Potential Tax Policy Changes with a New Administration

As we all wait for the dust to finally settle around the 2020 Presidential election, you’ll be interested in this look at potential tax policy changes written by Todd Simmens, National Managing Partner of Tax Risk Management, BDO. This assessment gives us an overview of what may be and what might have been regarding the Tax Cuts and Jobs Act of 2017 (TCJA) and other existing aspects of U.S. tax code.

The article that follows was originally published 10-30-2020.

Four Possible Scenarios for Tax Policy Post-2020 Election

Unlike in previous elections, tax policy has not been at the forefront of the 2020 presidential election cycle. In fact, as of October 28, 2020, the two major party candidates have only released soundbites to describe their vision for U.S. tax over the next presidential term (see BDO’s summaries of the tax policy changes revealed thus far by the two campaigns).

Future tax policy does not solely rest on the shoulders of the president, however. It depends in large part on the makeup of the White House, the Senate and the House of Representatives after the November 3, 2020, election. The following looks at four potential scenarios for tax legislation depending on who wins the election and whether any changes are made to the majority in the Senate. The analysis assumes that the House of Representatives will remain under Democratic control, as has been consistently projected in recent polls.

A Note on Legislative Filibustering

It is important to note that, under current Senate rules, a standalone tax bill would generally require a supermajority 60 votes to proceed. This so-called “legislative filibuster” rule provides that any senator may raise a point of order (a challenge that a Senate rule is being violated and, if sustained, would end the bill) if there are fewer than 60 votes to move a bill forward. In recent years, the Senate has found a workaround when it has been apparent that the requisite 60 votes would not be obtained to move tax legislation forward. Under the “Byrd Rule” (named for the late West Virginia Senator Robert Byrd), a bill passed under the “budget reconciliation” process allows the Senate to pass a bill with only 51 votes (which can include the vote of the vice president as a tie breaker) and avoid a legislative filibuster.

Generally, although the rules of a particular budget bill should indicate how much the tax provisions may increase the deficit, tax provisions cannot increase the federal deficit beyond the typical 10-year “budget window.” For example, the bill for the Tax Cuts and Jobs Act of 2017, P.L. 115-97 (TCJA) was drafted to increase the deficit by $1.5 trillion in the first 10 years, with no increase to the deficit outside the 10-year window. That is why most of the tax provisions in the TCJA expire within that 10-year window (except, for example, the reduction of the corporate rate to 21%, repeal of the corporate alternative minimum tax and the alimony provisions, all of which are permanent). This relatively short shelf life of the tax provisions is the tradeoff for circumventing filibuster.

There has been some speculation that, depending on the outcome of the 2020 election, the Senate may seek to abolish the legislative filibuster rule, which could pave the way to passing standalone tax legislation without having to include it in budget reconciliation legislation and, therefore, effectively eliminate the 10-year expiration of any new provisions.

The Scenarios

Scenario 1: President Trump wins reelection, the Senate remains under GOP control.

While the House may pass substantive tax legislation, if the Senate did as well, the two versions of a bill likely would look very different from one another and could not be reconciled. In such a case, we would be left with the status quo: Most provisions contained in the TCJA would generally expire in 2027, except for the permanent provisions.

Scenario 2: President Trump wins reelection, the Senate flips to Democratic control.

The House may pass substantive tax legislation. If the Senate legislative filibuster rule remained intact, the Senate likely could not pass standalone tax legislation; it would need to be included in a budget reconciliation package. Because of the uncertainty of presidential approval of any agreed-to bill, the Senate may not try to abolish the legislative filibuster. However, if the Senate did vote to eliminate the legislative filibuster, it may pass standalone substantive tax legislation. In either case, it is likely that both the House and Senate versions of a bill would contain similar provisions, or at least similar enough to be reconciled into one bill. It is unclear whether President Trump would sign such legislation into law or whether there would be sufficient votes to override a presidential veto. It is likely that we would be left with the status quo: Most provisions contained in the TCJA would generally expire in 2027, except for the permanent provisions.

Scenario 3: Former Vice President Biden wins the election, the Senate remains under GOP control.

While the House may pass substantive tax legislation, if the Senate did as well, the two versions of a bill would likely look very different from one another and could not be reconciled. In such a case, we’d be left with the status quo: Most provisions contained in the TCJA would generally expire in 2027, except for the permanent provisions.

Scenario 4: Former Vice President Biden wins the election, the Senate flips to Democratic control.

The House would likely pass substantive tax legislation. The Senate also would likely pass substantive tax legislation, but how the Senate would pass the legislation would depend on whether it maintained or abolished the legislative filibuster. If the Senate preserved the legislative filibuster, any tax legislation it passed would likely be through the budget reconciliation process. In such a case, tax law changes that were not paid for (i.e., offset with revenue) would expire during the 10-year budget window, similar to the TCJA. If, however, the Senate abolished the legislative filibuster, it could likely pass a more permanent standalone tax bill that would not be required to expire, irrespective of whether it is paid for.

Comments

Scenarios 1, 2 and 3 would likely yield no enacted tax law changes, at least in the short term. It is, of course, possible that specific tax provisions could be in play as part of other legislation. Scenario 4 presents the most likely possibility of a more comprehensive tax bill moving forward to enactment. The contents of such a bill and the extent to which it may be permanent will depend in large part on the future of the Senate filibuster rule.

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