In light of the historic Georgia State runoff elections earlier this month we reflect on our pre-election tax analysis from October 2020.
Although the results of the runoffs have been overshadowed by other events in the capital, the outcome for US taxpayers is significant, given the opportunity now presented to Joe Biden to shake things up in his first year of presidency.
Prior to this runoff it appeared unlikely that the President-elect would have a clear path to push forward his tax policy reform with the Senate under Republican control. But the results of the runoff elections required in Georgia, after no senators secured 50% of the vote in November, will play a significant part in a shift in the dynamics. With the Democrats securing these 2 seats, the Senate is now effectively split 50:50. With Vice President-elect, Kamala Harris, having the overriding vote in the event of any ties, the Democrats now have a foundation to enact new laws. Further, Biden has the tax writing committees of both the House and the Senate to broadly support his aims.
Certain proposals within Biden’s tax manifesto would need to navigate the filibuster, which requires 60% support to pass legislative changes. He can instead look to the budget reconciliation process to allow certain statue to pass with a simple majority.
With the six closest fought states in the 2020 presidential election all having Senate races in 2022, it is likely that Biden will focus tax changes around central positions. The natural first step would be the reversal of the top personal tax rate to 39.6% for taxpayers with income in excess of $400,000. We could also see the more favourable investment tax rates replaced with ordinary rates for taxpayers with income in excess of $1m. An increase in tax rates for carried interest could also be towards the top of the priority list given this has support from both parties. Whether any increase to the business or GILTI tax rates occurs remains to be seen. In interviews last Fall, Biden indicated the increase of the GILTI rate to 21% and an increase in corporation tax rates to 28% would be primary matters he would like to tackle. A more detailed summary of the potential tax changes can be found here.
There are other areas where Biden can play his hand. Giving the Treasury and the IRS additional resource, and authority for extra audits and tighter regulation, could bolster their support for the direction in which he wants to move.
The timing of any implementation of updates is also open to speculation. Looking back at previous administrations, tax changes take time but Biden will want to get to work whilst he holds sway over the split Senate. With a wide range of political stances within the party to unite, Biden will have some relationships to build first before pushing any major tax legislature through. As such, it is perhaps unlikely that any new laws will be applied retroactively to the beginning of 2021. This would clearly be welcomed by many US tax filers, in the hope of a window of opportunity for protective tax planning if changes do not apply until 2022. Those contemplating the sunset provisions on the generous estate tax exemption threshold may want to advance their plans this year. There may also be a nervous waiting game for entrepreneurs in jurisdictions like the UK with an owner managed business subject to the GILTI regime.
Our Private Client US/UK Tax Team are happy to discuss your position, so please do get in touch.
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