Tax Implications of a Democratic Sweep in November’s Election

Published by Michael Novogradac on Monday, August 31, 2020
Journal Cover September Thumb 2020

The growing possibility that Democrats could sweep the House, Senate and White House has broad implications, including for federal tax policy.

Democrat Joe Biden holds a lead over President Donald Trump in national polling and in many battleground states. Democrats have a significant edge (232-198) in the current House of Representatives and are expected to maintain or expand that majority in November. The Senate, where Republicans hold a current 53-47 edge (including two independents who caucus with Democrats), has become at least a toss-up and possibly leans toward Democrats.

If Biden is elected, history suggests tax legislation is coming. The past seven newly elected presidents (from Jimmy Carter through Trump) signed major tax legislation  within  an  average of six months of taking office. A Democratic Party sweep of the House, Senate and presidency in 2020 dramatically increases the likelihood that tax legislation will be enacted that resembles what Biden has proposed during his campaign.

This month, we will examine the general tax changes proposed by the Biden campaign and look at the key members of a potential Democrat-controlled Senate who will have outsized influence on what legislation can be enacted. Next month, we will examine how these proposals  affect  various  tax incentives, including tax credit equity pricing, and how federal appropriations and regulatory rulemaking might look under a Democratic Party-controlled government.

Corporate Tax Proposals

Biden has put forward several tax proposals, from broad (corporate and individual tax rates) to specific (a financial risk fee for large banks, changing the rules for estate taxes). Here are some highlights:

  • Corporate rate: Biden’s campaign suggests an increase in the corporate tax rate from 21 percent to 28 percent, which is halfway back to the 35 percent rate in effect before 2017 tax reform. That change would bring an extra $1.1 trillion to $1.3 trillion to the federal government from 2021-2030, according to the estimates gathered by the Committee for a Responsible Federal Budget (CRFB).
  • Minimum tax on book profits: Biden has called for a 15 percent minimum tax on the annual reported net income for corporations with at least $100 million in annual income. This would set a minimum for corporate taxes, although it would allow a tax credit for taxes paid to other countries and would allow companies to carry over losses from other years.
  • Minimum tax on foreign subsidies of U.S. firms: Biden has called for doubling what is currently called the Global Intangible Low-Taxed Income from 10.5 percent to 21 percent.
  • Financial risk fee: Biden proposes to impose a fee on large banks, bank holding companies and non-bank financial institutions that meet a $50 billion asset threshold.  Biden’s campaign hasn’t released specifics, but a version proposed by the Obama administration in 2015 would have levied a 7 basis point fee on covered liabilities, which it defined as total assets minus tier 1 capital (primarily common stock and disclosed reserves) and FDIC-insured deposits.

Individual Tax Proposals

  • Top individual rate: Biden’s plan calls for a boost in the top ordinary income tax rate (presumably for individual taxpayers making more than the current top rate of $518,000 annually and for couples earning more than $622,000) from 37 percent back to the 39.6 percent maximum that was in place from 2013-18. Over 2021-2030, data collected by CRFB suggests the increase would bring in an additional $100 billion to $153 billion to the federal government.
  • Itemized deductions: Biden proposes to cap itemized deductions at a 28 percent rate. About 10 percent of taxpayers itemize, but most high-income-earners do and Biden’s proposal would set 28 percent as the rate against which deductions could be taken. Presuming rates other than the top rate remain static; this would affect individuals who earn more than $163,300 per year or couples who earn more than $326,600 per year–since they pay taxes at a higher rate than 28 percent. This would allow a 28-cent reduction for every dollar that is deductible, even if the taxpayer is in a higher tax bracket.
  • Pease limitation: Biden proposes to reinstate the Pease limitation, which caps the value of itemized deductions for taxpayers who earn more than $400,000. For every dollar in earnings more than $400,000 the value of itemized deduction would be reduced by 3 percent–meaning, for instance, a taxpayer who earned $420,000 would have to reduce their allowable itemized deductions by an additional $600 because 3 percent of $20,000 (the difference between $420,000 and $400,000) is $600.
  • Capital gains: Biden would tax capital gains as ordinary income for taxpayers with more than $1 million in income. That means instead of 23.8 percent (the rate for the past several years for most high-income earners: 20 percent plus a 3.8 percent tax for the Affordable Care Act), those taxpayers would pay capital gains taxes at 39.6 percent (the Wall Street Journal reported that the 39.6 percent includes the 3.8 percent Affordable Care Act tax). Biden would also alter current law that allows a stepped-up basis and no capital gains at death, although his tax plan doesn’t specify whether the capital gains would be taxed at death or that heirs would assume a carryover tax basis.
  • Small business income deduction: The Biden plan would phase out the ability to deduct 20 percent of qualified business income for taxpayers with income greater than $400,000.
  • Social Security: Biden proposes that taxpayers who earn more than $400,000 would pay Social Security taxes at a rate of 12.4 percent. Under current law, the 12.4 percent payroll tax that funds Social Security is split between the employer and employee, but caps out at $137,700 in employee earnings (increasing with federal wage growth each year). This would reinstate it once the taxpayer hits $400,000 in annual pay.
  • Real estate provisions: Biden vowed to “eliminate tax preferences for the real estate industry,” in his proposal to expand care for children and the elderly. Presumably, that includes an elimination of the exemption from passive loss rules for $25,000 in rental losses.
  • Like-kind exchanges: Under Biden’s plan, taxpayers who make IRC Section 1031 like-kind exchanges could no longer defer capital gains taxes. That would make OZs and installment sales the primary options to defer capital gains taxes on asset sales.
  • Bonus depreciation: Biden proposes a repeal of 100 percent expensing. The 2017 tax legislation doubled bonus depreciation to 100 percent for qualified properties acquired and placed in service before Jan. 1, 2023.
  • Estate taxes: Biden proposes a return to the pre-2018 limits concerning estate taxes, exempting from taxes those assets from estates that were valued at less than a designated amount when being passed to heirs after death of the owner. Those amounts for 2020 are $11.58 million for individuals, $23.16 million for couples. Assets worth more than those levels would be taxed at 40 percent. As mentioned earlier, Biden’s plan would also alter current law that allows a stepped-up basis and no capital gains at death, although his tax plan doesn’t specify whether the capital gains would be taxed at death or heirs would assume a carryover tax basis. 

Potential Senate Leadership

If Democrats control the Senate, Sen. Chuck Schumer, D-N.Y., would presumably be Senate Majority Leader and Sen. Ron Wyden, D-Ore., would head up the Senate Finance Committee (SFC), which oversees tax legislation.

In the current Senate, there are 15 Republicans and 13 Democrats on the SFC. A narrow Democratic Party majority would change that to Democrat control, although the number of members is flexible (the two most recent times Democrats controlled the Senate, their SFC margin was 13-11).

Current Democrats on the committee are Wyden, Debbie Stabenow of Michigan, Maria Cantwell of Washington, Robert Menendez of New Jersey, Thomas Carper of Delaware, Benjamin Cardin of Maryland, Sherrod Brown of Ohio, Michael Bennet of Colorado, Robert Casey of Pennsylvania, Mark Warner of Virginia, Sheldon Whitehouse of Rhode Island, Maggie Hassan of New Hampshire and Catherine Cortez Masto of Nevada. Of those 13, only Warner is running for reelection and he is favored to win.

Of the 15 Republicans on the SFC, two members (Mike Enzi of Wyoming, Pat Roberts of Kansas) are retiring this year and four members–Bill Cassidy of Louisiana, Ben Sasse of Nebraska, Steve Daines of Montana and John Cornyn of Texas–are up for reelection. Cassidy and Sasse’s seats are generally seen as safe, while Cornyn is favored and Daines is in a toss-up race. Incumbent senators generally retain their seats, but two Republican retirements and the possible loss of another seat means the Democratic edge on the Finance Committee could be 13-12 or 13-11.

Power in the Center

If Democrats sweep the House, Senate and White House, House Democrats would presumably be more progressive than Biden, while a Democrat-controlled Senate would likely be slightly to the right of Biden. The political implications are that the Senate–with a narrow Democrat majority and several members who are ideologically more centrist–would have a significant say in the shape of tax legislation, since their support would be necessary.

Democrats–like Republicans, who took nearly a full year to pass 2017 tax reform–don’t walk in lockstep, so certain incumbents and many of the candidates in toss-up races (who need to win to create a Democratic majority) would be key votes to pass tax legislation. November’s election plays a big role in determining who that includes.

Toss-Up Races Crucial

In mid-August, political news and polling data aggregator RealClear Politics listed 46 Republican seats as either held by incumbents or considered safe in November’s election, with 45 Democrat seats in the same position. That left nine Senate races considered toss-ups–eight with Republican incumbents. Democrats would need to win five to control the Senate if Biden wins the presidency, since in that scenario, the tie-breaking Senate vote would be cast by Vice President Kamala Harris.

Here’s what we know about the Democrats in those nine races and what they’ve said about taxes. 

  • Arizona: Former astronaut Mark Kelly has led in most polls by a wide margin and outraised incumbent Martha McSally–who was appointed in 2018 to finish the term of Sen. John McCain. Kelly has criticized the 2017 tax reform legislation, saying it was written for “the wealthy and big corporations,” and specifically calls for investment in infrastructure.
  • Colorado: Former Gov. John Hickenlooper is challenging Sen. Cory Gardner. During Hickenlooper’s brief presidential campaign, he called for capital gains to be taxed at the same rate as ordinary income, similar to Biden’s proposal. Hickenlooper has called for a repeal of the 2017 tax cuts.
  • Georgia: Democrat John Ossoff is a 33-year-old challenger to Republican incumbent David Perdue in this traditionally red state (Georgia has voted Republican in the past six presidential elections). Ossoff has called for lower taxes for all but the wealthiest Americans, with no public stance on corporate rates.
  • Iowa: Democrat Theresa Greenfield, a real estate executive, faces first-term Sen. Joni Ernst. Greenfield called 2017 tax reform a “massive giveaway to huge corporations,” but provides few details on what tax provisions she would support.
  • Maine: Former Maine House Speaker Sara Gideon faces Republican incumbent Sen. Susan Collins. Gideon was harshly critical of 2017 tax reform legislation and has advocated clean energy initiatives.
  • Michigan: The only state on this list held by Democrats features incumbent Gary Peters against Republican challenger John James. In 2017, Peters opposed the tax reform legislation and said, “it is wildly irresponsible to pile on this debt to finance a tax break for the wealthiest people in the nation.” He was one of 42 Senators to sign a 2019 letter urging Treasury Secretary Steven Mnuchin not to cut capital gains taxes.
  • Montana: Popular two-term Gov. Steve Bullock is running against first-term Republican Sen. Steve Daines. Bullock was also candidate for president, and falls in line with most other Democrats in opposing the 2017 tax reform. However, Bullock doesn’t agree with the idea of “a wealth tax,” according to a July interview with Politico–although he didn’t specify whether that includes capital gains taxes. Like Biden, Bullock has called for the 28 percent corporate tax rate.
  • North Carolina: Former state Sen. Cal Cunningham is challenging incumbent Republican Thom Tillis. He has been largely silent on tax issues.
  • South Carolina: Democrat Jamie Harrison is challenging Sen. Lindsey Graham. Like Cunningham, Harrison hasn’t been vocal about taxes.

Swing-Vote Incumbents

A narrowly Democrat-controlled Senate would also include some ideologically moderate members. Two Democrats and an independent who caucuses with Democrats could be part of the group that Biden and the Democratic leadership would need to convince on key legislation.

  • Joe Manchin has represented West Virginia since 2010 and is seen as the most conservative Democrat in the Senate. Manchin voted against the 2017 tax reform plan, but did so while backing tax cuts, calling the bill “rushed” and citing the extra debt it created.
  • Kyrsten Sinema of Arizona is a self-professed “independent-minded” Democrat who supported some Trump appointees and famously gave a standing ovation to Trump’s mention of opportunity zones during Trump’s 2020 State of the Union address. As a member of the House in 2017, she voted against the tax reform legislation, but later voted to extend the tax cuts for individuals–meaning Republicans could see her as a friendly Democrat.
  • Angus King of Maine is an independent who caucuses with the Democrats. He voted against the 2017 tax reform, but his position toward the middle politically makes him a possible target for Republicans who want to moderate any tax–or other–legislation proposed by Democrats.

Changes Could Come

There’s still two months until Election Day and plenty can change. Biden and the Democrats are proposing major changes to the tax code that would have a significant effect on most Americans.

Next month, we’ll examine the details of what Biden and the Democrats proposals might mean for those involved in community development and affordable housing incentives. But it’s clear as we enter the home stretch that a Democratic sweep could involve some significant changes to tax law and some new faces in significant positions of power when considering those changes.