The Biden administration released a budget proposal on March 9 that recycles many of the tax increases that stalled over the last two years, but also introduces new provisions that would increase the top Medicare tax rate, quadruple the new excise tax on stock buybacks, impose a new excise tax on digital mining and overhaul international tax rules.
Treasury released its accompanying publication, the fiscal 2024 “Green Book,” which provides key details and full scores of Biden’s proposed tax platform. The Green Book estimates that Biden’s proposed tax platform would raise more than $4 trillion in net revenue over the next 10 years—though that figure comprises roughly $4.7 trillion in total tax increases offset by slightly more than $700 billion in tax cuts. The budget envisions using this net revenue gain to fund many of the social spending priorities from the old Build Back Better agenda and to reduce deficits.
Grant Thornton Insight
The budget proposal is less meaningful this year than it was over the prior two years when Democrats were still hoping to enact major aspects of it in a reconciliation bill. Ultimately, many of the most ambitious proposals were omitted from the Inflation Reduction Act (IRA) and have little chance of enactment over the next two years with Republicans now in control of the House. Still, the budget represents an important statement of tax priorities, and signals that the president remains committed to some of his more transformative reforms.
Taxes could become a significant campaign issue in 2024 because built-in changes to tax code could prompt reform in 2025. In addition, some of the more narrowly targeted and less partisan proposals could be picked up as discrete revenue raisers for other bipartisan priorities. Over the last two years, for example, Republicans and Democrats approved bipartisan changes to expand Form 1099-K reporting, crack down on syndicated conservation easements, expand information reporting to digital assets and reinstate Superfund taxes.
Doubling down
The overwhelming majority of the tax proposals are recycled from either prior budgets or the House-passed version of the Build Back Better agenda, which was ultimately blocked and replaced by the slimmer IRA. These include some of the most significant and controversial proposals, such as:
- Raising the corporate rate to 28% (estimated to raise $1.3 trillion over 10 years)
- Increasing the top rate on ordinary income to 39.6% ($235.2 billion)
- Taxing capital gains as ordinary income for high-income taxpayers ($213.9 billion)
- Imposing a 25% minimum tax targeting unrealized gains for individual taxpayers with $100 million in net assets ($436.6 billion)
- Expanding the 3.8% tax on net investment income (NII) ($305.9 billion)
- Taxing carried interest in certain partnerships as ordinary income ($6.5 billion)
- Repealing the step-up in basis of inherited assets and requiring tax at death (no separate score)
- Repealing oil and gas incentives ($36.5 billion)
- Repealing like-kind exchanges ($18.6 billion)
- Changing grantor trust rules ($65.1 billion)
- Accelerating the covered employees expansion under Section 162(m) and other changes ($14.2 billion)
- Imposing new restrictions for large individual retirement accounts of high-income taxpayers ($22.7 billion)
Grant Thornton Insight
Many of these are among Biden’s most sweeping proposals and ultimately ran into opposition even from Democrats. The most ambitious proposals, such as taxing unrealized gains, remain very difficult politically. Others were blocked by only one or two holdout Democrats. Proposals like modest increases in the corporate and capital gains rates were widely popular with Democrats. While these remain unlikely over the next two years, they could be resurrected if Democrats make gains in the 2024 elections.
New proposals
The budget does offer a handful of significant new tax increase proposals targeting a variety of difference activities. These include:
- Medicare tax increase: The budget proposes to raise an estimated $344 billion by increasing the top rate applying to both the Medicare tax on earned income and the NII tax. The current 3.8% tax on NII applies to the extent adjusted gross income (AGI) exceeds $200,000 (single) or 250,000 (Joint). The proposal would increase the rate to 5% once AGI exceeds $400,000. Similarly, a 0.9% Medicare surtax is currently imposed on earned income to the extent AGI exceeds $200,000 and $250,000. This brings the top combined rate for the employee and employer shares (1.45% each) to 3.8% (also the top rate for self-employment tax). The proposal would increase the 0.9% surtax rate to 2.1% once AGI exceeds $400,000 for a total combined top rate of 5%.
- Digital asset mining excise tax: The budget would raise an estimated $3.5 billion by imposing a new digital mining excise tax of 30% of the cost of electricity used. The budget includes several other new and old proposals targeting digital assets, including provisions to apply wash sale rules to digital assets, expand and clarify information reporting, and expand the mark-to-market under Section 475 rules to include digital assets.
- Quadrupling the excise tax on stock buybacks: The budget would raise an estimated $237.9 billion by increasing the rate of the new excise tax on stock buyback from 1% to 4%. The tax was enacted in the IRA and became effective in 2023.
International reform
The budget offers a substantial package of international tax reforms that echoes earlier proposals, but with some important modifications and expansions. The provisions would raise over $1 trillion combined, and are also intended to align U.S. tax rules with the global minimum tax regime under the Pillar 2 initiative from the Organisation for Economic Co-operation and Development (OECD).
GILTI
The bill would significantly reform the GILTI system. The Section 250 deduction related to GILTI would be reduced from 50% to 25%. In addition, GILTI would generally be determined on a country-by-country basis with the ability for controlled foreign corporations (CFCs) with tested losses in a particular country to carry forward such losses to reduce future years’ test income.
The bill would fully repeal the exemption for the deemed rate of return on qualified business asset investment (QBAI). The deemed paid credit for foreign taxes attributable to GILTI would increase from 80% to 95%, with FTCs allowed to be carried forward for 10 years.
Grant Thornton Insight
This version is harsher than the proposal in the House-passed reconciliation bill in 2021, which would have retained a 28.5% Section 250 deduction and a 5% QBAI deduction. The shift to a country-by-country approach would better align the system with the Pillar 2 income inclusion rule (IIR) as envisioned in OECD guidance.
FDII
The budget would fully repeal the foreign derived intangible deduction (FDII), but would pledge to use the resulting revenue “to encourage R&D.”
Grant Thornton Insight
This change is consistent with earlier White House proposals, but worse than the House-passed reconciliation bill, which would have only reduced the deduction. The administration still has offered no further information on potential R&D incentives to replace FDII, although the budget proposes a separate 10% credit for “onshoring” activity.
Undertaxed profits
The proposal would repeal the BEAT in 2024 and replace it with a UTPR and qualified domestic minimum tax (QMDTT) more in line with the OECD Pillar 2 model rules.
The UTPR would apply only to financial reporting groups that have global annual revenue equivalent to 750 million euros or more in at least two of the prior four years. Under the UTPR, domestic corporations or branches would be denied deductions in order to collect the hypothetical amount of “top-up” tax required for the financial reporting group to pay an effective tax rate of at least 15% in each foreign jurisdiction in which the group has profits. The computation of profit and the effective tax rate for a jurisdiction is based on the group’s consolidated financial statements, with adjustments to address temporary and permanent differences between the financial accounting and tax bases. Profit in a jurisdiction would be reduced by 5% of the book value of tangible assets and payroll (similar to a QBAI concept).
The deduction disallowance applies pro rata with respect to all otherwise allowable deductions. There are coordination rules with other countries that impose a top-up tax under a qualified UTPR. The proposal also includes a QDMTT that would apply to domestic companies potentially covered by another country’s UTPR. This 15% minimum tax would be designed to capture the revenue that would otherwise be collected under a foreign UTPR.
Grant Thornton Insight
The proposals would align the U.S. system with Pillar 2, but implementation will be very difficult. House Republicans have fiercely criticized the OECD agreement, and are planning to use their oversight function to criticize the administration’s role in brokering it. Given Republican opposition, legislation aligning U.S. rules to the agreement appears unlikely in the next two years. As the rest of the world moves forward, however, it could increase pressure on the U.S. to respond in 2025 after the 2024 election. The White House proposal still leaves important questions unanswered. The QDMTT would represent a sweeping new minimum tax regime, and it is unclear how it would interact or replace the current minimum tax on financial statement income that took effect in 2023. The administration also pledged to ensure that taxpayers could still benefit from tax credits and other tax incentives despite the minimum tax, but it’s not clear how that would be achieved when incentives drive effective rates below 15%.
Dividends received deduction
The budget would repeal the 100% dividends received deduction (DRD) currently available for shareholders that own at least 10% of the stock of a CFC or foreign corporation. In its place, the budget would allow only a 65% DRD and only for CFC or qualified corporations in which a shareholder owns at least 20%. Shareholders falling below this threshold would only receive a 50% DRD.
The budget includes several other notable new or recycled international changes, including:
- Revising the rules that allocate Subpart F income and GILTI between taxpayers
- Aligning the calculation of CFC E&P for subpart F and other purposes
- Limiting foreign tax credits from sales of hybrid entities
- Limiting the interest deduction interest based on domestic corporation’s share a global group’s interest expense and financial statement income
M&A activity and transactions
The budget targets many transactions that the administration claims taxpayers use to avoid tax. Many of the proposals were offered in previous budgets or legislation, though there are some new provisions. Major proposals include:
- Restricting basis adjustments between related partners under Section 754 ($64.4 billion)
- Conforming the corporate “control” test under Section 368(c) based only on vote share with the affiliation test under Section 1504(a)(2) to add a value component ($5.5 billion)
- Amending various rules for distributions to expand dividend treatment ($1.3 billion)
- Modifying safe harbors to expand gain treatment for leveraged divisive reorganizations ($39.2 billion)
- Expanding Section 267 to deny deductions for built-in losses in certain liquidations ($5.4 billion)
Impact on debt limit negotiations
Biden’s budget release coincides with negotiations to increase the federal statutory debt limit. The Congressional Budget Office (CBO) recently published estimates showing that, barring Congressional action, the U.S. could reach its debt limit as soon as July. Negotiations over raising the debt limit have made little progress, but the issue is still dominating Capitol Hill and the budget will likely be fodder for public posturing.
Biden met with House Speaker Keven McCarthy, R-Calif., over a month ago to discuss the debt limit, and both sides said the meeting was productive—though the talks did not appear to involve significant substance. The White House said Biden simply reiterated his position that the debt ceiling is not subject to negotiation, while McCarthy refrained from laying out any specific demands besides reiterating a general desire to curb government spending without cuts to Medicare or Social Security funding.
House Budget Committee Chairman Jodey Arrington, R-Texas, listed potential Republican spending cut targets last month, including recapturing unobligated COVID funding, reinstating work requirements for certain welfare programs, “reducing fraud” in the child tax credit and food stamp programs, and repealing funding for the Environmental Protection Agency included in the IRA. McCarthy responded to the budget by indicating he believe deficits were a spending problem, not a revenue problem.
Grant Thornton Insight
Tax increases still seem unlikely to be a part of the debt limit resolution. Republicans will fervently oppose them, and the Biden administration would prefer not to negotiate on the debt limit at all and pass as clean a bill as is possible.
Impact on tax extenders negotiations
It is also unclear whether Biden’s budget proposals will have any impact on ongoing negotiations concerning a potential tax extenders package. Democrats and Republicans have spent the past several months discussing trading enhancements to the child tax credit for key business provisions, including retroactively restoring expensing of research and experimental (R&E) costs under Section 174, extending 100% bonus depreciation (which reverted to 80% for property placed in service after 2022), and retroactively providing relief from the limit on interest deductions under Section 163(j).
The budget does not directly address any of these issues. It does call for a number of tax cuts or tax cut extensions that could be part of a negotiation over Republican tax priories. The budget proposals include:
- Making the new markets tax credit permanent
- Creating a new “neighborhood homes” tax credit
- Expanding and enhancing the low-income housing tax credit
- Increasing the employer-provided child care tax credit
- Making permanent the expanded health insurance tax credit
- Enhancing the child tax credit and extending enhancements
- Restoring and extending enhancements to the earned income tax credit
Grant Thornton Insight
The budget’s exclusion of provisions extending R&E expensing, extending bonus depreciation, and providing Section 163(j) relief is not surprising, as these are the three biggest provisions Republicans have been pushing for in an extenders package. Democrats want to preserve them as leverage for a potential exchange for child tax credit enhancements or other individual tax relief. But so far, a breakthrough has proven elusive, and a deal appears unlikely before the debt limit is resolved. The cost of a potential package could also be problematic given the focus on deficits.
Next steps
While many of Biden’s tax proposals are unlikely to be enacted in this Congress, some of the narrower provisions could be used as revenue raisers in smaller bipartisan bills. The more sweeping proposals could also play a part in the 2024 campaign and could be resurrected in 2025 depending on the outcome of the election. Businesses should assess the potential impact of proposals, and continue to monitor legislative developments. Negotiations on the debt limit and a potential extenders package are likely to intensify in the coming months.
For more information, contact:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “§,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More legislative updates
No Results Found. Please search again using different keywords and/or filters.