With the Democratic Party taking effective control of the Senate and Bernie Sanders to become chairman of the Senate Budget Committee, it becomes possible for President Biden to enact his tax proposals through the process of 'budget reconciliation'.
The proposals include:
- reducing the estate and gift tax exemption amount from $11,700,000 (currently applicable in 2021) to approximately $5,600,000 or perhaps $3,500,000
- eliminating basis step up for inherited assets
- increasing the top marginal individual income tax rate to 39.6% (from 37%)
- taxing long term capital gains and qualified dividends as ordinary income at 39.6% (rather than the current 20% capital gains rate) for individuals with income over $1,000,000
- increasing the corporate tax rate to 28% (from 21%) and increasing the effective rate of GILTI tax applicable to 'controlled foreign corporations' to 21% (from 10.5%)
For further details regarding President Biden's tax proposals and for planning ideas to help mitigate their impact please click here for our US Election 2020 coverage.
While enactment of most legislation will require cooperation from Republicans, as 60 votes are generally needed to pass legislation in the Senate, fiscal related legislation can instead be passed with a simple majority vote using the budget reconciliation process. With the Senate split 50 / 50 between Democrats and Republicans, Vice President Kamala Harris will be in position to cast the tie breaking vote (provided that all the Democratic Senators present a unified front).
In past years, the Republicans have used the budget reconciliation process to enact President Trump's 2017 tax plan and President George W. Bush's 2001 tax plan and the Democrats used the process in 2010 to enact elements of the Affordable Care Act under President Obama.
Any legislation passed through the budget reconciliation process must not increase the budget deficit beyond a ten year window, new spending must be offset with either new revenue or other spending decreases and each element of the legislation must have a direct non-incidental impact on the budget. Thus, non-fiscal legislation such as civil rights and voting rights would seem unlikely to be able to be implemented under this process. Budget reconciliation does though potentially lend itself to legislation such as infrastructure, climate change, health care and, of course, tax.
The reconciliation process is generally available only once a year, and Congress did not pass a budget resolution for 2021. For example, if Republicans are unwilling to support a Democrat sponsored package for further COVID relief, it would be possible for Democrats to use the reconciliation process in the early days of Biden's term to pass a COVID relief package and then again later in the year for other legislation in connection with passing a 2022 budget.
To what extent the Democrats actually will be able to use the process to implement major legislation may ultimately be a question of political will power. From a practical perspective, assuming that Senator Bernie Sanders uses his role as Chairman of the Senate Budget Committee to propose more liberal budget related legislation, how will that be received by the more conservative Senate Democratic members? If even one Democrat Senator chooses not to support a proposal, then the matter will not progress. From a broader political perspective, will President Biden be willing to enact major legislative policy changes without any element of Republican support? If so, how will that impact on President Biden's vows to unify America and build bridges between Democrats and Republicans? The budget reconciliation process allows for the possibility of many legislative changes. President Biden and his administration will need to form a strong view of which of those outcomes are desirable in the broader political context.