The Biden Administration is moving quickly and aggressively to deliver on key promises made during the Presidential election campaign. In addition to the $1.9 trillion COVID economic relief package passed into law in late January, the Administration has introduced two additional major policy initiatives totaling almost $4 trillion in spending and taxes this spring—one to address our country’s aging infrastructure and the second to shore up the financial footing of lower and middle-class families as the country finally emerges from the pandemic.
In terms of priority, the sequencing is telling with the infrastructure-focused American Jobs Plan hitting the streets weeks ahead of the American Family Plan that was unveiled in late April. White House staff has noted that the President has long wanted to pursue an infrastructure package and appears more passionate about that effort.
Specific details of the American Jobs Plan are scarce. The 25-page high-level summary document that was released on the day the proposal was unveiled is all that exists. The proposal lays out hundreds of billions of dollars for roads, bridges and ports among other items and, although there is disagreement on funding levels and areas of focus, spending on infrastructure enjoys bipartisan support at least on a conceptual basis. Congress is now in the beginning stages of considering legislation reauthorizing our nation’s surface transportation programs. Known as “the highway bill,” this measure will serve as the lynch pin for any comprehensive infrastructure package that is forged this Congress. The current highway bill expires in September.
The aspect of both the infrastructure plan and the American Family Plan that has attracted the most attention is how to pay for all of this new spending. Here again, the tax titles in these proposals are generally short on specifics but paint a decidedly clearer picture of who will be impacted than the spending components of these measures. Media coverage has focused on the jump in the corporate tax rate to 28 percent from 21 percent. Also receiving attention are the many provisions to curb off shoring—most notably the doubling of the global minimum tax (known as GILTI or Global Intangible Low Tax Income) from 10.5 to 21 percent. These two major tax increase planks are tagged as the funding mechanisms for the programs outlined in the American Jobs Plan.
Additional tax increases are outlined in the American Family Plan, most prominently the proposed capital gains increase to 39.6 percent from 20 percent for those earning $1 million or more. The other widely discussed proposed change is ending long-standing capital gains tax break on inheritances known as “step-up in basis,” which allows tax payers to use the market value of assets at the time of inheritance rather than the actual purchase price as the cost basis for capital gains when the holdings are sold.
What has not been widely reported on are the many potential revenue raisers not in either proposal that will almost certainly surface as the Congressional tax writing committees begin their task of fashioning actual legislation to implement these plans. One area on which the Hardwood Federation is keenly focused is a potential increase in taxes S Corporations and other pass through entities currently pay. Beginning in 2018 after enactment of the Tax Cuts and Jobs Act, a new tax deduction for owners of pass-through businesses took effect. Pass-through owners who qualify are able to deduct up to 20 percent of their net business income from their income taxes, reducing their effective income tax rate by 20 percent. This deduction is currently slated to run through 2025 unless extended by Congress. Given that pass-through businesses employ a majority of private sector workers (58 percent), pay a significant share of all business taxes (51 percent) and that large S Corporations (over 100 employees) pay 20 percent of all business taxes, it seems reasonable to conclude that Congress will turn to pass throughs at some point as they sharpen the pencil on raising revenue.
Another proposal that has received serious consideration in previous Congresses is eliminating the preferential tax treatment on standing timber. Currently, standing timber is assessed at the capital gains rate, recognizing the long term investment and risk that landowners incur to produce trees that can take 50 to 80 years to mature. So called “pay fors” have surfaced in Congress in recent years that would eliminate capital gains preferential tax treatment for revenue derived from harvesting timber and instead assess gains as ordinary income at the top tax rate. More than doubling the tax rate on timber proceeds would be devastating for forest landowners across the spectrum–from small private landowners trying to put a kid through college with a timber sale or thinning project to large industrial forest landowners. The downstream effects on companies in the Hardwood manufacturing sector that rely on forest fiber for product and energy are consequential. Although the timber tax “pay for” has not been discussed for a few years, we have found that these tax proposals have a way of coming back from the dead…and just like zombies, they are hard to kill!
These proposals and others impacting our sector may surface in the coming weeks. The Hardwood Federation team is fanning out virtually to offices on both sides of the Capitol to gather intelligence and discuss the impact that increased taxes will have on jobs in rural areas. A study recently conducted for the National Association of Manufacturers concluded that one million jobs would be lost in the manufacturing sector alone following with first two years after enactment of revenue raisers that are being discussed. As always, we will keep you apprised of what we hear and may be calling upon you to help engage Congress as threats—and opportunities—materialize.