As we are sure you have all heard, the Biden Administration plans to invest billions of dollars in infrastructure. Collectively, this proposal is known as the “Build Back Better Plan”. The proposal includes investments in both hard infrastructure and soft/human infrastructure. Money flowing into hard infrastructure will fund projects such as bridges, roads, and tunnels, whereas money flowing into soft/human infrastructure will take the form of direct payment to low/middle income families and subsidies for education, child care, and other Administration policy priorities. The next logical questions are what is in the plan and how will it be paid for? Some of the answers to these questions can be found in the language of the legislation recently reported out of the House Ways and Means Committee.
The legislation reported out of the House Ways and Means Committee on September 15, 2021 was part of the Committee’s consideration of proposals under the budget reconciliation process. The reconciliation process allows for Congress to pass legislation with only a simple majority in both the House of Representatives and the Senate, thereby eliminating the threat posed by the filibuster. However, not everything can be passed via the reconciliation process. Legislation enacted though the reconciliation process is limited in scope and must affect one of three categories: (1) the debt limit; (2) taxes/revenue; or (3) spending. The legislation reported out of Committee will, over a ten year period, increase federal revenue by approximately $2 trillion and expand tax credits to the tune of about $1 trillion. The Tax Foundation estimates that, excluding potential revenue from increased tax compliance, the changes would raise $862 billion dollars over the next decade.
On the revenue side, there are significant proposed changes to the tax code. First and foremost, the top tax rate will increase from 37% to 39.6% for those individuals making more than $400,000, heads of households above $425,000, and married couples filing jointly with a combined income above $450,000. Married individuals filing separately will top out at the max tax rate if they earn more than $225,000. There is also a provision that imposes a 3% income tax surcharge on individuals with a modified adjusted gross income in excess of $5 million. The legislation also changes the treatment of socalled “Mega IRAs”.
Mega IRAs are those IRAs valued in excess of $10 million. Under the proposed legislation, once an individual’s IRA reaches the $10 million mark, they will be prohibited from any further contributions. Additionally, the Required Minimum Distribution (RMD) of these accounts will also be accelerated. Under the proposed rules, 50% of any amount over $10 million must be distributed via RMD. Roth conversions are also being eliminated for individuals earning over $400,000. There are also changes in store for other taxes.
The proposed act allows for individuals earning over $400,000, heads of households over $425,000, and married joint filers over $450,000, the top capital gains rate will increase from 20% to 25%. Also, there is a modification to the carried interest rule. Long term capital gains originating from an applicable partnership interest must now be held for a period of five years, rather the current three year period, lest they be recharacterized as a short term capital gain. The estate tax exemption is also being reduced from $11.7 million down to a little over $6 million.
On the spending side, the legislation largely advances the priorities of the current Administration. These priorities include, among other things, extending the impact of the American Rescue Plan Act (ARPA), expanding housing tax credits, and lowering prescription costs. The legislation seeks to make certain provisions in the American Rescue Plan, also known as the COVID-19 Stimulus Package, permanent.
The ARPA made a host of temporary changes to the tax code. Two changes were the expansion of the Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCTC). The ARPA expanded the CTC from $2,000 per child to $3,000 per child for children older than 6 years of age, but younger than 18 and $3,600 for children under 6 years of age for qualifying families. The credit was also made fully refundable and removed the earned income requirement. The CDCTC is a benefit geared toward defraying some of the costs associated with child/dependent care when the taxpayer is at work. The ARPA expanded the CDCTC by increasing the maximum benefit to $4,000 for one eligible person and $8,000 for two eligible people. The Build Back Better Plan seeks to make these changes permanent. The plan also seeks to increase the availability of housing for lower income folks.
One of the ways the legislation seeks to increase the availability of low income housing is by increasing available funds for the Low Income Housing Tax Credit (LIHTC). This is a tax credit issued to state governments to spur the construction or rehabilitation of affordable rental housing for low/middle income people. Currently, the tax credit is $2.70 per person in the state, capped at $3.1 million. The proposal will increase this number over the next few years and then index further increases to inflation. The proposed numbers are $3.22 per person, or about $3.7 million total in 2022 with step increases per year until reaching $4.88 per person, or roughly ~$5.6 million in 2025. In addition to creating additional affordable housing, the Build Back Better Plan also seeks to lower prescription drug prices.
The proposed legislation seeks to lower prescription drug prices by directing the Secretary of Health and Human Services to establish what is termed a “Fair Price Negotiation Program”. This program, which is to begin in 2025, empowers the Secretary to negotiate with pharmaceutical manufacturers to establish a maximum price for certain drugs. Once the ceiling price is established, any manufacturer or importer exceeding the ceiling would be subject a tax on the sales of the drugs subject to the program.
In conclusion, total proposed legislation weighs in at a hefty 885 pages and is not set in stone – it must make it through the full House of Representatives and the Senate. Still, it would be impossible to summarize all of the changes here; therefore, we have only scratched the surface with this article. We have not even discussed the significant changes to the corporate tax rate, the treatment of outbound taxation, and the changes to business taxation. However, if you have questions, about how these proposed changes may affect your individual situation, please reach out to your JGB attorney.