President Biden proposed many new tax changes during the 2020 election, but with a divided Congress the administration may meet with a limited ability to pass those changes.
Regulatory Tax Changes in the Senate
The majority of Biden's proposed changes, specifically tax increases, focused on individuals and businesses with high earnings. Those changes are not likely to pass muster with Republicans. Even the Democrats' tie-breaking vote may not be enough to pass many of the proposed changes, considering the handful of fiscally conservative-leaning Democratic Senators.
One tactic that President Biden and Treasury Secretary Janet Yellen are likely to use to enact the proposed changes will be to modify regulations, especially those that affect the way tax law is interpreted. The Treasury Department wraps up the regulation and guidance regarding tax changes made by the Tax Cuts and Jobs Act, or TCJA. Enacted in 2017, the TCIA included tax changes in excess of 1,000 total pages. The completion of this task means a clean slate for new changes.
Proposed Regulatory Tax Changes
To change tax policy and regulations, the Treasure must take several steps, including:
- Providing a basis for interpreting the existing tax laws
- Giving sufficient notice to the public
- Inviting comments from both the public and stakeholders
- Defending proposed changes to interpretation in the courts
- The process is a long one, both for the Treasury and taxpayers, and can be fraught with uncertainty regarding tax code compliance.
One example of changes that Biden's Treasury Department may work to enact involves the Global Intangible Low Taxed Income (GILTI), which was finalized by the Treasury Department in 2020. The Biden administration will likely examine and attempt to modify rules in order to knock out the generous high-tax exception. Currently, the exception allows corporations who pay a sufficiently high tax rate on some income to opt out of paying the GILTI. This, along with some rules relating to estate tax and carried interest tax, is likely to be a focus of regulatory tax changes.
Use of the Congressional Review Act
One tool at the Democratic Senate's disposal is the Congressional Review Act, or CRA. This act allows Congress to review regulatory actions which were taken during the Trump administration and potentially overturn them.
In 2017, Congress used the Congressional Review Act to overturn regulations passed late in the Obama administration. However, given the limited number of tax regulations made late in the Trump administration, Democrats are limited in how much they can change under the CRA, even with the tie-breaking vote required to secure both chambers of Congress.
Administration of Tax Changes
Another challenge faced by both the Biden Treasury Department and the Internal Revenue Service (IRS) is the ongoing administration of the American Rescue Plan, commonly known as the third stimulus. This most recent economic relief bill, which runs alongside the current tax season, presents enough challenges to the system that proposed tax changes may have to take a backseat for some time.
It's clear that tax policy, regulatory action, and administration will be a focus of the Biden administration throughout 2021. As the economy continues to recover from the COVID-19 pandemic, it remains to be seen how effectively the Biden administration will enact proposed changes.