an agreement by the end of October, although many Hill and private sector people working on this bill think that date will slip, possibly by quite a lot.
Another proposal of significant impact, though not related specifically to spending, is a requirement for financial institutions to track and submit to the IRS information on the inflows and outflows of every account above a de minimis threshold of $600 during the year. Intended to help the IRS target wealthy tax dodgers, the unintended consequence is the overly broad proposal will directly impact almost every American and small business with an account at a financial institution. Negotiators are considering an increase in the de minimus as high as $10,000. Although increasing the de minimus to $10,000 is less objectionable, it is still a flawed assumption and will not significantly reduce the scale or scope of this new IRS program.
Prospects: The reconciliation bill contains many additional provisions that are hotly controversial but do not directly impact NAIFA interests. These include climate change provisions, education, childcare, housing, elder care, and other issues. Any of them could impact whether Democrats will succeed in fashioning a bill that can win 50 votes in the Senate and 218 votes in the House. We will keep you informed.
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
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