Would Increase Taxes on Individuals, on Capital Gains & at Death
On April 28, President Biden released his $2 trillion American Families Plan to expand federal spending on childcare, community college and paid leave programs. The plan, as outlined in a White House fact sheet, would be financed with a slew of new taxes and increased enforcement through the Internal Revenue Service (IRS).
A brief outline of the labor and education proposals include two years of free community college, an expansion of Pell Grant funding and other educational programs. It is unclear how these initiatives could help with the construction industry’s workforce development needs.
The plan proposes a national federal plaid leave and medical leave program for Americans. The program is phased in over the next 10 years and will provide up to 12 weeks of partial wage replacement for family and medical leave. The program, as proposed, is fully funded by the federal government and would be run through the Social Security Administration (SSA) with eligible workers receiving wage replacement directly from SSA. As proposed at this time, there would be no cost sharing or funding by individual employees or employers. However, this is just an initial proposal and AGC will continue to monitor it throughout the legislative process where it could change greatly.
Increase the Top Individual Tax Rate from 37 percent to 39.6 percent
The Tax Cuts and Jobs Act, passed in 2017, lowered income tax rates across the board, including a reduction in the top rate from 39.6 percent to 37 percent for individuals and families (currently) earning more than $523,600 or $628,300, respectively. The fact sheet proposes to “[restore] the top tax bracket to what it was before the 2017 law,” which was 39.6 percent for incomes over $400,000 for individuals and $450,000 for joint filers (adjusted for inflation since 2013).
Increase the Top Capital Gains Tax Rate from 23.8 percent to 43.4 percent
Currently, the top tax rate for long-term capital gains is 20 percent for individuals and joint filers earning more than $445,850 and $501,600, respectively. Separately, the Affordable Care Act created the Net Investment Income Tax (NIIT), which was a 3.8 percent “surtax” applied to capital gains (amongst other forms of income) above $200,000 and $250,000 for individuals and joint filers, respectively, for a combined top rate of 23.8 percent. The American Families Plan would apply the (proposed) top income tax rate of 39.6 to capital gains for “households” earning more than $1 million. When combined with the NIIT, this would push the top tax rate on capital gains income to 43.4 percent, the highest rate since the 1920’s.
Tax Capital Gains at Death
Under current legislation, when someone dies and passes property on to an heir, the “basis” for calculating capital gains taxes for the person/entity receiving the property is “stepped-up” to the value of that property at the time of death. This has existed in the tax code since its inception in 1913, with the exception of one year, in 2010, when the estate tax was temporarily repealed.
The American Families Plan proposes to both end “stepped-up basis” and tax property (at the proposed 43.4 percent tax rate) for capital gains over $1 million ($2 million for couples) at the time of death, regardless of whether the property is sold or not. While the fact sheet says that the proposal “will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business” previous attempts to shield family-owned businesses and farms from the estate tax, such as the Qualified Family Owned Business Interest (QFOBI) deduction passed in 1997, have proven to be both extremely complicated and ineffective.
Expand the Net Investment Income Tax (NIIT) to All Forms of Income
The proposal “would apply the [NIIT] taxes consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.” While there is not a lot of detail, we believe this will be similar to a proposal from the Obama Administration to apply the 3.8 percent NIIT tax to additional forms of income, including income from employee/owners of S Corporations and Limited Liability Corporations (LLCs) who “materially participate” in the business.
Increased Tax Enforcement
The proposal would significantly increase the enforcement budget of the Internal Revenue Service (IRS), with the goal of raising an additional $700 billion over the next 10 years. One of the ways they propose collecting this additional revenue is by requiring financial institutions “to report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are.” It is unclear what this proposal would specifically entail, but the revenue projections from better enforcement are extremely suspect.
The proposal also includes several revenue proposals that could impact construction firms. The President proposes to make permanent a provision of the Tax Cuts and Jobs Act that would limit the ability of the owners of pass-through businesses to claim net operating losses that is currently set to expire in 2026. It would also repeal like-kind exchanges for real estate with capital gains over $500,000, and tax “carried interest” at ordinary income tax rates.
Altogether, these proposals would raise approximately $1.7 trillion in revenue. Much additional information will be needed to fully assess the impact of these proposals on construction firms, which we expect will be forthcoming in the near future.