Fernway DiarySM

Jul 13, 2022

Senate Democrats are in talks to negotiate a budget reconciliation bill that would allow passage of a pared-down version of President Joe Biden’s economic package with a simple majority before the fiscal 2022 reconciliation instructions expire on September 30. Sources report that Senate Majority Leader Chuck Schumer and West Virginia Democratic Senator Joe Manchin have engaged in private talks to reduce the proposed tax hikes in the measure in order to make them more favorable to businesses.

Last year the House passed a $1.5-trillion version of the “Build Back Better” bill, itself slimmed down from the original plan that was estimated to cost $3.5 trillion. Manchin and Arizona Senator Kyrsten Sinema were holdouts on previous versions of the reconciliation measure, which would need the support of all Democratic Senators plus a tie-breaking vote from the Vice President to pass. Although the deadline to pass a bill is at the end of September, many Democrats believe it must pass prior to the congressional recess in August if it is to pass at all.

Among the requirements Manchin has indicated are necessary to gain his support are the use of half of any new tax revenue and budget savings to reduce the deficit rather than funding new spending, and no fiscal “cliffs” that sunset new programs to present a low cost. These requirements leave less room for expanded spending, and the specifics of what to include are still under discussion.

Potential Corporate Tax Changes

Among changes that would affect US corporations are a reworked provision of the proposed 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} global minimum tax, under revision by the Senate Finance Committee. The new proposal would allow companies to blend their overseas tax payments to meet the minimum threshold, instead of requiring corporations to meet that level separately in each country in which they operate. The committee is also reported to be considering giving companies more time before having to comply with international tax law changes.

Also under consideration are changes to the 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} domestic minimum tax on financial profits, known as the book tax. According to those with knowledge of the Finance Committee’s deliberations, the change would exclude a business’s deductions for investments when calculating the tax, which would reduce the amounts many companies would pay. Without this change, tech and manufacturing are expected to be among the sectors most affected by the book tax in its current proposed form.

In addition, business groups are pushing Democrats to exclude income from pass-through entities such as LLCs and partnerships from being subject to a surtax for high earners that is included in the House legislation. That surtax would add a 5{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} levy on incomes above $10 million and an additional 3{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} on incomes above $25 million. However, there is no indication that a proposal to create a 1{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} excise on stock repurchases by publicly traded companies will be altered or eliminated. Because this is a comparatively smaller tax, it has drawn less pushback from corporations.

Conflicting Spending Priorities

The reduced scope of a new reconciliation bill makes it unclear which spending priorities will make it into the final version. Among items under discussion are a permanent extension of expanded tax credits for insurance purchased on health care exchanges, estimated to cost $220 billion by the Congressional Budget Office, which are due to expire at the end of 2022. It remains to be seen if all parties can agree on a scaled-back version of the bill that will garner the necessary support for passage.

Because legislative negotiations are ongoing, it is possible that further changes may be made to tax proposals included in the bill before it is voted on in the Senate, and passage is not guaranteed. Businesses or individuals concerned about the potential impact that tax law changes might have on their financial picture are advised to monitor the progress of talks and speak to their professional tax advisor to determine if adjustments should be made to optimize their financial and tax planning.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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