By now, you have likely heard this question from some of your clients because they read it on various news websites and social media channels.
Before you answer that question, keep in mind that when President Donald Trump won the election four years ago, with everything going their way, the Republican party was not able to pass a tax cut until December 2017. And it was touch-and-go on whether the tax cut would pass just one week before it actually happened.
What do I mean by “the GOP had everything going their way?” At the time, they controlled both houses of Congress, Trump was in the White House, the economy was excellent and they were trying to pass a tax cut, which is much easier than trying to pass a tax increase. The conclusion to draw from that experience is that comprehensive tax acts are not easy to make happen. And they don’t happen quickly.
So with that in mind, how do you answer a client who asks you what is going to happen to the tax law?
Here is what I would tell your client: First, if the Democrats don’t flip the Senate, it won’t matter if Joe Biden wins the presidency. Senate Majority Leader Mitch McConnell has shown that he does not care how much criticism he receives. He is not going to let the Democrats pass any legislation that he is opposed to.
Second, because the Democrats aren’t going to have 60 seats in the Senate no matter how big the “blue wave” is, there will be only two paths to passing a tax increase: killing the filibuster for all time or reconciliation. As to the first, the Democrats may be willing to kill the filibuster since it is already dead for purposes of approving federal judges. But there may still be some reluctance to take such a critical step because of concern about what the Republicans might do if they have the majority in the Senate after 2020, so reconciliation is more likely.
So, what is reconciliation? The simplified definition is that it is the process that can be used to pass revenue and spending legislation if one’s party does not have 60 votes to overcome a filibuster by the opposing party. It must be used in connection with a budget resolution. If the bill violates the spending and revenue targets of the budget resolution, then any senator can raise a point of order that requires 60 votes to overcome. Generally, tax bills passed by reconciliation expire after 10 years.
The important point is that tax bills passed by reconciliation have a number of procedural hurdles to overcome, so getting them passed is not a foregone conclusion for the party with more than 50 but fewer than 60 votes.
The next question is, “If the Democrats are able to pass a tax increase, are they more likely to increase the estate tax, the income tax or both?
My prediction is only an income tax increase. The primary reason is that any tax increase will be difficult to pass because the Republicans will fill the airwaves with talk that a tax increase will hinder the financial recovery from the current recession.
Passing one tax increase will be a heavy lift. If the Democrats have to choose one tax or the other, they will most likely opt for an income tax increase because it will generate far more tax revenue than an estate tax increase. In addition, the Democrats will be looking for a way to cut into 2020’s $3.1 trillion deficit. The existing estate tax exemption drops by 50% as of Jan. 1, 2026, anyway, so the Democrats may believe that the political capital they would have to expend to accomplish something that will take care of itself in five years is not worth the cost.
Dysart Taylor shareholder/director H. Joseph Price Jr. helps businesses and individuals plan for their future through estate planning, tax planning, business succession planning and wealth preservation. He may be contacted at [email protected].