Wednesday’s inauguration marked the beginning of Joe Biden’s presidency. Though eager to take action, President Biden faces many roadblocks ahead that may limit his agenda. A particular question that many Americans are asking now is will there be a tax increase in 2021?
Between the very narrow lead in congress, a focus on managing the pandemic, and the quick shift to mid-term elections in 2022, we think major tax legislation in the short-term is unlikely. With that in mind, let’s start by looking at key elements of President Biden’s proposed tax plan to see what might be on the table for future changes to the tax code.
Throughout his campaign, President Biden made numerous claims about what he would do as President, particularly around taxes. Here are the main points he emphasized:
Example: A client in the proposed 39.6% bracket that earns $10,000 and then immediately donates those dollars to charity would receive a deduction of $10,000 x 39.6% = $3,960. The cap would be calculated as $10,000 x 28%, leaving them with a $3,960 - $2,800= $1,160 tax bill attributable to the $10,000 of income that they had immediately donated.
On January 5th, democrats unexpectedly won both Georgia Senate runoff elections. These victories gave democrats a 50/50 split in the Senate. In the event of a tie, the deciding vote would be cast by Vice-President Kamala Harris. This win opens up the opportunity for Biden to pass some of his tax initiatives; however, these razor-thin majorities in the Senate and House are limited. Here’s why:
1) Moderate Democrats
In order to get the even 50 Senate votes, President Biden will need to win over a small group of moderate democrats. This list includes senators Joe Manchin (West Virginia), Jon Tester (Montana), and Angus King (Maine). You may want to remember these names, as they hold significant power in implementing Biden’s tax proposals. Precisely, if legislation is not acceptable to them, it will not move forward.
2) The Pandemic
Given the effects the pandemic has had on our economy in the last year, raising taxes may be put on hold. We expect President Biden to focus a significant amount of his efforts on controlling the pandemic instead.
3) Mid-Term Elections in 2022
In 2022, lawmakers will be primarily focused on their own re-elections, which limits Biden’s window for change to one year. As we mentioned in the previous point, a majority of this year will be focused primarily on controlling the pandemic, limiting what President Biden will be able to accomplish in terms of significant tax legislation.
The combination of these factors will make it difficult to implement changes, but not impossible. President Biden will need to water down his proposals to appease the majority in the Senate and House within a short window before the focus shifts to mid-term elections. If he can do so, he has the opportunity to get some legislation passed, but likely nothing that will include major tax changes as we saw in 2017 with the Tax Cuts and Jobs Act.
As an associate advisor on the team, Brenna is responsible for preparing, monitoring, and updating client financial plans.
She gathers financial reports and records to review. With this information, she assists the planning team to make appropriate recommendations to clients.
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