Earlier this year, President Biden’s administration released an FY2024 budget proposal, an annual document sent to Congress outlining a long list of recommendations on how the federal government will generate and spend revenue in the coming fiscal year.
The 182-page proposal includes the President’s priorities, detailed spending requests from each federal agency, revenues, and a litany of other information.
But the most important thing to remember—it’s just a proposal.
In an era of hyper-partisan government, where a Democratic President faces a Republican-led House of Representatives and a moderate Senate, the Biden budget was panned as “dead on arrival” by conservatives.
But the key takeaway for businesses and analysts isn’t the budget’s efficacy, it’s the message. Even though it may never pass Congress, the budget forecasts the President’s priorities and the tax and regulatory environment that businesses can expect from the Biden administration and potentially future Democratic administrations.
Below are some of the key messages that the Biden administration sent in this year’s budget.
Businesses will drive new tax revenue
The Biden budget proposes new spending that is largely paid for by increases in taxes to businesses. The rate hikes—significant to businesses of any size—are framed in the context of tax rates before the Tax Cuts and Jobs Act, which were much higher at the time and slashed when the 2017 bill passed.
The headlines are notable for corporations of any size.
- The corporate tax rate becomes a flat 28 percent
A major increase in corporate tax bills that the administration touts as an uncomplicated mechanism for raising revenues. It would keep half of the tax cut that was passed in 2017 and is one of the main components of paying for new investments in the tax plan.
- Stock buybacks and corporate distributions targeted
The proposal includes raising the tax on domestic, publicly traded corporations to four percent, up from one percent. The current one percent tax does seemingly little to influence buybacks, which hit $1.2 trillion in the last fiscal year.It also closes a loophole in corporate distributions, which companies have found ways to limit being taxed. The proposal taxes such distributions in the same manner as if they were dividends, thus increasing overall revenues.
- Loopholes closed
Many businesses avoid taxes by reorganizing their work and splitting certain pieces of business away from the main organization to shelter themselves from higher tax rates. The Biden administration proposal tamps down corporate flexibility on moving assets from one corporation to another, thereby raising revenues and forcing more of the money to be taxed at the increased rate.
A global approach to taxation
Foreign earnings did not escape the radar of the Biden administration’s proposal, which were used as a foil in many proposals to show that they would be costing foreigners, as opposed to Americans and American companies.
The plan would raise the global minimum tax, limit deductions for non-controlled foreign corporations, reform what incomes are exempt, and limit the ability of U.S.-based corporations to move abroad, among other measures.
It is important to note that many of these same measures were included in the administration’s FY 2022 proposed budget, which was not implemented. This reinforces that although these foreign taxation proposals are again unlikely to become law in the United States, international companies should be wary that they are in a more aggressive tax environment under a Biden presidency.
Targeting fossil fuels
It’s clear that climate is one of the Biden administration’s highest priorities, and the tax plan doubles down on that by targeting oil and gas producers specifically. It removes the enhanced oil recovery (EOR) tax credit, which allowed companies to claim a 15 percent credit for certain oil credits.
It would repeal the marginal well credit, which incentivizes companies to tap cruise oil supplies using wells. More significantly, it would do away with expensing for domestic intangible drilling costs (IDCs), deductions for tertiary injectants, loss limitations and percentage depletion for oil and gas wells.
Though unlikely, if passed the measures would mean a significant impact to how oil and gas companies structure their taxes, and also, likely to consumers of fossil fuel products.
Increasing taxes for high earners
Putting businesses themselves aside, many of the people with stakes in the businesses would also see their tax figures go up under the Biden proposal. Anyone who makes over $400,000 annually would see their investment income taxed at five percent, up from 3.8 percent, and also see their Medicare tax rate increase to five percent.
One of the most notable pieces of the plan would impose a “minimum tax” on individuals with wealth that totals over $100 million. The new tax would mean that anyone that fell into that category would pay a minimum 25 percent tax on their total income.
Similar to Biden’s fossil fuel proposals, it is clear that high-net-worth individuals are the targets of the plan and are revenue sources for the plan’s additional expenses.
Loopholes
A key piece of the Biden plan is closing “loopholes” that shield certain pools of money from being taxed. These measures would address things including carried interest, like-kind exchanges, depreciation deductions, private foundation requirements and others.
The takeaway
While Biden’s proposals have a low probability of being implemented as part of the FY 2024 federal budget, the plan does put corporations, fossil fuel companies, foreign investors and others on notice. These measures may not be happening this year, but they are in the crosshairs. Many of the policies are popular with voters, and should Democrats gain majorities in both houses of Congress, versions of many of these policies may come closer than once thought.
For more information, contact your Windham Brannon advisor, or reach out to Nicole Suk.
