Just based on its sheer size and scope, the Biden administration’s Build Back Better (BBB) agenda was always likely to shrink as it made its way through Congress. Two goals seemed certain on the tax side, though: Democrats would raise both the 21 percent corporate income tax rate and the 37 percent top ordinary income tax rate that were established by the 2017 Tax Cuts and Jobs Act (TCJA).
As the year comes to an end, Democrats will miss their self-imposed Christmas deadline for passing BBB, and the support of key senator Joe Manchin (D-WV) for any bill at all seems less certain than ever. But it has been clear for months that Biden and congressional Democrats will be unable to reverse the rate cuts in the TCJA, the signature economic legislation during President Trump’s tenure.
So how did rolling back the TCJA, a big pillar of the Democratic platform, go by the wayside? And what does it mean for the future of the law’s provisions that are due to expire or change over the next few years?
The Politics and the Pledge
Holding the slimmest possible majority in the Senate certainly played a role. Once Sen. Kyrsten Sinema (D-AZ) announced her opposition to any BBB tax rate increases (proposed surtaxes not withstanding), even the politically popular corporate and top individual income rate hikes were doomed in the Senate.
However, the future of the TCJA individual provisions already was murky. Except for raising the top rate back to 39.6 percent, Biden’s first budget proposal mostly remained largely silent on the 2017 law’s individual income tax provisions—which expire at the end of 2025 (Congress scheduled these tax breaks to disappear to reduce the costs during the 10-year budget window).
Similarly, he had little to say about the variety of corporate tax provisions that phase out or change starting in 2022. By contrast, the tax plan Biden unveiled on the campaign trail called for phasing out TCJA individual income tax provisions for those making $400,000 or more.
That pledge to hold harmless all taxpayers earning less than $400,000 explains some of the tension. Between the top marginal rate, the state and local tax (SALT) deduction, the child tax credit, personal exemptions, and the alternative minimum tax, it’s difficult to make wholesale changes to post-2025 law without potentially running afoul of the administration’s goal.
Unwanted Corporate Payfors
Things are more stable on the TCJA’s corporate side, but 2022 and 2023 have some less-than-pleasant changes in store for businesses. As a result, there may be bipartisan interest in blocking or at least delaying the scheduled changes in some TCJA tax measures.
For example, starting on Jan. 1, businesses will no longer be allowed to immediately expense research and development costs. Instead, they will have to amortize those expenses over five years for domestic investment and 15 years for foreign investment. Concerned that losing this tax break would slow research investment, House Democrats included a 4-year extension of expensing in their version of BBB.
Another change coming in the New Year is tighter restrictions on net interest expense deductions. TCJA initially limited the deduciton to 30 percent of earnings before interest, tax, depreciation and amortization (EBITDA), and in 2022 that will shrink to 30 percent of earnings before interest and tax (EBIT).
But wait, there’s more! The TCJA’s allowance of full expensing of most equipment—“bonus depreciation”—will begin phasing down after 2022 before expiring at the end of 2026.
There hasn’t been the same talk about net interest and full capital expensing as for expensing of research costs. But if Republicans regain control of at least one house of Congress in the midterms, the tradition of attaching tax extenders and other changes to must-pass legislation could create an opportunity to amend both.
All that being said, House Democrats were not shy about raising revenue in their version of BBB. Many high-income households and corporations would pay higher taxes under BBB than they do under the TCJA.
There is a millionaire’s surtax (in lieu of an increase to the top marginal rate) and a corporate minimum tax on accounting “book income” (rather than a much simpler corporate rate hike). BBB would also raise a sizeable chunk of revenue from bolstering international tax provisions established by the TCJA, such as the proposal to toughen the global intangible low-tax income—or GILTI.
But with the 21 percent corporate rate and top individual rate of 37 percent seemingly untouchable—and Biden’s $400,000 pledge looming large—it appears more likely than ever that most of the TCJA’s tax cuts will stay put, at least until 2025.
