Congress Expected To Debate Size Of Tax Increases Through The Fall

Ongoing negotiations to massively overhaul federal tax-and-spend policies remain impossible to pin down, a Capitol Hill insider told NAIFA members last week.

The stakes are so high, talks could continue right through Christmas, said Tim Hanford, counsel for Raffaniello & Associates and a former congressional staffer.

"Congress always makes the hard decisions at the very last," he said. "Next year being an election year will make it harder to do it. And the longer these proposals stay out there, the harder it gets to sell them. So I think it has to get done this year."

The $3.5 trillion 10-year spending plan includes sweeping child care and eldercare provisions, climate proposals, and drug pricing controls. While the measures are popular with many Democrats, they come with a price tag that has centrists on edge.

The National Association of Insurance and Financial Advisors webinar focused on the revenue aspects of the plan. That is, tax hikes.

The proposed top tax rate would revert to 39.6% on individuals earning more than $400,000, or $450,000 for couples, and there would be a 3% tax on wealthier Americans with adjusted income beyond $5 million a year. For big businesses, the proposal would lift the corporate tax rate from 21% to 26.5% on incomes beyond $5 million, slightly less than the 28% rate the president had sought.

In all, the tax hikes are in line with Biden’s own proposals and would bring about the most substantive changes in the tax code since Republicans with then-President Donald Trump slashed taxes in 2017.

House Democrats are considering several tweaks and proposals in an effort to get the 218 votes needed to pass the plan. One of them deals with the net investment income tax and could be costly for small business owners, Hanford said.

"Right now a lot of businesses are formed as S corporations and they pay the 3.8% net investment income tax only on the salaries that they pay out, not on the rest of the business income," he explained. "The Ways and Means' proposal would say that all of the business income is subject to that 3.8% tax. That's quite a change for some small businesses."

Retirement Plan Focus

One area Republicans and Democrats share some agreement is legislation to boost retirement savings. A House committee last week passed legislation that would require small businesses to provide retirement plans for their workers.

Under the bill, employers with five or more employees would have to offer a retirement plan and automatically enroll employees, diverting 6% of their pay to a retirement account. Contributions would be invested in a Roth IRA and employees would contribute more over time -- although they could opt out.

Employers who ignore the mandate face stiff penalties.

"If employers fail to provide a retirement option, such as a 401(k) or an individual retirement account, it would cost them an excise tax liability of $10 for every worker per day of noncompliance," said Diane Boyle, senior vice president of government relations for NAIFA.

According to an Employee Benefit Research Institute analysis, the proposal would create 62 million new retirement savers and add an additional $7 trillion in retirement savings over a 10-year period. And 98% of the new retirement accounts would be owned by those earning less than $100,000 per year.

The bill includes a number of provisions aimed at high-income taxpayers, Boyle noted. It would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers with taxable income over $400,000, or married taxpayers filing jointly with taxable income over $450,000. It would also prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual’s IRA and defined contribution accounts exceed $10 million.

Hanford called the mega-IRA proposals "an example of how tax policy sometimes comes direct from the headlines that we're reading." Specifically, a summer story about Peter Thiel owning an IRA worth $5 billion.

"All of these proposals stem from that one story," Hanford said.

Just Politics

At some point, the vote is going to come down to how much spending centrist Democrats be able to stomach, Hanford and Boyle agree.

"You're starting to see some of the moderate Democrats having some concerns with the process with the package, even in this early stage," Boyle said. "And in the House, there's this very slim margin."

Two centrists who have argued against the high cost of the package, Democratic Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, met with Biden this week to discuss the road ahead. In the House, swing district Democrats have also voiced concerns.

Speaking at the White House on Thursday, Biden laid out a choice: “Are we going to continue with an economy where the overwhelming share of the benefits go to big corporations and the very wealthy, or are we going to take this moment right now to set this country on a new path?”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.