Corporate tax rate increases, first and foremost, are among the most politically palatable tax increases to pay for economic stimulus and pandemic-related costs. 

With the election of Raphael Warnock and Jon Ossoff to the United States Senate in the Georgia runoff elections, the Democratic Party has completed a legislative trifecta. Once these senators-elect are sworn into office, and President-elect Joe Biden is inaugurated, Democrats will maintain effective control of the House of Representatives, Senate and presidency.

In the Senate, there will be 48 Democrats in the chamber plus two independents who generally caucus and vote with the Democrats. While this would normally result in a tie vote with the Senate’s 50 Republicans on many matters, the Democrats would likely utilize the president of the Senate, Vice President-elect Kamala Harris, as a tiebreaker.

In the House, the Democrats currently hold an 11-seat edge following the November election: 222 Democrats to 211 Republicans. Two seats remain vacant at this writing, in New York’s 22nd and Louisiana’s 5th Congressional Districts. The New York race is yet to be certified and is in litigation until at least January 22 regarding approximately 2,400 voter applications that were submitted timely but not processed by Election Day. The Louisiana seat was won by Luke Letlow in a December 5, 2020, runoff election, but he passed away on December 29 from complications arising from COVID-19. A special election to determine the seat is scheduled for March 20.

With such razor-thin margins, for any legislation to pass by a simple majority, Democrats would need to obtain support from their entire Senate caucus and nearly all Democratic House members. As such, more progressive policies are nearly impossible to pass in the short term due to the necessary coalition that must be maintained. Even with such a slim majority, the incoming president will have a far easier path to enacting the more moderate portions of his agenda than if Republicans retained control of the Senate.

Historically, once a party gains control of the presidency and both chambers of Congress, tax legislation is swift and significant. The two most recent instances of such a consolidation of power―the 108th Congress under George W. Bush and the 111th Congress under Barack Obama―each resulted in significant tax legislation: the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and the Affordable Care Act (ACA), respectively.

Despite a narrow lead in both cases, these major pieces of legislation were both passed with less than 60 votes in the Senate. However, these Congresses were not also confronting a pandemic. With the JGTRRA taking six months from the party gaining majority to enactment, and the ACA taking 14 months, we believe it is probable that tax policy change will occur in the third or fourth quarter of 2021, under a reasonable best-case scenario. While it is not impossible, we believe it is more politically palatable that any change to the Tax Code would be prospective, rather than retroactive, and expect an effective date following the date of passage rather than January 1, 2021.

Given the current national health and economic challenges, we expect President-elect Biden will focus on his nontax policy agenda first, specifically getting the COVID-19 pandemic under control and providing fiscal relief to taxpayers and, to a lesser extent, businesses. These nontax objectives could likely be accomplished through enactment of other policy initiatives of the president-elect, including infrastructure improvements and green energy policies, with higher taxes being “in the mix” but not the sole or initial focus.

With that said, and recognizing a very thin majority in Congress, some level of tax increases are likely to occur in the near term―again, we anticipate in the third or fourth quarter of this year―as soon-to-be Senate Minority Leader Mitch McConnell knows how to negotiate and has a long history of working with President-elect Biden, dating back to their decades in the Senate together. Additionally, with the possibility that the mid-term elections may change the balance of power in the House and Senate in two years, there will be added pressure on both sides to reach a step 1 compromise in 2021 and a step 2 compromise in 2022.

Several of President-elect Biden’s tax policies would likely be on the bargaining table for swift consideration. Corporate tax rate increases, first and foremost, are among the most politically palatable tax increases to pay for economic stimulus and pandemic-related costs. Along with any corporate tax increase, we expect a reduction in the pass-through qualified business income deduction under IRC Section 199A. Thus, for business taxpayers, in most circumstances, we presently recommend a lean toward accelerating income to 2021, which will likely be the lower tax rate year, while deferring expenses to 2022, when tax rates may be higher.

For individuals, an increase in personal taxes may possibly be off the table until the pandemic and economic recovery is under solid footing. We think the chances of the most significant or costly policy proposals passing in 2021 are very slim. However, it would not be a surprise to see an increase in the top income tax rates, although prospective, and for individuals to experience tax hikes in some form, although these would likely be smaller, incremental changes rather than sweeping reform. Once our economy and the pandemic are in good order, individuals earning over $400,000 would likely see tax hikes. We expect rate hikes on both income and capital gains as well as a new payroll tax for high earners. These changes would, more likely than not, occur in 2022 on a prospective basis rather than retroactive. At that point, estate tax changes would also be ripe for revision.

TAG’s Perspective

Predictions for a corporate tax increase in the third or fourth quarter of 2021 and individual tax increases in some form starting in 2022 are still very tentative and contain significant assumptions. The COVID-19 pandemic is still not under control, though we hope and believe that we will be in a better place in six months. Unemployment remains high, and that will likely lead to a slower recovery. Despite recent election outcomes, current federal tax rates are relatively low and key provisions of the Tax Cuts and Jobs Act of 2017 are scheduled to expire in 2025. Given all of these forces at work, there are many tax planning strategies meriting real consideration at this time, with taxpayers remaining flexible and nimble in order to pivot and react quickly at a moment’s notice to changing law.

For More Information

If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, John I. Frederick, any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.