In the third part of our New Age of American Infrastructure webinar series, Venable's multidisciplinary team, including Josh Finestone, Sam Olchyk, and Sarah Donovan, addressed pressing questions regarding the tax implications of the Biden administration's sweeping proposals.
Q: Both Democratic and Republican leaders in the House and Senate met recently with the president to discuss the tax implications and how to move forward with the administration's infrastructure proposals. Based on what we know so far, how are these proposals likely to be moved through the legislative process, and are we likely to see both an infrastructure package and a surface transportation bill, or will it be one or the other?
A: This is what is being worked through right now. Congress and the Biden administration are currently seeking an agreement on a long-term, bipartisan surface transportation bill. The current surface transportation authorization bill, the 2015 FAST Act, is set to lapse on September 30, creating a near-term forcing mechanism for legislative action. One way or another, Congress must extend the highway program for some period of time, and, as a practical matter, this is almost certain to happen through regular order. Once this question is resolved, we expect Democrats to use the budget reconciliation process to achieve as much of the remaining Biden infrastructure agenda as possible. Either way, there is no black-and-white answer right now regarding whether there will be one bill or two, as we are dealing with many unknowns while Congress and the administration try to figure out how to balance politics and policy.
Q: The Biden administration is planning to use significant tax offsets to pay for some of the infrastructure proposals. Should the legislation go forward, when are these offsets likely to take effect, and might they be retroactive?
A: Congress has the authority to enact tax increases retroactively. In fact, in 1993 when President Clinton increased the maximum individual tax rate from 31% to 39.6%, it was signed into law in August but was made retroactive to January 1. As the negotiations continue, however, we're unlikely to see a bill coming to fruition until the fall. That time frame would make it politically challenging to make the revenue-raising provisions take effect this year. More likely, most of the key revenue provisions wouldn't take effect until 2022.
Q: Regarding the tax offsets, the proposals include increasing the corporate income tax rate from 21% to 28%. Is there likely to be any compromise on these proposals, such as enacting a sliding scale for lower rates based on the size of a business?
A: It seems unlikely that Congress will enact a graduated corporate tax system. Prior to 2018, the corporate tax rules applied a graduated system, but the income levels were so compressed that corporations quickly found themselves subject to the 35% corporate tax rate. If the maximum tax rate ends up being 25%, it seems unlikely that a lower rate will be available to smaller companies.
Q: More than any other potential offset, the Sales and Local Tax (SALT) deduction has created a split among Democrats – particularly in the House. Are they likely to reach a consensus on SALT? Because based on where one lives, that may have a significant impact.
A: Congressional leadership will have to be creative to resolve the SALT issue. One possible outcome is for Congress to increase the $10,000 cap to somewhere between $50,000 and $75,000. It is unlikely that the deduction will be repealed entirely, so there will have to be some compromise.