Episode 6 | Tax Law Outlook Under the Biden Administration - A new presidential administration and a shift in control of the Senate means changes in the legal landscape as well. In Part 3 of our series on the anticipated changes due to the new look in Washington, Frantz Ward Partner Matt Kadish provides a civics lesson and explains why it's particularly hard to read the tea leaves on tax issues this year. But he has some predictions on what changes we are likely to see, when they'll occur, and the variables that will affect the outcome.
Podcast First Aired: March 30, 2021
Guest & Host
Chris Koehler: Welcome back to Frantz Ward's podcast series, Shoveling Smoke. This is the third installment of our series on the impact of the changing of the guard in Washington, DC. I'm Chris Koehler, a partner at Frantz Ward, and I'm hosting today's discussion with my colleague, Matt Kadish. Welcome, Matt.
Matt Kadish: Thanks, Chris. It's good to be here.
Chris Koehler: We're now over two months into the new presidential administration and life with a newly elected Congress. If you listen to parts one and two of this three-part series, we anticipate, and in fact are already seeing, stark changes in employment and healthcare laws as a result of the changes in Washington. Today, we're going to dive into the exciting world of tax laws and discuss what is on the horizon in that area, although I think you're going to learn that it will be very difficult to predict. Since I'm the furthest thing from an expert on tax issues, we're fortunate to have Matt here with us. Importantly, Matt comes at this issue from several different angles. He's known nationally for his tax law expertise and practices in a wide range of tax-related areas, including estate planning, business succession, foreign bank account reporting, and entity taxation. As a result, he regularly represents clients before the IRS and the U.S. Tax Court and is a frequent lecturer on these topics. More interesting though, perhaps, is that, in addition to counseling clients on tax laws, Matt is also on the front lines of tax legislation and knows how the sausage gets made, for better or for worse. He is the CEO of the Small Business Council of America, which is the voice of privately owned businesses in DC and has served for many years as its Vice President of Legislation, which often involves lobbying. Through that work. He actually testified in Congress at the invitation of the U.S. Senate Finance Committee on tax relief for small businesses. Matt, what was it like to testify before the Senate?
Matt Kadish: It was my Supreme Court moment. Basically, you sit in front of a... It feels like almost a stark chamber of these famous people you've seen on the news looking down on you from high back chairs. And it was absolutely extraordinary. It was a real honor. I got to see myself on C-SPAN too.
Chris Koehler: Do you still have it recorded somewhere at home?
Matt Kadish: Oh, absolutely. And getting that recorded was really difficult because they've got sea sense set up almost as if nobody ever wants to watch it and I can't figure out why.
Chris Koehler: Well, I think that leads into what people don't want to talk about today, which is the outlook for 2021. With employment and healthcare laws, it was relatively easy to predict the impact of the new administration. But from our discussions leading up to today, it appears that's not so much the case with tax laws. Why is that?
Matt Kadish: Well, employment and health law is much more administratively driven. And far too much of the legislative area feels like a bad flashback to high school civics. I used to have a teacher who bored me to death. I used to sit and do anything except pay attention. And now the universe is having its revenge on me and in my main career hobby, I'm living civics. So as you'll remember, you have the legislative branch, you have the judicial branch and you have the executive branch. The executive branch, under the President, controls an enormous amount of power through the various agencies, the Department of Labor, Health and Human Services, all of which have regulatory and enforcement ability. As long as the legislation gives them that leeway, the president can operate. In the tax area, the IRS, which is the primary regulatory agency and administrative agency in that area, is much more constrained to operate within laws. When they want to change things, it has to run through Congress first and getting Congress to agree on anything these days, as we'll see, is a bit of a challenge.
Chris Koehler: So it sounds like things are particularly difficult given where we are today. Where are we today?
Matt Kadish: Well, that's a very, very well phrased question, intentionally or otherwise. The we is the problem. People like to point to Congress and blame them. Let's go back to this bad memory civics lesson. We live under a representative democracy. We like to think that they ignore us, but the problem is it's much worse than that. They pay too much attention to us. They are hyper sensitively dysfunctionally representative. When they get the sense that somebody has moved in their chair, they're leaning forward to figure out why. So whatever the perception in Washington is of what the people want, what we want, they try to do it because they want to stay in power. And that's the way the Constitution designed it. The problem is that their perception can be a bit skewed. And if you take a mirror and hold it up to the American public, we are a mess right now. We don't get along very well. We're not acting very maturely. We're not acting very rationally. And we seem to want to live through a reality TV show more than moving forward and being adults. And, wouldn't you know it, Congress reflects that.
Chris Koehler: So what's going on in the House and the Senate where we stand since January, since last November, that will affect whether you can predict the tea leaves on tax legislation?
Matt Kadish: Well, there are things going on that are numbers based and there are things that are going on that are sociology based. The things that are going on that are, and they're linked to each other. Number based, both the House and the Senate, as probably everybody tuning into this knows, are controlled by the Democrats right now, but they're razor razor thin. The House has the narrowest Democratic majority in recent memory. And they're at serious historical risk of losing the majority in 2022 because the President's party usually loses seats. Biden was actually restricted in how many Cabinet members he could pull from existing House members because they could actually have lost the House majority by doing that. So the House majority is very narrow, and if people disagree on things, things don't pass the House. Remember civics. It passes the House, the Senate and the President, or it's not a law. I'm just a bill sitting on Capitol Hill. The Senate is 50/50. That's about as close as you can get. That's as a result, you'll remember, in January of the historic runoff elections in Georgia, where both of the Democratic candidates won 50/50, but there are two key moderate Democrats from Republican leaning states. Manchin in West Virginia and Sinema in Arizona, who represent their states, as you'd expect. Much like their constituencies, they don't go very far in the liberal direction. So that's the numbers. That's the numbers. And so nothing passes if they can't get enough votes. On the House side, the House has been passing a bevy of surprisingly progressive liberal bills and sending them to the Senate. They're passing things on voting rights. They're passing things on immigration. They're passing things on labor. They send them to the Senate where the Senate has to decide whether they're going to move them forward. The Senate is subject to the filibuster rules. Generally speaking, they need to get 60 votes to pass something unless it's under an obscure set of rules called budget reconciliation, which I'll talk about in a moment. There's enormous pressure right now that you'll probably be reading about that is the biggest thing going on is whether or not the filibuster is going to get restricted or cut or eliminated. And that's going to have a very big impact in everything we're talking about.
Chris Koehler: One, do you want to talk about reconciliation now or later on as we get to specific legislation?
Matt Kadish: Well, let's talk about the filibuster first.
Chris Koehler: Okay.
Matt Kadish: So if the House sends a bill in and they don't get 60 votes, then the minority party, the Republicans currently, can object, they can filibuster and the bill can't pass unless it can get past that. In order to pass bills, the Senate is allowed to vote on two different bills. Well, three technically, but practically speaking, two bills per year under reconciliation. The COVID relief bill that just passed, which I believe we've also talked about in some other podcasts, which I'd recommend because our COVID people are really great, it passed by way of reconciliation because there, again, they can't get 60 votes on almost anything right now. And that was deemed to be the top emergency in front of the country. And so Biden and the Democrats put that on the plate, got that through using the bulk of their initial political capital. The second and probably final reconciliation bill for 2021 will likely be coming down the road in the fall. We don't have an exact date, we don't even have a bill. But under reconciliation, they can pass that with 50 votes plus the tiebreaker from Vice President Harris. There are limitations on what they can do, but under budget reconciliation, they can get it through on 50 plus one votes. And so that's what we're looking at.
Chris Koehler: So we're talking about... These are forces within Congress that will affect tax legislation and what it looks like and when it's passed. Are there external forces, the economy, for instance, that will affect when and what it looks like?
Matt Kadish: I think the two biggest, and you can get different opinions from different people, but here I am. Here's mine. There are two primary factors, I think, that will tell us what's going to be in the bill in the fall, which is going to be a heavily tax-oriented bill. The first one is how things go with the filibuster. The filibuster, which is going on right now, is driven, in the immediate sense, by the voting rights issues that the Democrats are framing, rightly or wrongly, as an attempt to prevent the repeal or worse of the civil rights access to voting because they feel that many of the Republican state legislatures are trying to inhibit the vote in their states to try to undo the type of voting that happened in Georgia and got them knocked out there. And the Democrats want to prevent that on a federal level and preempt the state's ability to limit who can vote. Former Vice President Gore came out recently and said that every American should be automatically registered to vote. And you can imagine how that plays with the people that are trying to inhibit the vote. This is an extremely contentious issue and many of the Democrats feel that if they allow this to go forward and they don't break through the filibuster that would otherwise block that, that the Republicans may be able to do their own version of steal the vote and do worse than gerrymandering and lock themselves into power by restricting which voters are getting through. If the Democrats ram through voting rights legislation over the objections of the Republicans and the filibuster, the well is going to be greatly poisoned and they're going to each other much less than they already do, if they-
Chris Koehler: Is that possible?
Matt Kadish: Oh, well, that's a very good question. People think that relations in Congress are as bad as they've been historically. There have not been any duels recently. And sometime, if we have more time, I'll go through some of the history of the violence that's happened on the floor and in the offices in Congress because things got that bad, especially leading to the Civil War. It's a very interesting little history lesson there. But if things get worse, the Democrats are going to really tack left. Right now, they're tacking central left, but if they figures the heck with it, we're not going to get along with these people anyway, then they're really going to lean into it. The other thing to look at is the economy. If the economy starts to improve, and there's a lot of people that think that the $1,400 COVID stimulus is going to perhaps heat or super heat the economy, then the Democrats will feel emboldened to raise taxes more because it won't cause people to lose their jobs. If the economy goes down, say if we have a third wave of COVID like they're having in Europe right now, I just noticed that France is under lockdown in significant parts of the country because they lost the battle there because they eased the restrictions too quickly, then it's going to be much harder for the Democrats to do a tax increase when people are losing their jobs.
Chris Koehler: So politics and the economy make it hard to predict with any certainty what kind of tax legislation is coming down to the pike. Do you have any general ideas of at least the topics that are going to be under consideration and then a soft prediction of where things might go? [inaudible]
Matt Kadish: I absolutely do. And before I run through a couple of those really quick, if you're tuning in here to find out what's going on in taxes, I'll give you my laundry list of what I think will happen, but you can't ignore all these other issues because everything's interrelated. We're all in one giant fish tank, and if something else is polluting the fish tank, it changes the optics. It changes the ecosystem and things may or may not pass or change just because of that. So here are my top feared targets of things that are likely to be in the tax bill, which will be predominantly tax increases. There's not going to be a lot of tax decreases for our clients that I see coming down the pike. There will be some, but I don't think that's really the primary focus right now. The top target, politically speaking, of Biden and the Democrats are who they see as the primary beneficiaries of the 2017 Tax Cuts and Jobs Act of '17, which were big corporations and wealthy individuals. They defined wealthy individuals on the campaign path as individuals making more than $400,000 a year. These things can change, but that's the talking point. For those individuals, ordinary income rates could go back to the pre-'17 rates. That would mean 35% now, max, up to 39.6% max. Capital gains rates could go up from 20% all the way up to the 39.6. That would be a doubling of capital gains rates. They initially said that that would only be for individuals making over a million dollars, but if they hate each other, watch them tack left. It'll go down to $400,000. We don't know. It's very fluid. On the corporate side, C corporations currently pay tax at a very low 21% historically, which the '17 Act lowered for international competitiveness purposes. The Democrats think that's a giveaway to big corporate America. They want that back at 28%. That's a very large percentage increase. Section 199A, which was enacted to try to help our small business clients, S-CORPs, Partnerships, LLCs, flow throughs, and sole proprietorships with a 20% deduction to try to bring parity with that lower C Corp rate. They very much want to get rid of that. They say that may only be for earner that are earning over $400,000, but there's forces that want to do worse than that. The other big area to watch for is the estate and gift tax area. There's a lot of talk about the unified credit and the rates in the estate and gift tax, which I'll get to in a second. But before we get to that, the biggest, biggest issue by far here is that Biden wants to repeal the step-up in basis. And for those people who aren't tax-oriented, when you sell an asset, you pay tax on the amount you realize minus what you paid for it, the basis. It's called the adjusted basis. So if you didn't have any gain, you don't pay any tax. If you have something, if you have stock, for example, that you bought for a hundred and you sell it for $1,000, 900 of gain. Now die with that stock and it gets a basis step-up on your date of death and your heirs take it at a $1,000 basis. No gain. It erases the gain. It's like a gain eraser. Biden wants to get rid of the gain eraser. And there are policy reasons for doing that, but that, in the view of the Small Business Council and many others, is an enormous tax increase on small businesses and regular people. It affects everybody, not just the wealthy, and is a terrible, terrible idea. If they want to raise money, they should do it from the people they're trying to raise money from. And I just don't think they understand that. So we're going to be fighting that. Watch for that and come join us in that crusade. On the unified credit and rates, the estate and gift tax is a transfer tax, an excise tax on the transfer of wealth from this generation to the next, generally speaking. Currently, an individual can transfer up to $11.7 million times two, if you're married and you plan properly. That allows over $23 million to pass, less prior taxable gifts, life and death combined. That's due to sunset and get cut in half in '16. Biden and the Democrats want to reduce that. It might be to the range of $3.5 to 5 million, depending on how well people are getting along. That could be an enormous amount of opportunity to shift to the next generation that's lost. And a lot of people are doing planning now to try to capture that credit before it's taken away. There are possible risks of it being retroactive. And you have to talk to your advisors to see how to plan around that and what to do. There's also the possibility that rates may go up. They're currently 40%. They could go up to 50%, especially if there's a pendulum shift on not getting along. The millionaires, the merely rich, want unified credit. The billionaires want lower rates. And they'll all be lobbying like crazy, and our clients want all of the above and they really want the basis step-up once they understand it. And we're very worried about what the effective date is. We're not sure. Most likely, it's going to be January 1 of 2022. It could be the effective date. It could be retroactive. Your results may vary. And as we get closer to the telescope, we'll be able to see more clearly.
Chris Koehler: So take a breath, Matt. That was a lot. It sounds like some of the things that you're suggesting may happen won't just affect the super rich, as you might have anticipated coming from a new Democratic-controlled Congress. But they might affect, as you said, regular people.
Matt Kadish: Any of these bills that pass. If you have a normal bill that passes, you're going to find that it's somewhere between 1,000 and 1500 pages of actual legislative text. Just think of all the wonderful mischief that can get tucked away in that bill that didn't get read at the last minute by the congressmen that are voting for it. That's something will affect everybody. And there's an old saying that legislation is the price paid by those who aren't vigilant. So I encourage everybody to try to get as involved and informed as they possibly can. They can do it through America's most awesome small business lobbying group, sbca.net. They can do it through whatever they like to do, but get involved. Make your voice heard because they're listening.
Chris Koehler: And, again, timeframe, you're thinking sometime this fall. 2021.
Matt Kadish: That's our best guess. Yes. I mean, conventional wisdom is that reconciliation takes a long time. But, again, your results may vary. Reconciliation takes a long time. How long did it take them to pass COVID relief? Biden got into office in late January. COVID reliefs already passed and the checks are going out. There's an old joke, Chris. How do you get a thousand hippopotami on the floor of Congress? And the answer is, by unanimous consent. If they say that down is up, if they vote unanimously, it is effective now. Alice in Wonderland Through the Looking Glass was actually written about the British Parliament because of how bizarre law making is. But it matters and you have to make your voice heard and, yeah, let somebody else pay the taxes because you made noise. Someone's going to pay them.
Chris Koehler: So our goal for each podcast, Matt, is to give listeners a couple concrete takeaways. I think I know where you're going to go, but what do you have for our people today?
Matt Kadish: Get as informed as you can. Plan now.
Chris Koehler: Okay. Thanks, Matt. As always, you take what many believe is a dry topic and make it accessible, understandable and even entertaining. So, to recap, most importantly, get involved now, but talk to your advisors and plan ahead. You can start planning now for something that's going to happen two or three years from now. Start laying the groundwork for that. So, again, thanks, Matt. That's it for this episode. We appreciate your joining us and we look forward to our next discussion.
Matt Kadish: Thanks, Chris.
Speaker 3: Shoveling Smoke is a production of Evergreen Podcasts. Our producer and audio engineer is Sean Rule-Hoffman. Thanks for listening.