President Biden’s 2023 budget: New and old tax proposals require perspective—and awareness

Key takeaways from RSM’s analysis of the tax proposals in President Biden’s 2023 budget proposal:

• The budget proposal and its proposed tax changes amount to an aspirational list; they are not drafted legislation.
• Proposed international tax reforms show commitment to implementing the OECD minimum tax agreement in the United States.
• The administration remains committed to taxing wealthy individuals, but there’s already opposition to the latest proposal.
• The reappearance of proposals dropped from the Build Back Better Act does not signify they’re now more politically viable.
• Taxpayers should not discount possible tax changes that the administration left out of this budget proposal.

 

President Joe Biden’s proposed budget for fiscal year 2023 contains new and old tax proposals that signal the administration’s thinking after the Build Back Better Act stalled in the Senate last December. Although the proposed tax changes in the budget proposal announced March 28 are not drafted legislation, taxpayers can at least see an ongoing focus on international tax reforms and strengthening of taxation of wealthy individuals.

In this edition of “Tax Policy Now,” RSM tax leaders—including Dave Kautter, former assistant secretary for tax policy at the Treasury Department—explain how taxpayers can keep the latest proposals in the proper perspective. They also interpret the reappearance of tax proposals that had been left behind in the previous legislative cycle and break down new proposals that stand out.

Below is a transcript of the discussion among Kautter, RSM federal specialty tax leader; Matt Talcoff, RSM national industry tax leader; and Dan Ginsburg, RSM public affairs leader. The conversation has been edited for clarity and length.

Dan Ginsburg: Before we get started on the details, it’s important that we discuss exactly what the proposal is and what it isn’t—and, most importantly, whether we think it will become law anytime soon. So, Dave, what do you think?

Dave Kautter: As you said, this is the president’s proposed budget for FY23, which begins on Oct. 1 of this year. Over the years, budgets have become expressions of political, philosophical, ideological, economic and even societal aspirations of the administration in power. They’re the beginning of a process, not the end. And the likelihood of any president’s budget being enacted as proposed is zero.

The reason for that is Congress takes its constitutional spending and taxation responsibilities very seriously. And Congress is not inclined to outsource them to the executive branch.

What a budget does do, though, is serve as an opening offer, a benchmark. So, consider this the administration’s wish list.

Dan: Got it. So, to reiterate, this proposal is not drafted legislation. Actual legislation—if it comes at all—is far off. It’s unlikely we’ll see any of it signed into law anytime soon. But political winds can quickly shift direction, and it’s certainly important to understand what might be coming down the road.

With this in mind, what are some highlights of the proposal? What are your thoughts about what’s new?

Dave: The proposal is noteworthy in that it amounts to an update of the administration’s thinking about several tax issues that we’ve all become familiar with over the past year or so. But there are two new proposals worth focusing on.

The first one is in the area of international business taxation, where the administration has put forward a proposal to conform U.S. tax law to the agreement reached in the OECD (Organisation for Economic Co-operation and Development) with respect to a 15% global minimum tax.

The proposal deals with the so-called undertaxed profits rule and would allow the United States to increase taxes on U.S. companies if they do not pay a certain rate of tax abroad. Frankly, it illustrates how committed this administration is to implementing the OECD minimum tax agreement here in the United States.

The second new proposal that stands out to me is the proposal focused on high-income taxpayers. Specifically, a minimum tax of 20% on “total income”—and total income is regular taxable income, but would add to it unrealized capital gains—would apply to all taxpayers with wealth greater than $100 million.

Now, it took West Virginia Sen. Joe Manchin less than a day to publicly announce his opposition to that proposal. But again, in the context of this being an update of the administration’s thinking, we see a continued focus on taxing wealthy individuals and businesses but difficulty in achieving consensus around how to do it.

Dan: Along those lines, it’s interesting to note they included a few tax proposals that were actually negotiated out of the Build Back Better Act last year before it was introduced. You’ve got:

• Increasing the top marginal income tax rate for higher earners to 39.6%
• Increased tax on certain capital gains
• Changes to income, estate and gift tax rules for grantor trusts
• Taxing carried interest as ordinary income
• Repealing deferral of like-kind exchanges

And, of course, increasing the corporate tax rate from 21% to 28%. So, what do you make of these proposals reappearing?

Dave: Well, to be frank, I think it shows the commitment of the administration to increasing taxes on businesses and high-income individuals. The provisions you mentioned were dropped from the Build Back Better Act because Democrats in Congress couldn’t reach consensus among themselves on those provisions. If they were to gain traction in Congress this year, it would be a dramatic turnaround from last year—something that I just don’t expect.

Dan: Matt, let’s turn to you. Given the perspective we’ve just heard from Dave, what should companies and individuals actually be doing right now? How are you advising them?

Matt Talcoff: Why don’t we start with what we are telling them not to do?

Number one: Don’t panic. As you and Dave stated, the budget proposal released by the administration is simply that—it’s a proposal; it’s not legislation. In fact, there’s no pending vote on it in Congress. And as Dave mentioned, we already have at least one senator, Sen. Manchin, who has voiced his opposition to one of the proposals related to taxing unrealized gains.

And the second thing, Dan: Don’t assume that a proposal discussed in Congress that was not in the president’s budget is off the table. The idea of a tax surcharge on wealthier individuals, increased state and local tax deductions, which we like to call SALT, or changes to the treatment of research expenditures, and many more, certainly could find their way into future tax proposals and potential legislation.

Dan: Got it. So that’s what we’re telling them not to do. What are we advising that our clients should do?

Matt: We’re advising our clients to be aware of the potential changes specific to them. For example, anyone in the real estate sector, they should stay close to the provisions related to like-kind exchanges. The financial services sector, certainly they’re very interested in any potential change with respect to carried interests. And for wealthier families, we say stay close to the potential tax rate increases, as well as any changes related to trusts.

Dan: You often suggest that we model out these proposals. Are we suggesting that here, as well?

Matt: We talk about that a lot, you’re right. So, first, we’re saying stay close to your advisors, and be prepared for potential tax changes down the road. There certainly is a lot of value in modeling potential tax changes to gauge how they might affect your specific tax liability, but I don’t think we need to rush with respect to modeling out every single thing in this budget. Your time and energy really is better spent right now keeping the budget proposal in proper perspective.

For example, the proposal to impose a minimum tax of 20% on your total income, which would include unrealized capital gains for all taxpayers with wealth greater than $100 million: Well, that’s certainly garnering a lot of headlines because of the novelty and the question of whether it’s constitutional. But when you consider the fact that Sen. Manchin has already expressed opposition, I’d say that underscores the benefits of being able to sort through all the noise and being prepared to model, but not necessarily model everything.

Dan: Great thoughts, Matt, thank you. So, Dave, let’s turn back to you. What, if anything, should we expect to see coming out of Congress for the remainder of the year on tax policy?

Dave: Well, Dan, no one knows what’ll happen, and I’ve often said the quickest way to go broke is to bet on what Congress will do. Having said that, my personal view is that before Sept. 30, Congress will enact something using the reconciliation process. Having adopted a reconciliation resolution, I do not think the Democrats want to let that go to waste.

So, my guess is they’ll do something focused on clean energy and climate on the spending side; and they’ll try to use the international tax proposals to pay for that. At least, that seems to be the thinking on Capitol Hill at the moment among the people I’ve talked to.

Then, I suspect at some point Congress will start to focus on the FY23 budget. I doubt they’ll adopt a budget for FY23 before Oct. 1, which is when the new fiscal year begins. So we’ll end up with a continuing resolution for some period of time. And I also think that means they won’t get to any tax proposals for FY23 until sometime after Oct. 1.

They’re going to go into recess for the election. My guess is they’ll come back in a lame-duck session sometime after the November election and, at that point, level their sights on extenders and other substantive legislation, which could include some of proposals put forth in the president’s FY23 budget. That’s what I think is going to happen.

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