By Allen J. Littman, J.D., LL.M., CPA
This blog was written on April 12, 2021 and has been back-posted
This is the first in a series of blogs about key legislation at the end of the Trump Administration through the current time of the Biden Administration. It will also cover related developments in tax legislation, particularly international tax. In today’s blog, I will briefly outline and discuss the following major legislation:
- The Consolidated Appropriations Act, 2021 (the “Act”), which became Public Law 116-260 when signed by President Trump on December 27, 2020;
- The American Rescue Plan (the “Rescue Plan”), which became Public Law 117-2 when signed by President Biden on March 11, 2021; and
- The American Jobs Plan and the Made in America Tax Plan, published on March 31, 2021, which is President Biden’s name for the proposed legislation to build infrastructure, provide U.S. jobs, and fund the legislation.
The Consolidated Appropriations Act, 2021
The Consolidated Appropriations Act, 2021 was a bipartisan compromise bill that included $1.4 trillion in “regular” budgetary provisions for the fiscal year ending September 30, 2021, and $900 billion in special COVID and other economic provisions. (All stated amounts of these bills are over a 10-year budget window unless I state otherwise.) The Act included a number of extensions or repetitions of provisions in earlier COVID relief bills, including additional loans to business under the PPP, expansion of unemployment benefits, additional funds for virus testing and vaccination programs, and immediate direct stimulus payments to individual taxpayers of $600, beginning to phase out at AGI in 2020 of $75,000. The Act also extended to 2021 the above the line charitable deduction of $300 (that was in the CARES ACT for 2020), as well as extending most of the regular group of extenders through 2021 (or in some cases, through 2025). The look-though treatment of payments between related CFCs under subpart F, which was extended through 2025, was the only international provision in the Act. The net revenue loss from the Act, according to the Joint Committee on Taxation, is $328 billion, of which $164 billion relates to direct stimulus payments and $104 billion relates to extenders.
The American Rescue Plan
Then-President-Elect Biden described the Act as a “down-payment” on future relief and stimulus. He soon made good on that promise with the $1.9 trillion American Rescue Plan. The Rescue Plan consists primarily of supplemental spending relating to support for schools, families, health care, small businesses, state and local governments and tribes, COVID vaccinations, testing, treatment and prevention, and scientific research and development. However, the Rescue Plan also provided for net tax decreases of $584 billion, including direct stimulus payments to individuals of $411 billion and increases of $109 billion to the child tax credit. There were a few tax raising provisions, but these were small relative to the size of this massive legislation. Because the Republicans in Congress refused to go along with this bill, the Democrats used the reconciliation rules. These procedures permit a majority party to avoid a Senate filibuster (i.e., no requirement of 60 votes in the Senate), but restrict the bill to Federal government spending and taxes. Thus, the Democrats were forced to drop their $15 per hour minimum wage proposal from the bill.
The sole international tax provision in the Rescue Plan is the repeal of the so-called worldwide interest allocation rules, which was originally enacted in 2004 to increase the foreign tax credits of large U.S.-based multinational corporations, the effective date of which had been delayed several times. It was scheduled to be effective beginning in 2021. The delay and repeal of this particular provision may mark a turning point at which the trend of improving the international tax situation for U.S. multinationals stalled, or perhaps reversed. In 2004, the provision was the darling of the multinationals.
The American Jobs Plan and the Made in America Tax Plan
The American Jobs Plan (the “Jobs Plan”) is, broadly speaking, a long-term plan to address American infrastructure, and to set the stage for long-term competition with China. It represents projected spending of $2.3 trillion over a span of many years, perhaps as much as 20 years for the longer-term infrastructure projects. The spending will be funded by the Made in America Tax Plan (the “Tax Plan”), which, according to the White House, would fully pay for the Jobs Plan within 15 years.
According to the White House, the Jobs Plan consists of the following groups of spending projects:
- Fixes and upgrades to highways, bridges, ports, airports and transit centers;
- Fixes and upgrades to water infrastructure, electric grids, and high-speed broadband;
- Modernization of homes, commercial buildings, schools and federal buildings;
- Creating caregiving jobs and raising wages and benefits for home care workers;
- Revitalizing American manufacturing and investing in innovation; and
- Creating good-paying union jobs and training programs for future jobs.
In order to fund these large project areas, the Tax Plan includes the following changes to corporate taxes, many in the international area:
- Increase in the general corporate tax rate from 21% to 28%;
- Increase in the corporate tax rate on GILTI from 10.5% to 21%;
- Calculation of GILTI on a country-by-country basis instead of on an overall taxpayer basis, including foreign tax credits, and elimination of the annual exclusion of 10% of foreign tangible assets;
- Seeking a global agreement through the OECD on a strong minimum tax on corporations that would also deny deductions to foreign-controlled corporations on payments to entities in countries without such a minimum tax;
- Repeal or reform of the BEAT;
- Enactment of stronger anti-inversion provisions;
- Elimination of the deduction for FDII;
- Imposition of a 15% minimum tax on corporate book income;
- Elimination of (all) tax preferences for fossil fuels;
- Denying companies expense deductions for “offshoring” jobs and providing a credit for expenses for “onshoring” jobs;
- Ramping up of IRS enforcement in the corporate area.
The foregoing is a long list, but it is not clear that all of these tax proposals would be sufficient to fund the Jobs Plan under the congressional reconciliation procedures. It is also not clear that the Democrats will have the necessary cohesiveness to push this legislation through under reconciliation – currently, they can afford no defections in the Senate. The details of these tax proposals, including revenue effects, need to be fleshed out.
The process of legislation for this massive bill is moving ahead. In early April, the Senate Democrats received Senate parliamentarian approval to legislate multiple bills in 2021 through the reconciliation procedures. On April 5, 2021, Ron Wyden, the Chairman of the Senate Committee on Finance, issued a framework for the Tax Plan, entitled “Overhauling International Taxation,” which discussed various alternatives for many of these tax proposals and solicited comments from the public. Treasury Secretary Yellen has indicated the Biden Administration’s support for the OECD BEPS 2.0 project, which the Trump Administration had effectively rejected.
Most recently, on April 9, 2021, the President proposed a $1.52 trillion budget for the fiscal year beginning on October 1, 2021, and released parts of that budget. Typically, an incoming President’s first budget is not formally completed in detail until April or May of his first year in office. To accompany the Administration’s detailed budget, the Treasury Department releases the “General Explanations of the Administration’s Revenue Proposals” which provides an explanation of the Administration’s revenue proposals, and the Treasury’s revenue estimates of those proposals.
Future installments of this blog will continue to track the progress (or lack of progress) of the Jobs Plan and Tax Plans, including the ensuing political discussion and key OECD events. I will also discuss the pros and cons of the tax legislation proposals as details are made available.