With Manchin’s current “no” vote, the Democratic caucus in the Senate does not have enough votes to pass the Build Back Better Act, assuming no Republican support.
As we have previously mentioned, the tax landscape is dynamic and can change based on the votes of just one or two individuals in Congress. And that is exactly what just happened, for now. On December 19, Senator Joe Manchin announced his intent to vote against the current version of President Joe Biden’s Build Back Better Act and its $1.5 trillion package of proposed tax increases. In announcing his decision, Manchin cited his concerns with how the cost of the bill was calculated and how long-term spending programs were being created while only funding these programs for a shorter time horizon. In effect, Manchin seems to be concerned by provisions such as the extension of the child tax credit, which while only extended through 2022 in the Build Back Better Act, was financed over a 10 year window, and would thus create a political expectation that the provision would be extended annually, like the “extenders” that had been renewed for many years.
With Manchin’s current “no” vote, the Democratic caucus in the Senate does not have enough votes to pass the Build Back Better Act, assuming no Republican support. In order to gain Manchin’s support, Democrats will likely have to rework energy incentives, include SALT cap relief, and cut some of the larger spending provisions in the bill, such as paid leave, expansion of Medicaid and the refundability of the child tax credit. So, as 2021 comes to an end, the massive changes to the tax code envisioned in October and November―and discussed extensively in our recent 2021 Year-End Tax Planning Guide―are almost certainly dead this year.
As Democrats revise and reshape the Build Back Better agenda, it will likely contain scaled-back versions of the original proposals with modest tax increases to fund them. Congress is unlikely to “reinvent the wheel,” so provisions we discussed this fall in this Alert and our 2021 Year-End Tax Planning Guide will continue to be considered in Washington as Congress regroups and strategizes in the coming weeks.
Thus, we expect continued negotiation with future debates to consider universal pre-K, increases in IRS enforcement, modest child tax credit expansions, corporate minimum taxes, climate change tax credits and net investment income tax increases. To a lesser extent, we also expect SALT deduction changes, high-income surtaxes and electric vehicle credits to remain on the table.
The reasoning for our expectations is two-fold. First, both Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi issued “Dear Colleague” letters on December 20, 2021, promising to push to get the bill enacted in 2022. House and Senate offices send “Dear Colleague” letters to their colleagues in other state offices to ask for their support or opposition to a particular issue. Second, while we have not yet seen much evidence of the Democrats working together in 2021, the looming 2022 midterm elections provide good reason for them to work together in 2022 to push legislation through. With the Republicans currently projected to take the House of Representatives next fall, Democrats need a signature piece of passed legislation to campaign on, which will likely require tax increases to fund the projected spending. Once Congress returns from the holiday break, we expect to gain greater clarity on potential legislation in January.
As we recommended in our 2021 Year-End Tax Planning Guide, the best course of action is generally to plan (and act) based on current law―and not solely speculate on future legislation but revise your plans as the need arises. So, for most taxpayers this December, the tried and true strategies of deferring income and accelerating deductions will prove beneficial. There are also plenty of estate planning opportunities available currently to maximize usage of the historically high unified credits that may be in jeopardy. However, with at least incremental tax legislation possible in 2022, and with potentially higher tax rates and the very unlikely possibility of retroactive application, there may be opportunities to benefit from the acceleration of income and deferral of deductions. Needless to say, TAG will continue to monitor developments as legislation moves through Congress, so continue to stay tuned, stay flexible and stay in close contact with us, develop plans as appropriate and act as necessary. As we like to say when monitoring potential legislation: Panic? No; Predict? Maybe; Plan? Absolutely!
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If you would like more information about this topic or your own unique situation, please contact John I. Frederick, Michael A. Gillen, Steven M. Packer, or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.