Tier One: Tax Law Changes Could Finally Be Here
In recent weeks, rumors abounded that Senate Democrats were attempting one last go to draft a reconciliation bill based on what was formerly known as the Build Back Better Act. While the House has passed a version of the bill, everyone knows that any chance of passage in the Senate rests with two Senators – Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, and that any bill would be significantly smaller in scope than the House version.
Last week we saw the first real evidence that this process was ongoing and starting to lead to actual progress and heading towards a potential vote. In fact, Democrats in the Senate now believe this process will dominate their summer with the goal of passing a bill well before November’s midterm elections.
So let’s recap what we know.
First, it appears that there are three distinct areas being negotiated by Senate Majority Leader Chuck Schumer and his caucus (though really Manchin and Sinema).
Lowering prescription drug costs;
Climate and energy provisions; and
Limited tax reform.
Second, it appears that Schumer and Manchin are looking to raise $1 trillion in new revenue with half being allocated towards deficit reduction and half to pay for provisions in any bill. Given the original Build Back Better plan included a $555 billion energy package and Democrats also want $200 billion to extend Affordable Care Act subsidies – something will have to give.
Prescription Drug Benefits
The first concrete breakthrough in the negotiations came with regards to the first bullet point above, with Schumer submitting language to the Senate Parliamentarian around the agreed-upon prescription drug plan. This plan would allow Medicare to negotiate prices with pharmaceutical companies starting in 2023 and cap out-of-pocket costs for Medicare patients at $2,000 per year, among other provisions (including an “inflation rebate” where drug companies will refund consumers if they raise prices above inflation).
The Congressional Budget Office estimates this plan would cut the deficit by $297 billion over 10 years and the plan has the approval of all 50 Democrats in the Senate. While the AARP has come out in support of the plan, both the pharma lobby and Senate Republicans have voiced their opposition.
Energy and Climate
The other two portions of the bill are still being negotiated are in greater flux, but we do have some insight into the direction of talks.
Given his home state’s reliance on the coal industry, it’s no surprise that Manchin would take particular interest in any bill’s energy provisions. There has been some reporting that Manchin is aiming at a total energy package of approximately $300 billion and that any such package would not include previously proposed tax credits for electric vehicles. Instead, the bill would include tax credits to expand the development of clean energy like wind, solar and battery storage.
What You Came For – Tax Talk!
The tax reform portion of any bill also remains in flux, though we have some glimmers of what might be coming. For example, at the end of last week, news broke of a proposed tax on high earners that would be earmarked to bolster Medicare. Specifically, a 3.8% surtax would be charged to income earned from owning a piece of a pass-through business, such as a medical or legal practice. The new proposal would apply only to people earning more than $400,000 a year, and joint filers, trusts and estates bringing in more than $500,000. The proposal is expected to generate $203 billion over a decade and keep the Medicare trust fund solvent through 2031.
It is also worth noting that while Manchin has largely been the focus of the energy and health negotiations, Sinema has shown a keen interest in any tax provisions, and therefore is likely to play a larger role in any negotiations on these issues.
Reading the tea leaves, what does the tax portion of the bill potentially look like? Given the greatly reduced top line number under discussion ($1 trillion versus prior versions at $2.2 and $1.5 trillion), there will probably be less changes to the tax code than originally thought.
Due to Sinema’s opposition to raising taxes on the richest Americans and corporations, the idea of rolling back Trump-era tax cuts has been abandoned by Democrats. Most believe that the core of the tax portion will be corporate and international provisions raising roughly $800 billion. These include provisions like a global minimum tax intended to cut down on overseas profit-shifting, with other smaller provisions to make up the difference.
The much-discussed surtax on multimillionaires remains very much in flux. The White House and Sinema had previously negotiated a plan to levy a 5% surtax on individual annual incomes above $10 million and extra 3% on those earning $25 million or more. That would raise roughly $228 billion and affect 21,000 US households (or 0.02% of all taxpayers). However, the lower revenue cap requested by Manchin means the surtax might not be part of a final bill as the other tax provisions as well as revenue from enhanced IRS enforcement could generate the $1 trillion amount without such a surtax.
This Is Just Round One
While this round of tax reform is coming in to view, and Republicans likely to take over the House come January 2023, there is a temptation to think we are all done with tax conversations for the foreseeable future. That would be wrong.
Current provisions of the tax law, including many affecting estate taxation, are set to expire at the end of 2025. This means we are likely to see another major tax debate in the not too distant future. Given the volatile state of our electoral politics, it is impossible to say who will be in charge to write the next set of tax rules.
Therefore, it is important to consider current tax laws and related sunset provisions and plan accordingly. If you have questions on how using life insurance will be impacted by any of the proposed tax changes, reach out to us today at www.lifeinsurancestrategiesgroup.com
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.