The Biden administration along with the Democrat-controlled Congress successfully moved their first-100-day agenda. They passed their Covid-19 relief bill, the American Rescue Plan, along party lines through reconciliation; met their vaccination goals; and made moves like pulling troops out of Afghanistan. Now, they are fully engaged on the next 100 days. They have introduced two infrastructure plans, one called the American Jobs Act and the other the American Family Plan. Together, they total over $4 trillion and are expected to be paid for by various tax hikes.

The Details
The first plan, the American Jobs Act, could be considered the more “traditional” infrastructure plan with a focus on:

  • Fixing highways, rebuilding bridges, and upgrading ports, airports and transit centers
  • Rebuilding clean drinking-water infrastructure, renewing the electric grid and high-speed broadband
  • Modernizing homes, commercial buildings, schools and federal buildings
  • Creating caregiving jobs and raising wages and benefits for essential homecare workers
  • Revitalizing manufacturing, ensuring products are made in America, and investing in innovation
  • Creating good-paying union jobs and training Americans for jobs of the future
To pay for it all, they are putting the bill on corporations:

  • Raising the corporate tax rate to 28%
  • Establishing a minimum tax of 15%
  • Increasing the tax for US-based companies with foreign subsidiaries
  • Discouraging companies from avoiding US taxes by partnering with foreign companies – by eliminating tax loopholes and expense deductions that incentivized companies to offshore jobs and park intellectual property overseas
So, which of these tax hikes could get through? Already, a few Democratic senators have said they will not agree to a 28% hike but would consider something around the 25% range. GILTI (global intangible low-taxed income) on foreign earning is probably going up. Currently it is at 10.5%. Biden has proposed doubling it to 21%, but it will most likely end up in the 15%–18% range. A flat tax of 15% on book income over a certain threshold is getting more traction, but it is still up in the air as to whether it stays in or the rate itself is adjusted.

The second infrastructure package, the American Family Plan, focuses on the human or social aspects of infrastructure. This plan will cost $1.8 trillion – with $1 trillion in investments and $800 billion in tax cuts. To pay for the $1 trillion, a series of tax hikes on individuals has been proposed. This includes the individual rate, capital gains rates, eliminating the step-up basis, ending the carried interest loophole, and ending real estate tax breaks for gains greater than $500,000.

The President Proposes, Congress Disposes
Changes to the tax policy are going to happen this year. But the likelihood of the Biden administration getting all of its tax proposals enacted is slim to zero. There is a phrase in DC government: “The president proposes and Congress disposes.”

For individuals, there is little doubt that the top rate is going up from 37% to 39.6%. The number cited for the incomes this affects is for those who make over $400,000. However, the actual number is $452,700 for an individual and $509,300 for couples. Wait! Didn’t Biden promise to only raise income on people making over $400,000? Half of $509,300 is $254,650. So there would be Americans making under $400,000 who see a hike in their tax rate. The reason for this is in the final bill they changed one word “individuals” to “households.” The Biden administration did confirm that yes, couples making a combined $509,300 would pay the higher rate even if it means one or both in the couple makes less than $400,000 a year.

For proposed capital gains tax hikes, getting to a 43.4% rate (39.6% + 3.8%) for households making more than $1 million is a little dicey. Doubling the capital gains rate for households making over $1 million a year is going to be a hard sell for the congressional delegation from high-tax states like California, New York, and New Jersey. These members of Congress are working furiously to rid the burden of the State and Local Tax (SALT) cap of $10,000 imposed by the 2017 TCJA. The House members from New York, New Jersey, and California have threatened not to vote for a bill that does not have a fix to SALT. If they are unsuccessful (and so far they have little support), they do not want to go back to their states without a change to SALT and with an increase in income taxes and an increase in cap gains.

Also, consider that the Democratic Speaker of the House, Nancy Pelosi, represents San Francisco and the Senate Majority Leader, Chuck Schumer, represents the state of New York. Therefore, one could assume that changing the proposed increase in the capital gains rate for households making more than $1 million is under great negotiation. It is possible that instead, they lift the capital gains rate for this income group to the mid- to high 20s. To sum it up, capital gains rates are going up but by how much is negotiable.

The step-up basis change isn’t a shoo-in either. Remember, Biden has promised not to raise rates on people making less than $400,000. And we already mentioned that he has had to back that up a bit with the tax on couples. Making the step-up basis effective for estates with more than $1 million in gains for individuals and $2 million for couples does help cut a lot of people from the higher tax, but people in lower income brackets could still get caught up in the tax trap. Again, something could be changed to the step-up basis and there is room for negotiation. On a side note, it was surprising that he did not propose to lower the estate tax exemption from $5.5 million for individuals and $11 million for couples or raise the estate tax rate from 40%.

These are a few examples of what could be negotiated. During the first few weeks of May, members of Congress were in learning mode – trying to determine what they support, what they cannot tolerate, and what they are neutral on. As far as the infrastructure spending size goes, a range of $2–$3 trillion is more likely – a much lower number than Biden’s $4+ trillion proposals. This reduction is most likely because if the Democrats take the bill through reconciliation, half of Biden’s proposals will not make it by the Senate parliamentarian.

One Bill, Two Bill, Red Bill, Blue Bill?
The Democratic Party is split on whether to work with the Republicans for a bipartisan bill that addresses traditional infrastructure and do a second bill through reconciliation that addresses people, schools, housing and healthcare – or to just go it alone. The challenge for the half that wants to bring in Republicans is that the Republicans have to really want to do this. Whether they spend weeks or months negotiating with the Democrats, but in the end decide not to give Biden and the Democrats a major infrastructure win, is more important than the infrastructure bill itself. Then they would put fuel onto the fire of partisan politics. Also, the Democrats have said that they want to “go big and bold.” So far, nothing about the Republican counteroffer of $600–$800 billion is big or bold – nor will the Republicans sign onto tax hikes for corporations or individuals.

The argument for doing one big bill is that the Democrats have the momentum right now and they want to keep it going. They passed the American Rescue Plan to fix the Covid-19 health pandemic and the economic crisis by March, and President Biden signed dozens of executive orders in his first month of office. Polling numbers are also on their side, signaling that the majority of the country is OK with corporations and the super-wealthy paying for infrastructure. The younger generations want government intervention, and frankly are not as capitalistic as their parents and grandparents.

Income distribution is a major problem in the US, and we are at a point where it will not self-correct. President Biden and the Democrats believe passing a “big and bold” infrastructure plan is the best thing they can do for the country. Going with one bill may also make it easier on leadership. With thin margins in both the House and Senate, they will struggle to get the votes they need for one bill, let alone two.

In the meantime, the centrists in both parties will hold out hope as long as they can, and so will Democratic leadership. Senate leadership is encouraging and facilitating bipartisan conversations, as are the president and vice president.

Timing Is Everything
The timeline for getting the bill through the House by July 4 – which was set by Speaker Pelosi – will also influence whether the Democrats go it alone or bring along the Republicans.

  • May: Decide how they are going to proceed – one bill, two bills, Republicans or no Republicans. This needs to be decided by Memorial Day weekend.
  • June: If they are going with one bill through reconciliation, then the budget resolution it is tied to needs to be passed in the House and the Senate. Writing and agreeing on budgets is a slow-moving turtle in Congress, so getting it written and passed in a month would be a monumental task. If they are going to write one bill with the Republicans, they have the month of June to do it. Whether they can do this depends on how willing both sides are to compromise and how hard the progressive left pushes back on their centrist Democratic caucus.
  • July 4: House bill passes and is sent to the Senate.
  • Month of July: Pass the chosen bill in the Senate and have it to the president’s desk before Congress leaves the first week in August for their month-long recess.
This is an extremely aggressive timeline. As far as the timeline for the Senate and the president goes, they do not have anything as rigid but they are supportive of the Speaker. However, they want to be flexible in order to account for the bipartisan conversations that are taking place.

Also regarding timing, the deeper you get into the year, the more the dynamics of policy and politics will change and you have to deal with primaries, election filing deadlines and the looming debt ceiling.

No matter which way Congress goes, it is going to be a wild ride. Let’s just hope they actually put together something that fixes our broken infrastructure and exercise some fiscal responsibility.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions.