There has been a lot of talk in the recent news about the Biden tax plan moving forward in Congress. However, there is no need for panic (yet!), as the potentially affected parties of this legislation are essentially “setting the table” to debate and draft the Biden tax plan.
The Democrats hold a narrow majority in the Congress and a razor thin majority in the US Senate (a tie broken by Vice President Harris). Though legislation must be passed by both houses of Congress, there is a wide spectrum of views on the legislation in the House, as well as at least two moderate Democrats in the Senate, which could derail the full impact of the potential legislation.
As of September 3, 2021, the following fissures exist within the Democratic Congress:
- President Biden has proposed raising the capital gains rate on those earning above $1M USD from 20% to 39.6% (plus the 3.8% Net Investment Income Tax and state level taxes). According to reports from the Bloomberg Bureau of National Affairs (“BNA”), about a third of the Democrats on the House Ways and Means Committee are advocating for a lower rate on investments of around 28%.
- According to reports, some Democrats are also balking at Biden’s end of a tax preference known as a “step up in basis”, which allows appreciated assets to be passed to heirs tax-free, on the basis that if an owner of a small business or family farm dies, it would place an undue burden on the heirs.
- There are approximately 33 members of Congress who wish to restore the unlimited state and local tax (“SALT”) deduction, which was capped at $10,000 in 2017 legislation, passed largely by Republican majorities of both houses. Some have upped the ante on this position, by developing slogans such as “No SALT, No Deal” or “No SALT, No Dice”. These congressmen have argued that the limitation on the SALT deduction has prompted wealthier taxpayers to move to low-tax jurisdictions, such as Florida and Texas, which hurts their state’s ability to fund robust social programs. The more “progressive” wing of the party, led by Alexandra Ocaso-Cortez (“AOC”) basically dismissed this argument by calling this position “a gift to billionaires”.
- In order to achieve a workable piece of legislation which will be supported by the House Democrats, certain changes, such as lowering the revenue to be raised by the legislation, will have to be made. The reduced revenue from the bill will have to decrease the amount of spending on social programs proposed under the plan.
- Led by AOC, the left flank of the Democratic party has vowed not to compromise on the plan and take an “all or nothing” approach to the legislation. They have done this to the point where they have vowed to block the passage of a separate Infrastructure Public Works bill, which has widespread bipartisan support in the US Senate, unless the Biden tax bill is paired with it.
Though the Democratic majority in both houses of Congress may seem to make the passage of the Biden tax plan – or some watered-down version of the proposed tax plan – thereof seem inevitable, significant fault lines exist within the Democratic party. What is clear, is that compromises will have to be considered at the expense of social spending. Should this scenario play out, the seeming intractability of the progressive wing of the Democratic Party on an “all of nothing” approach, may be the determinative factor as the whether the legislation can pass Congress.
Should the legislation pass Congress, it will move to the Senate Finance Committee and the US Senate, which has its own moderate Democratic Senators, who may not support such legislation.
 BNN Bloomberg, “Capital-Gains Tax Hike Exposes Divisions Among House Democrats”, www.bnnbloomberg.ca/capital-gains-tax-hike-exposes-divisions-among-house-democrats-1.1646589