Biden budget targets corporate minimum tax, executive comp

The Biden administration released a budget proposal on March 11 that doubles down on much of the president’s pre-existing tax platform, and introduces new provisions that would raise the corporate alternative minimum tax rate to 21% and significantly expand the limit on deductions for compensation exceeding $1 million under Section 162(m).

The budget should be considered largely aspirational and revisits many tax increases that stalled over the last three years. It is often best viewed a political document rather than a governing document, but can still offer important insights into legislative priorities and future tax policy debates. This year’s iteration carries more weight than normal due to the 2024 campaign and the potential for generational tax and fiscal debate in 2025. The tax platforms of both parties this year will set the foundation for next year’s anticipated multi-trillion-dollar negotiations over the expiring provisions in the Tax Cuts and Jobs Act (TCJA).

The descriptions and revenue estimates behind all the tax proposals are detailed in Treasury’s accompanying publication, the fiscal 2025 “green book.” The publication is a substantial 256-page document, but still generally only offers high-level summaries of the provisions. There is no actual legislative language, and it lacks key details in many areas. The green book estimates that Biden’s proposed tax platform would raise $4.3 trillion in net revenue over the next 10 years, including an estimated $341 billion return from increasing IRS funding by $104 billion. This net revenue increase comprises $5.3 trillion in tax increases against $1 trillion in new tax breaks.

Doubling down

The overwhelming majority of the tax proposals are recycled from either prior budgets or failed Inflation Reduction Act (IRA) proposals. Key business proposals from prior budgets include:

• Raising the corporate rate to 28% (estimated to raise $1.3 trillion over 10 years)
• Quadrupling the tax on stock buybacks from 1% to 4% ($166 billion)
• Reforming international taxation in a sweeping package that aligns more closely to Pillar 2 ($632 billion)
• Repealing oil and gas incentives ($35.2 billion)
• Repealing like-kind exchanges ($19.6 billion)
• Restricting basis adjustments between related partners under Section 754 ($14.8 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 ($6.7 billion)
• Amending various rules for corporate distributions to expand dividend treatment ($1.9 billion)
• Modifying safe harbors to expand gain treatment for leveraged divisive reorganizations ($43.7 billion)
• Expanding Section 267 to deny deductions for built-in losses in certain liquidations ($547 million)

Enacting a large package of “loophole” closing provisions, plus compliance and tax administration changes including increasing penalties, extending the statute of limitations in some circumstances, giving the IRS authority to regulate return preparers and requiring disclosure for positions contrary to a regulation

Prior tax proposals aimed at individuals and investment activity that reappear in the budget include:

• Increasing the top rate on ordinary income to 39.6% ($246 billion)
• Expanding the 3.8% tax on net investment income (NII) and raising the top Medicare and NII rate to 5% ($796 billion)
• Taxing capital gains as ordinary income for high-income taxpayers ($289 billion)
• Imposing a 25% minimum “billionaire’s tax” targeting unrealized gains for individual taxpayers with $100 million in net assets ($503 billion)
• Taxing carried interest in certain partnerships as ordinary income ($6.6 billion)
• Repealing the step-up in basis of inherited assets and requiring tax at death (no separate score)
• Changing grantor trust rules ($83.8 billion)
• Imposing new restrictions for large individual retirement accounts of high-income taxpayers ($22.7 billion)
• Changing digital asset tax treatment, including imposing a digital asset mining tax, expanding wash sale treatment to cover digital assets, expanding the mark-to-market rules under Section 475 to include digital assets, and expanding and clarifying information reporting ($49 billion)

The budget does offer a handful of significant new tax proposals described in more detail below.

Corporate alternative minimum tax

The budget would raise an estimated $137 billion by increasing the new corporate alternative minimum tax (CAMT) rate from 15% to 21%. The CAMT was created by the IRA and imposes a 15% minimum tax against a modified version of financial statement income. It generally applies to corporations with adjusted financial statement income exceeding an average of $1 billion over three years.

The green book stated that the increased minimum tax is also designed to align with an increase in the overall corporate to 28% and the budget’s international tax provisions, which themselves are meant to implement the global minimum tax rules under Pillar 2 negotiated through the Organisation for Economic Co-Operation and Development (OECD). In a briefing call last week, administration officials said the 21% corporate minimum tax is consistent with its position at the international level, though the OECD minimum taxes are generally only 15%. Perhaps more significantly, the green book proposal does not indicate any plans to amend the CAMT to align it more closely to the qualified domestic minimum top-up tax (QDMTT) concept that Pillar 2 envisions. The QDMTT threshold applies at a much lower 750 million euro revenue threshold (as opposed to $1 trillion in net income), and has very different rules. 

Limit on compensation deduction

The green book proposes to raise $272 billion by significantly expanding the limit on deducting compensation under Section 162(m).

Section 162(m) limits a public company’s annual compensation deduction to $1 million for each covered employee, and was amended significantly by the TCJA to expand the definition of a public corporation, eliminate the exception for performance-based compensation and broaden the definition of a covered employee. Covered employees include the CEO, CFO, the three other employees who are the most highly paid, and anyone who was a covered employee in a previous year.

The administration had previously proposed to accelerate a change scheduled for 2026 that would expand the definition of covered employees to include the next five most highly paid employees. The new proposal is much broader and would apply Section 162(m) to all C corporations, public and private, and would deny a deduction for any pay exceeding $1 million for any employee, not just a select number of covered employees.

Aviation taxes

The budget includes two new proposals aimed at private jet usage:

• Depreciation: The budget would increase the depreciable period for non-commercial aircraft primarily engaged in carrying passengers from five to seven years, consistent with the depreciable period for commercial aircraft.
• Fuel excise tax: The budget proposes to increase the excise tax on fuel for private jet travel from 21.8 cents per gallon to $1.06 per gallon over five years.

IRS funding

The budget proposes to provide the IRS a $12.3 billion budget for 2025, down from the $14.1 billion request last year (IRS funding is still under a continuing resolution; Senate appropriators have proposed a $12.3 billion budget and the House has proposed $11.2 billion). The budget also proposes an additional $104.3 billion special allocation modelled after the $80 billion allocation enacted as part of the IRA. Treasury argues this allocation would raise $341 billion in additional revenue for a net gain of $237 billion in revenue.

Tax cuts

The budget proposes two new refundable tax credits for home ownership: a credit of up to $10,000 for certain homebuyers with adjusted gross income below $200,000 (joint) or $100,000 (single) and a similar credit for certain home sellers meeting the AGI thresholds. The budget also includes past proposals aimed at housing and low- and medium-income individuals, including an expansion of the low-income housing tax credit, and an expanded refundable child tax credit.

Next steps

Congress is close to passing government funding for the remainder of the year, and with much of the negotiating done, proposals in this budget are even more symbolic than usual, at least in terms of immediate relevance. Aside from the $78 billion deal to revive three business tax breaks, as well as a more generous child tax credit, until the end of 2025, it’s unlikely any major new tax policy will pass this calendar year.

But the budget could influence significant tax and spending debates next year. The 2024 election and 2025 TCJA sunsets loom large. Former President Donald Trump, the presumptive Republican presidential nominee, has said he wants to extend much of the 2017 tax reform that he signed into law, but also wants to impose sweeping tariffs, whose effects could ripple out into the broader tax and spending debate anticipated in 2025. Trump may push for a further cut to the corporate tax rate, in addition to seeking to repeal much of the signature tax changes overseen by the Biden administration over the last three years, like the IRA energy tax credits, the CAMT and stock buyback taxes, and the increased IRS funding. The makeup of Congress will also be crucial for the 2025 policy debates, and the Biden administration’s new budget presents a menu of options for Democrats for when those talks take place.