The enactment of the American Rescue Plan showed how tax increases can be placed in bills with very little or no notice.
“There were a number of revenue-raisers added to satisfy revenue reconciliation that could actually be revisited in the future to generate additional revenue,” said Marc Gerson, a member of the Tax Department of law firm Miller & Chevalier Tax, and a former majority tax counsel to the House Ways & Means Committee. “One of those would be the expansion of the Code Section 162(m) limitation,” he said. Section 162(m) limits the deductibility of executive compensation paid to certain employees of a publicly held corporation.
“It’s scheduled to go into effect in 2027, but that’s something that might be moved forward to generate more revenue,” he continued. “Then there is the one-year extension to 2026 of excess business loss rules. These could be further extended into the future, so to some degree the American Rescue Plan represents a harbinger of things to come with respect to revenue-raisers.”
An interesting aspect of the changes to Section 162(m) is that the additional top five employees covered appear to include any employee of a company, and is not necessarily limited to officers as under current Section 162(m), according to Adam Cohen, a partner at law firm Eversheds Sutherland.
“This would mean that for companies with highly paid non-officers, the compensation paid to those individuals would be subject to the $1 million deduction disallowance,” he said. “Examples include companies with highly paid entertainment talent, employees with substantial commissions, or employees who have high income in a particular year due to option exercise or nonqualified deferred compensation payouts.”
Next on the Biden administration agenda will be a “very significant” infrastructure package, as well as a green energy package, with a significant portion funded by tax increases, Gerson indicated. “The infrastructure proposal and the Green Book [the Treasury’s general explanations of the administration’s revenue proposals] will set the starting point for tax policy discussions for the year. There’s a lot to figure out both on the scope of spending and how to pay for it, including what tax increases will be necessary to pay for it. We’re in a little bit of a holding pattern, but I expect the spring will be busy as committee hearings are followed by the release of the Green Book in late April.”
Dustin Stamper, managing director in the Washington National Tax Office of Top Eight Firm Grant Thornton, agreed.
Treasury Secretary Janet Yellen “has said that the Green Book will give us a clue into the administration’s top tax priorities,” he noted. “The passage of the American Rescue Plan opens the door for the Democrats to look at more transformational tax proposals. It will be their first opportunity to show how aggressive they want to be on their tax increase proposals.”
“They’ve indicated that they want to go pretty big on things like climate change and infrastructure, and they’re not going to want to do all that with deficit funding, so revenue-raisers will be on the table. There’s been a lot of discussion about a corporate tax rate increase. Joe Manchin [D-West Virginia] has indicated he’s supportive of an increase to at least 25 percent. That kind of moderate buy-in is significant.”
“Other low-hanging fruit will be increases in the top marginal rate, the capital gains rate and other rates on investment income,” he continued. “Congressional Democrats are also focused on international tax rules. We’re expecting in the next couple of weeks a pretty significant tax reform package from Senator Wyden [D-Oregon, chairman of the Senate Finance Committee]. But I think it’s important to keep in mind that whatever proposals for tax increases we’ll see will be dialed back from what we saw during the campaign, but that still leaves room for some significant tax increases.”
The other question is not just what they pursue, but when they make it effective, according to Stamper. “We’re still hopeful that they’re going to be reluctant to impose increases retroactively. It seems more likely, given the fragile economy, that they’ll look to make changes prospectively.”
Businesses are following developments closely, and are bracing for tax increases, noted Gerson. He cited the 15th Annual Tax Policy Forecast Survey by Miller & Chevalier and the National Foreign Trade Council, noting that the survey results reflect increased concern over how the tax legislative agenda unfolds.
“The dynamic and ever-changing political environment, combined with the threat of significant business tax increases, has given taxpayers a heightened sense of awareness of tax policy developments,” he said. “Taxpayers are monitoring and reacting to developments on a daily basis. There has never been a more important time to be engaged with policymakers.”
