Within the first one hundred days of his inauguration, President Biden proposed over $7 trillion to fund the programs within his Build Back Better plan. When he announced the proposed tax increases to pay for The American Jobs Plan and The American Families Plan, it was clear that much of the burden would fall directly on the commercial real estate industry if those proposals became law.
Immediately, a flurry of industry publications sounded the alarm, detailing each proposed change and how it might adversely affect commercial real estate. While the detrimental effects described in those publications are spot on, the primary question to consider is can these proposals survive the legislative process unchanged and, if so, in what time frame? Currently, there are many obstacles and resistance to the proposed plan, making it appear that we are a long way from a final tax package proposal.
The American Rescue Plan, the first of the three plans, passed in March as another COVID-19 stimulus package, allocating $1.9 trillion for cash payments to individuals, extending enhanced unemployment benefits, extending a 15% increase in food stamp benefits, and numerous other subsidies. Although COVID relief was still a top priority, The American Rescue Plan passed with the slimmest of margins as legislators wrestled over the size and scope of the package in light of the country’s massive debt accumulated during the pandemic.
As the administration rolled out its $5 trillion+ revenue-producing proposals to fund The American Jobs Plan and The American Families Plan, concerns and objections from Republicans, Democrats, business groups, and advocacy organizations flooded the news cycle. The proposed tax increases are broad and substantial. The key takeaways include:
- The top individual federal income tax rate would increase from 37% to 39.6%;
- The corporate tax rate would increase from 21% to 28% with a minimum 15% tax on corporate book income;
- American corporate foreign income would be taxed at 21%;
- Taxpayers with income over $1 million would see their capital gains tax rate jump from 20% to 39.6%. When the net investment income surtax of 3.8% is added, the capital gains tax goes to 43.4%;
- The step-up in basis upon death and the carried interest benefit would be eliminated;
- The tax deferral available through 1031 exchanges would be eliminated for capital gains greater than $500,000; and
- Current deductions for excess business losses would be phased out.
While the goal of these tax increases is to redistribute wealth by increasing the tax burden on corporations and wealthy individuals, this would cause collateral harm to numerous segments of the economy and businesses.
The realities of the legislative process will make the progression of these tax increases and program changes from proposals to law a long and tedious process. Additionally, reservations and objections to these proposals have come from Democrats and Republicans in both legislative bodies. The majority of the objections concern the adverse effects that tax increases would have on the economy when the country struggles to recover from the pandemic and the recession caused by the pandemic. Other lawmakers have voiced reservations about the size of the proposed tax increases and how the funds will be spent. Still, others have expressed objections to specific elements of the proposed tax hikes like the increase in corporate taxes and capital gains taxes, the phasing out of 1031 exchanges, and the elimination of the step-up in basis upon death. Of import, most of the dissenting voices come from lawmakers within the President’s party, such as Representative Richard Neal, Chairman of the House Ways and Means Committee, the committee tasked with overseeing tax policy, and Senators Joe Manchin, Jon Tester, and Chris Coons.
Adding to the beltway resistance, the U.S. Chamber of Commerce, representing many powerful business groups, has promised a “lobbying blitz” against the proposals, calling the proposed tax increases “misguided.” The Chamber’s executive vice president, Neil Bradley, noted that the proposed corporate tax increases threaten to undermine the Chamber’s support for infrastructure spending as such increases “…will actually obviate all the economic gains we could possibly gain in infrastructure.” An advocacy group representing major corporations such as AT&T, FedEx, Home Depot, Toyota, and UPS blasted the tax plan and vowed to lobby against it. Other groups opposing the President’s tax plan include the Real Estate Roundtable, American Farm Bureau Federation, American Hotel & Lodging Association, Mortgage Bankers Association, and National Association of Realtors.
With so much disagreement and resistance to the President’s tax plan, it is reasonable to expect that many changes to these proposals will need to be negotiated before legislation can pass in either chamber. In fact, a bill reflective of these proposals for Congress to consider has not yet been drafted and, according to representative Bill Pascrell (D-NJ) of the House Ways and Means Committee, “…there aren’t any plans to move on a tax package anytime soon.” With 2021 nearly half over, it is unlikely that a final negotiated version of these proposals acceptable to the Democrats in Congress will be up for a vote this year.
Director of Research
Written by John Fioramonti
Senior Market Analyst
Kidder Mathews Research