Q&A: 2021 Tax Policy Outlook

Welcome to the sixth edition of Talking Tax, where each month I explore a major trend or topic in corporate taxation and share advice on how to put tax strategy at the heart of decision making. Be sure to subscribe, so you’ll get the latest edition directly in your inbox.

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Now, let’s Talk Tax.

For this edition, I invited my colleague Todd Simmens, National Managing Partner of Tax Risk Management at BDO and former legislation counsel to the U.S. Congress Joint Committee on Taxation, for a conversation about what we might see regarding federal tax policy changes in 2021. A transcript of our conversation is below. 

Matt: Todd, thanks for joining me today. Now that control of the White House and Congress is officially set for the next two years, what federal tax policy changes do you expect to see come down the pike?

Todd: Thanks for having me, Matt. Although the Democrats control the White House and Congress, their majority in the Senate is slim, which means they’ll need bipartisan support to pass major legislation or else go solo and push bills through the budget reconciliation process. As most folks reading this are probably already aware, reconciliation would allow Democrats to pass legislation through a simple majority, but only if the changes do not increase the federal deficit beyond the budget window, which means any such changes generally would expire within, say, 10 years. Republicans, you might recall, used reconciliation in 2017 to pass the Tax Cuts & Jobs Act under President Trump. 

Matt: Right. If they can’t find enough bipartisan support for a bill, reconciliation allows senators to simply gather support from within their own party. Speaking of the TCJA, how do you anticipate President Biden will adjust or roll back TCJA provisions? Are we in for a full-scale repeal & replace?

Todd: It’s interesting—from what President Biden has said thus far, it isn’t likely he will champion a full-scale repeal of all TCJA provisions. I think incremental change is more likely. Take the corporate tax rate, for example, which the TCJA lowered from 35% to 21%. Biden has called for raising the corporate tax rate to about 28% and not to the pre-TCJA level of 35%. Biden has proposed other changes to TCJA provisions as well, but generally speaking, I don’t think we’re in for a massive overhaul—just incremental changes of varying degrees to specific tax provisions.

Matt: Interesting. So aside from the TCJA, what other major changes do you expect?

Todd: There are several possibilities, such as new tax credits for renewable energy and incentives to encourage re-shoring the supply chains of critical industries like high tech and healthcare. One area that I don’t feel has received enough attention recently is Social Security. Biden has proposed extending the Federal Insurance Contributions Act (FICA) tax to incomes over $400,000 to help address Social Security’s insolvency issue and extend the lifespan of the program. The proposed rate would be 12.4%, the same as currently on incomes below $137,700. In a similar vein, Biden has proposed raising the top individual tax rate back up to 39.6% after the TCJA lowered it to 37%. He has also proposed phasing out the qualified business income deduction (Section 199A) deduction for individuals with over $400,000 in income and increasing the estate and gift tax by reducing the exemption amount.

Matt: That’s a really good point, and I think the idea is the added revenue from those tax increases would go to Social Security and funding other projects, such as major infrastructure investments. We’ll see, however, if Biden is able to get these kinds of changes through Congress. Looking ahead, which of the changes we’ve talked about today are most likely to come to pass in the near future? What specific legislation do you anticipate making it to President Biden’s desk by the end of 2021?

Todd: There might be some tax provisions in any forthcoming COVID-19 relief bill, such as an expansion of the Child Tax Credit, but I don’t expect any standalone tax legislation until relief is passed—that’s still priority #1. After relief is passed, I think it’s safe to say the Democrats will want to pass a tax package, which will likely include some of the changes to the corporate rate, Section 199A deduction and other changes we discussed. For the foreseeable future however, expect lawmakers to be focused on COVID-19 relief until a bill is on President Biden’s desk for signing.  

Matt: Makes sense. Thanks so much for joining me, Todd.

For a deeper dive into Biden’s tax policy proposals, check out our insight.