When negotiations began on the Build Back Better Act (BBBA) in Congress, the tax community, including yours truly, was almost certain that tax rates were going to increase in 2022. However, recent breakdowns in negotiations regarding the specifics of BBBA have almost assured that the 2017 tax cuts are here to stay.
The Treasury Department’s recent release of 120 pages of detailed tax proposals in the administration’s budget recommendations for FY 2023 (commonly referred to as the “Green Book”) has stirred up new warnings of tax increases. But what are the odds Congress passes anything before the midterm elections this November? Below is a summary of the proposed tax increases and the likelihood of these provisions being enacted into law.
What’s in It?
- Increase in corporate income tax rate from 21% to 28%.
- Repeal of Base Erosion and Anti-Abuse Tax (BEAT) on corporate taxpayers and replace it with an Undertaxed Profits Rule (UTPR).
- Increase in top individual income tax rate from 37% to 39.6%.
- Subject long-term capital gain and qualified dividend income to ordinary income tax rates for taxpayers earning more than $1 million.
- Treat the transfer of appreciated property by gift or inheritance as a taxable sale ($250,000 per-person exclusion for household furnishings and personal effects and a lifetime $5 million per-donor exclusion for other unrealized capital gains).
- 20% minimum tax on total income, including unrealized capital gains, for all taxpayers with a net worth greater than $100 million.
- Subject carried interest income to ordinary income tax rates for partners with taxable income exceeding $400,000. The proposal also would subject the income to self-employment tax.
- Limit capital gain deferral from a section 1031 exchange to $500,000 per taxpayer ($1 million for joint returns).
- Increase top tax rate for section 1250 recapture (i.e., depreciation recapture on the sale of real property) from 25% to 39.6% for taxpayers with adjusted gross income above $400,000.
What Has a Shot at Passage?
With midterm elections less than 7 months away, the Democrats have a narrow window to pass BBBA 2.0 before a potential loss of one or both chambers of Congress. Most of the above proposals have been debated at length by members of the Senate and several have been flatly rejected. A skinny version of BBBA would cost roughly $1 trillion with most of the tax provisions being aimed at large corporations and high-income individuals. Below are the tax proposals that have the best shot at passage:
- 15% corporate alternative minimum tax on very large corporations – $319 billion
- Excise tax on repurchase of corporate stock – $124 billion
- Modification to foreign-derived intangible income (FDII), global intangible low-taxed income (GILTI) and BEAT – $268 billion
- Application of net investment income tax (NIIT) to trade or business income of certain high-income individuals – $252 billion
- Making limitations on excess business loss limitations permanent with carryforward modifications – $160 billion
- Surcharge on high-income individuals, estates, and trusts (5% surtax on AGI in excess of $10 million and an additional 3% surtax on AGI in excess of $25 million) – $228 billion
Which Proposals Are Dead on Arrival?
- Increase in top corporate or individual tax rates
- Taxing capital gains at ordinary rates
- Wealth tax or equivalent tax on unrealized capital gains
- Repeal of section 1031 exchanges
With Congress gearing up for one last shot at BBBA before the midterm elections we have a clear picture of what tax increases have a realistic chance of passage. Corporate and individual tax rate increases seem to be off the table for now; however, Congress has shown a willingness to use surtaxes and minimum taxes to target the largest corporations and wealthiest individuals.