April 30, 2021

Tax News & Views Capitol Hill briefing. April 30, 2021

In this issue:

Biden’s ‘American Families Plan’ proposes significant tax hikes for upper-income individuals but leaves out key details ...... 1 Taxwriters debate clean energy, fossil fuel incentives at Finance Committee hearing ...... 9 Wealth tax, ‘book’ income tax, stricter audits of upper-income taxpayers would raise $6 trillion, Warren says 13

Biden’s ‘American Families Plan’ proposes significant tax hikes for upper-income individuals but leaves out key details

President Biden this week called for increasing the top individual income tax rate and the capital gains tax rate, taxing carried interests as ordinary income, eliminating stepped-up basis for certain inherited assets, and other tax hikes focused on upper-income taxpayers to help offset the cost of his proposed $1.8 trillion initiative known as the “American Families Plan.”

The president formally rolled out his proposal during an address to a joint session of Congress on April 28. But the White House thus far has not provided key details on how his revenue-increase proposals would operate,

Tax News & Views Page 1 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. and early indications suggest the administration is likely to encounter resistance from Republicans and could even face challenges in holding together the tight Democratic majorities in the House and Senate as it attempts to move the proposal through Congress.

Revenue-raising provisions

At a high level, the American Families Plan proposes new spending on what the administration has called “human infrastructure” priorities such as paid family and medical leave, universal child care, access to pre- kindergarten education and free community college, and nutrition assistance programs, along with tax relief targeted primarily at lower- and middle-income taxpayers.

According to a fact sheet that the White House released ahead of the president’s speech, these provisions would be paid for through revenue offsets drawn largely from proposals that then-candidate Biden put forward during the 2020 presidential campaign. (For an overview of tax proposals in Biden’s campaign platform, see A change in course: Tax policy implications of a Joe Biden presidency from Deloitte Tax LLP.) URL: https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families- plan/ URL: https://www2.deloitte.com/us/en/pages/tax/articles/biden-tax-policy-impact.html

Ordinary income tax rates: Following through on his campaign pledge to ensure that wealthy individuals pay “their fair share” in taxes, the president has proposed to increase the top individual income tax rate to 39.6 percent (from 37 percent under current law) for taxpayers “within the top one percent.”

The White House fact sheet does not cite specific income thresholds that would apply for individual filers and married taxpayers filing jointly; however, Axios, citing comments by an unnamed White House official, reported on April 29 that the 39.6 percent rate would begin at $452,700 for individuals and $509,300 for joint filers, the thresholds that would have been in effect prior to the enactment of the Tax Cuts and Jobs Act (TCJA, P.L. 115-97).

Capital gains and dividends, net investment income tax: Under the president’s plan, income from long-term capital gains and certain dividends would be taxed at ordinary rates for “households making over $1 million,” although the White House does not specify how the threshold would be calculated for taxpayers with a mix of both ordinary and capital income.

Presumably, taxpayers in this income bracket would see their capital gain and dividend income taxed at the president’s proposed top rate of 39.6 percent. That rate, combined with the 3.8 percent Medicare tax on net investment income that was enacted 2010 as part of the Patient Protection and Affordable Care Act, would bring the maximum tax rate on capital gain and dividend income to 43.4 percent.

The White House fact sheet also states – without additional explanation – that the president’s plan would ensure that the net investment income tax will be applied “consistently to those making over $400,000.”

Tax News & Views Page 2 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. Carried interest income: The plan would “permanently eliminate the carried interest loophole.” Although the administration has not provided additional detail, this presumably means that carried interest income would be taxed at ordinary rates.

Estate tax: The president proposes to repeal the step-up in basis of inherited assets at death for gains greater than $1 million (which could be as much as $2.5 million per couple when combined with current-law tax exemptions for certain proceeds from the sale of a primary residence). Special rules – which the administration has not described – would apply to protect family-owned businesses and farms that are passed on to “heirs who continue to run the business.”

Notably, the plan does not appear to include a campaign proposal to return the estate tax to the parameters in effect for 2009 (that is, a top rate of 45 percent and an exemption of $3.5 million per taxpayer).

Like-kind exchanges: The White House fact sheet states that the president’s plan would “end the special real estate tax break that allows real estate investors to defer taxation when they exchange property” – presumably a reference to the like-kind exchange rules – for gains on real property greater than $500,000.

Excess business losses: The president proposes to permanently extend the excess business loss rule, which generally limits certain losses attributable to trades or businesses for noncorporate taxpayers to $250,000 ($500,000 in the case of joint filers), indexed for inflation.

The limitation was originally put in place through 2025 in the TCJA, but was suspended for taxable years beginning in 2018, 2019, and 2020 in last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). It was extended through 2026 in the recently enacted American Rescue Plan Act of 2021 (P.L. 117-2).

Some campaign proposals left out: The plan does not appear to include other notable revenue-raising proposals from Biden’s presidential campaign, such as capping the value of itemized deductions for upper- income taxpayers, reinstating the so-called “PEP” and “Pease” limitations on itemized deductions, or eliminating the 20 percent deduction for certain passthrough business income under section 199A.

Stricter reporting and enforcement requirements

Just how much revenue the president’s tax-increase proposals might raise is impossible to determine until Congress drafts actual legislative language that fills in the critical missing details. The administration does suggest, however, that its proposals for stricter enforcement of existing tax laws, additional funding for the Internal Revenue Service, and more stringent information reporting requirements will narrow the “tax gap” – the difference between the amount of tax owed to the government and the amount paid – and net an additional $700 billion for the fisc over 10 years.

The IRS’s most recent published estimate, which covers the years 2011-2013, puts the gross annual tax gap at $441 billion. But IRS Commissioner Charles Rettig recently told the Senate Finance Committee that the tax gap

Tax News & Views Page 3 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. actually could equal or even exceed $1 trillion a year due in part to the growth of cryptocurrency transactions and other sophisticated financial transactions and tax-avoidance strategies in the marketplace. (For prior coverage, see Tax News & Views, Vol. 22, No. 20, Apr. 16, 2021.) URL: https://www.irs.gov/newsroom/the-tax-gap URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210416_3.html

Enforcement: To address the tax gap, the president proposes to boost the IRS’s enforcement budget to expand its audits of high-income individual taxpayers and corporations. The exact amount of the proposed budget bump is not specified on the administration’s fact sheet, but the Treasury Department confirmed in an April 28 news release that it would be “roughly $80 billion” over 10 years. According to Treasury, the additional funds would be allocated to “overhauling technology to improve enforcement efforts” as well as “hiring and training auditors to focus on complex investigations of large corporations, partnerships, and global high-wealth individuals.” URL: https://home.treasury.gov/news/press-releases/jy0150

Information reporting: In addition, the administration’s fact sheet says the plan would require financial institutions to “report information on account flows so that earnings from investment and business activity are subject to reporting more like wages already are.” The Treasury Department explained in its news release that this proposal “leverages the information that financial institutions already know about account holders, simply requiring that they add to their regular, annual reports information about aggregate account outflows and inflows.” The enhanced reporting requirements would “help [the IRS] improve audit selection so it can better target its enforcement activity on the most suspect evaders, avoiding unnecessary (and costly) audits of ordinary taxpayers,” Treasury said.

Paid preparer regulation: To reduce fraud and improper payments under various tax credit programs such as the child tax credit and earned income tax credit – something the administration says is attributable largely to unscrupulous practitioners – the plan also proposes to give authority to the IRS to regulate paid tax return preparers.

No mention of effective dates

One key detail missing from the descriptions of all of the president’s proposed revenue raisers is when they would take effect. We likely will learn more in the coming weeks when the president releases his budget blueprint for fiscal year 2022, which is expected to be accompanied by a Treasury “Green Book” that typically contains more detailed descriptions of an administration’s revenue proposals.

Enhanced family tax credits

On the incentive side, the American Families Plan calls for extending certain enhancements to several family- focused tax relief provisions that the president proposed on the campaign trail and were put in place for just one year under the American Rescue Plan Act.

Tax News & Views Page 4 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. Child tax credit: The president’s plan would make the child tax credit fully refundable on a permanent basis. (The American Rescue Plan allows full refundability of the credit for 2021 only.)

The administration also would extend through 2025 the increased the credit amount ($3,000 per child or $3,600 for a child under age 6, subject to a phase-out), the increased age limit for a qualifying child (to 17), and a provision making the credit available in advance in equal installments on a “periodic” basis. As enacted in the American Rescue Plan, all of these provisions are scheduled to expire at the end of this year.

Child and dependent care tax credit: The president’s plan would permanently extend the American Rescue Plan’s temporary enhancements to the child and dependent care tax credit, including:

• Full refundability; • The increased maximum credit rate (50 percent); • The higher income threshold for phasing out the credit ($125,000 of adjusted gross income instead of $15,000); and • The increased amount of child and dependent care expenses that are eligible for the credit ($8,000 for one qualifying individual and $16,000 for two or more qualifying individuals).

Without congressional action, these provisions also will expire at the end of 2021.

Earned income tax credit: The president’s proposal would permanently extend a provision in the American Rescue Plan Act that expanded eligibility for and the amount of the earned income tax credit for taxpayers with no qualifying children (the “childless EITC”) for 2021 only.

Specific enhancements that would be made permanent include the reduction in the minimum age to claim the childless EITC from 25 to 19 (except for full-time students) and elimination of the upper age limit, an increase in the childless EITC credit percentage and phase-out percentage from 7.65 to 15.3 percent, an increase in the earned income limit for the maximum credit amount to $9,820, and an increase in the income threshold at which the credit begins to phase out to $11,610 for non-joint filers.

Health insurance premium assistance credit: The White House proposal would permanently extend American Rescue Plan Act provisions that made the premium assistance credit under the Patient Protection and Affordable Care Act more generous and expanded the income thresholds used in determining eligibility for the credit. As enacted in the American Rescue Plan Act, these provisions are effective only for 2021 and 2022.

SALT-free: The president’s plan as released does not include a proposal to repeal or relax the $10,000 cap on the deduction for state and local taxes (SALT), which was enacted in 2017 as part of the TCJA. Biden took no position on the deduction cap during the campaign, but a number of congressional Democrats – and some Republicans – have urged the administration to address the cap in any significant tax proposals he sends to Congress. (More on that below.)

With the release of the American Families Plan, the president and administration officials now begin the task of selling the tax-and-spending package to the public and to members of Congress.

As he has done with his American Jobs Plan, the president maintains that he would like to move this portion of his economic agenda with bipartisan support.

“I wanted to lay out, before the Congress, my plan before we got into the deep discussions,” Biden said during his address to Congress. “I’d like to meet with those who have ideas that are different – they think are better. I welcome those ideas.”

Resistance from Republicans

Based on initial reactions from some top Senate Republicans, however, the administration would have to make some significant changes for the president’s proposal to win over any members of the GOP.

In a statement released April 28, House Ways and Means Committee ranking member Kevin Brady, R-Texas, said the plan would “sabotage[e] America’s economic recovery with crippling tax hikes that hurt working families and drive jobs overseas. It’s the last thing we need right now.”

In the Senate, where the president and Democratic leaders would have to gain support from 10 Republicans to avoid a filibuster, Minority Leader Mitch McConnell, R-Ky., said in a release that the White House “wants to jack up taxes in order to nudge families toward the kinds of jobs Democrats want them to have, in the kinds of industries Democrats want to exist, with the kinds of cars Democrats want them to drive, using the kinds of child care arrangements that Democrats want them to pursue.”

Some mixed messages from Democrats

The administration also may need to do some work to assuage the concerns of some Democrats – an important consideration given the party’s narrow majorities in both chambers.

In the House, where Democrats have an edge of just six seats over the GOP, Ways and Means Committee Chairman Richard Neal, D-Mass., expressed support for the president’s plan, commenting in an April 28 news release that “[f]rom major investments in child care and paid leave to fixing our broken tax code and strengthening enforcement at the IRS, this package puts American families first, and will unlock the talent and opportunity our nation needs to thrive.”

Neal earlier this week released a discussion draft of his own proposal to provide universal paid family and medical leave, guaranteed access to child care, and permanently extend the family tax credits in the American Rescue Plan that differs in some ways from the president’s plan. (For example, it would permanently extend all the components of the enhanced child tax credit while the president would make the refundability component

Tax News & Views Page 6 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. permanent and extend other enhancements to the credit for just four years. Neal’s proposal also calls for certain payroll tax credits that are not in the president’s plan and does not include revenue offsets.) URL: https://waysandmeans.house.gov/media-center/press-releases/chairman-neal-unveils-groundbreaking-proposal- reshape-american-economy

Neal acknowledged those differences in his April 28 news release but appeared confident they could be resolved.

“President Biden and I are united by our shared purpose to improve the lives of American families,” Neal said. “The committee will explore how to move forward with permanent extensions to the child tax credit, earned income tax credit, and child and dependent care credit, and I think we can do so while still responsibly investing in other top priorities.”

SALT problem: But the White House’s decision not to address the cap on the SALT deduction in its initial version of the American Families Plan could trigger opposition from a sizeable contingent of House Democrats from high-tax states such as California, New Jersey, and New York who have demanded that the cap be repealed or at least relaxed.

In a letter sent to House Speaker Nancy Pelosi, D-Calif., and House Majority Leader Steny Hoyer, D-Md., earlier this month, 17 of New York’s 19 Democratic House members said that they “reserve[d] the right to oppose any tax legislation that does not include a full repeal of the SALT limitation.” Separately, 41 House Democrats from California – all except Speaker Pelosi – sent a letter to President Biden on April 15 urging him to restore full deductibility of SALT. And a group of House lawmakers from both parties recently formed a “SALT caucus” whose mission is to advocate for the SALT cap’s repeal in the weeks and months ahead. (For prior coverage, see Tax News & Views, Vol. 22, No. 20, Apr. 16, 2021.) URL: https://nadler.house.gov/uploadedfiles/04.13.21_salt_delegation_letter.pdf URL: https://mikelevin.house.gov/imo/media/doc/2021-04-16%20CA%20Delegation%20SALT%20Cap%20Letter.pdf URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210416_1.html

For his part, House Ways and Means Committee member Bill Pascrell, D-N.J., one of the more vocal critics of the cap, made clear this week that his position has not changed.

“I will be banging my fists onto the table to make New Jersey’s voice heard and do everything in my power to put SALT repeal on the books. I expect certain elements of the [president’s] proposal to shift as it moves through Congress,” he said in an April 28 release.

But any serious effort to include an outright repeal of the cap in an infrastructure package likely would spark opposition from progressive Democrats, who, like many congressional Republicans, argue that doing so would primarily benefit higher-income households. (For prior coverage, see Tax News & Views, Vol. 22, No. 21, Apr. 23, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210423_3.html

Tax News & Views Page 7 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. The president thus far has not taken a position on the SALT deduction cap, although White House officials have said the administration would consider proposals to repeal it if proponents offered acceptable revenue offsets.

Pay-for concerns in the Senate: In the evenly-divided Senate, where Democrats don’t have a single vote to spare if they intend to move a bill without Republican support, the administration may have to address the concerns of some Democratic lawmakers about some of the plan’s proposed offsets.

Democrats Robert Menendez of New Jersey and Mark Warner of Virginia – both members of the Senate Finance Committee – endorsed the notion of increasing the tax rate on capital gain income but suggested that the president’s proposal to tax it at ordinary income rates may be an overreach.

“For me, it is what you’re doing, the totality of the package, and how does it affect the ability of growth to continue to take place. That’s how I’m judging it,” Menendez told reporters this week. “Right now it seems like a rather high rate to me.”

Warner commented to reporters that “there needs to be some differential” in the treatment of ordinary and capital gain income but noted that the current differential “is much too great” and that he is “open to narrowing that.”

Other Democrats, meanwhile, question whether the cost of the president’s latest package needs to be fully offset, according to comments reported by Axios ahead of the American Families Plan’s formal release.

Hawaii Democratic Sen. Brian Schatz told Axios that he’s “not a big pay-for guy” and that “some investments are worth deficit-financing.”

Connecticut Democrat Chris Murphy likewise commented that “there’s plenty of money in this country to pay for smart investments. But at the same time, if it’s a good investment, I don’t know that it needs to be fully paid for.”

Montana Democrat Jon Tester argued that “we should find a way to pay for half of it upfront and then hopefully with good infrastructure, it’ll create economic growth and pick up the other half.”

Regular order versus reconciliation

These complicated political dynamics will be critical to Democratic leaders’ decisions around whether to pursue a bipartisan package that can garner at least 10 Senate Republican votes to overcome a potential filibuster or whether, instead, to again invoke the budget reconciliation process to bypass the GOP and pass a bill with all 50 Senate Democrats plus the tie-breaking vote of Vice President Kamala Harris. (Reconciliation allows for certain tax and spending legislation to clear the Senate with just 51 votes, rather than the usual 60 needed to overcome a filibuster in that chamber. But it also comes with some constraints on what can be included and a statutory requirement that the legislation not increase the deficit in any fiscal year beyond the budget window.)

Tax News & Views Page 8 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. Democrats opted for budget reconciliation to enact the American Rescue Plan Act late last month and are weighing it as an option for advancing President Biden’s American Jobs Plan, although they have not made a final decision.

Democratic leaders appear to have at least two more opportunities to invoke the fast-track budget reconciliation process this year. One path would involve adopting a budget resolution for upcoming fiscal year 2022 (which is set to begin October 1) that includes reconciliation instructions. A second would involve revising the fiscal 2021 budget resolution that Democrats adopted to move the American Rescue Plan in a way that recharges the reconciliation process teed up in that blueprint.

That latter option – which has not been leveraged before by either party – recently became available when a spokesperson for Senate Majority Leader Charles Schumer, D-N.Y., indicated the Senate parliamentarian had given Schumer a favorable ruling in that regard. However, questions persist about just what that ruling said – it has not been made public – and whether it includes any process- or policy-related constraints. (For prior coverage, see Tax News & Views, Vol. 22, No. 19, Apr. 9, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210409_2.html

Questions around whether to advance the administration’s two expansive proposals separately or in combination provide an additional layer of complexity. Opting to move the American Families Plan separately from the American Jobs Plan presents both opportunities and challenges that Democratic leaders will have to navigate before deciding whether to attempt to move one very large bill or to break it down into two smaller, but still substantial, packages.

— Michael DeHoff Tax Policy Group Deloitte Tax LLP

Taxwriters debate clean energy, fossil fuel incentives at Finance Committee hearing

Democrats and Republicans on the Senate Finance Committee found some common ground during an April 27 hearing on the perceived need to streamline energy-related tax incentives, but diverged sharply on the relative merits of particular provisions some members said benefit the renewable energy and fossil fuel industries.

The Finance Committee has explored this topic numerous times in prior years, but this week’s discussion was particularly topical as many congressional Democrats hope that climate-related policies can be incorporated into any forthcoming jobs-and-infrastructure package. (President Biden’s American Jobs Plan and its related financing component, the Made in America Tax Plan, which were unveiled late last month, generally propose to eliminate tax provisions that the White House says favor the fossil fuel industry as part of the administration’s larger goals of addressing climate change and achieving net-zero emissions in the US by 2050.)

Tax News & Views Page 9 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. Alongside the bills and concepts discussed at the hearing, the Growing Renewable Energy and Efficiency Now (GREEN) Act introduced earlier this year by House Ways and Means Select Revenue Measures Subcommittee Chairman Mike Thompson, D-Calif., and supported by all Democrats on the panel, will be key proposals to watch as the legislative debate unfolds this year. URL: https://mikethompson.house.gov/newsroom/press-releases/chairman-thompson-ways-and-means-democrats- introduce-green-act

Clean Energy for America Act

Finance Committee Chairman Ron Wyden, D-Ore., opened the hearing by plugging the Clean Energy for America Act, a bill he and 24 of his Senate Democratic colleagues rolled out on April 21 that would consolidate roughly 40 current-law energy-related tax provisions into just a handful of so-called “technology-neutral” incentives for clean electricity, clean transportation, and conservation and efficiency, while repealing a number of tax provisions he says benefit fossil fuel producers. (For prior coverage of Wyden’s legislation, see Tax News & Views, Vol. 22, No. 21, Apr. 23, 2021.) URL: https://www.finance.senate.gov/imo/media/doc/Clean%20Energy%20for%20America%20Act.pdf URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210423_2.html

“The energy tax code in America is a cluttered, old heap of more than 40 different tax breaks for a variety of energy sources and technologies…,” Wyden said. “Most of these incentives are temporary. That keeps clean energy businesses…in an uncertain state of limbo. On the other hand, at the base of this system are century- old, permanent tax breaks for oil and gas companies.”

Wyden came back to this theme several times during the hearing, expressing the view that his bill could help the US achieve the Biden administration’s goal of cutting carbon emissions in half relative to 2005 levels by the end of this decade.

“In terms of tax certainty and predictability, [the Clean Energy for America Act] would level the playing field for everybody,” he said. “It would be a job-creating, free market competition to get to net-zero carbon emissions.”

Crapo pushes alternative approach: The committee’s ranking Republican, Mike Crapo of Idaho, meanwhile, acknowledged the merits of a technology-neutral approach, but questioned whether certain renewable energy projects and investments still require taxpayer support.

“While I support Congress taking a neutral approach to energy tax credits, we must consider whether some of these technologies continue to require assistance and ensure we are designing the tax code to be fair and effective,” Crapo said.

As an alternative approach, Crapo backed a bipartisan discussion draft he released April 26 with Finance Committee Democrat Sheldon Whitehouse of Rhode Island that would grant an “Energy Sector Innovation Credit” (ESIC) – available as either a 40 percent investment tax credit (ITC) or 60 percent production tax credit (PTC) to “low market penetration” technologies across a wide range of energy sources. As a technology matures in the marketplace, the ESIC would phase out for that particular energy source.

Tax News & Views Page 10 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. URL: https://www.finance.senate.gov/ranking-members-news/crapo-whitehouse-release-energy-innovation-tax-credit- proposal

“Our tax code should incentivize technology-wide clean energy innovation, helping to bring breakthrough power generation to deployment until they can compete independently in the market,” Crapo said.

Chairman Wyden’s legislation similarly relies on alternative PTCs and ITCs for clean electricity, along with phase-downs in the value of the credits when certain emissions targets are achieved (rather than as technologies gain market share, as in Crapo’s discussion draft).

One key difference, however, is that Crapo’s discussion draft is silent on the fate of existing temporary tax incentives for renewable energy and energy efficiency, whereas Wyden’s bill would generally extend those provisions through 2022 as a way to transition into his proposed new system.

Democrats push specific breaks for ‘clean’ power, EVs

At the same time that many Democrats on the taxwriting panel expressed support for Wyden’s technology- neutral approach to energy tax policy, a number of them also spoke in favor of extending, and even expanding, certain current-law provisions benefiting the clean energy sector.

Refundability, ‘direct pay’: One concept discussed on the Democratic side of the aisle related to making certain renewable energy incentives refundable, such that the benefit would be available to companies that may not yet be generating taxable income or that are having difficulty obtaining private financing.

To that end, Sen. Tom Carper, D-Del., discussed the Save America’s Clean Energy Jobs Act – legislation he introduced with Sen. Whitehouse and Sen. Martin Heinrich, D-N.M. that would grant temporary refundability to certain tax credits encouraging the development and operation of certain renewable energy projects, including those related to wind, solar, fuel cells, and carbon capture and sequestration. URL: https://www.epw.senate.gov/public/_cache/files/2/c/2c333d59-e75c-4252-a3d6- 311a2e3a97f5/7FA6B59CCBE45EECA68410F7ECBCADEA.americas-clean-energy-jobs-act---introduced.pdf

“Clean energy developers are currently unable to access tax equity financing as a result of the pandemic, leaving clean energy projects frozen and unable to break ground,” Carper said. “Refundability of these credits will provide efficient access to capital that will immediately help facilitate job creation in the clean energy sector….”

In a similar vein, Chairman Wyden’s proposal would create a tax credit bond – or so-called “clean energy bond” – designed to incentivize the production of clean electricity and fuel, which entities could elect to offer as a tax credit bond or as a direct pay bond. (In the latter case, the Treasury Department would reimburse the bond issuer at a rate of up to 70 percent of the interest cost.)

Advanced energy manufacturing: For her part, Sen. Debbie Stabenow, D-Mich., touted a bill she recently introduced with Republican taxwriter Steve Daines of Montana – the American Jobs in Energy Manufacturing

Tax News & Views Page 11 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. Act of 2021 – that would expand the section 48C credit for advanced energy manufacturing and focus a portion of its benefits on communities that have suffered the closure of coal mines or coal power plants. URL: https://www.manchin.senate.gov/imo/media/doc/AJEM%20Bill%20Text.pdf

EVs and clean transportation: Stabenow also highlighted bipartisan legislation she introduced during the previous Congress with Sen. Susan Collins, R-Maine, and former Sen. Lamar Alexander, R-Tenn., that would expand the tax credit under section 30D for purchasers of certain electric vehicles (EVs) by, in part, increasing the number of qualifying vehicles a manufacturer can sell before the credit begins to phase out. This concept has wide appeal among congressional Democrats and seems likely to be discussed as part of any infrastructure and climate legislation developed with the Biden administration.

Chairman Wyden’s Clean Energy for America Act also contains EV policy – proposing to remove the per- manufacturer cap, make the credit refundable for individuals, and create a 30 percent nonrefundable credit for commercial operators purchasing EVs. Wyden’s legislation would also create a technology-neutral “clean fuel production credit that would be designed to incentivize the production of transportation-grade fuels that are at least 25 percent cleaner in terms of their lifecycle emissions (that is, from production through use in a vehicle) than the current US nationwide average.

In many ways going hand-in-hand with the section 30D electric vehicle credit is the credit under section 30C for alternative fuel vehicle refueling property. Sens. Stabenow and Carper expressed their support for extending and expanding the section 30C credit as in bipartisan legislation – the Securing America’s Clean Fuels Infrastructure Act – they introduced earlier this year with fellow Senate taxwriters Richard Burr, R-N.C., and Catherine Cortez Masto, D-Nev. URL: https://www.epw.senate.gov/public/_cache/files/9/4/9464cf3c-028c-412e-9935- d4033f3c4a3b/1D7C185FED2A5CFA72A244CD2B83D082.securing-america-s-clean-fuels-infrastructure-act-3-23-2021.pdf

“This [alternative refueling] infrastructure is necessary for the success of our American automakers and for the widespread adoption of cleaner vehicles,” Carper said.

For her part, Sen. Maria Cantwell, D-Wash., who introduced the original EV tax credit in 2007 with former Finance Committee Chairman Orrin Hatch, R-Utah, noted that so-called “heavy duty trucks” comprise only 5 percent of vehicles on the road, but account for 23 percent of emissions.

“What we found with the tax credit for automobiles is that it really accelerated [the market], in just a short period of time – look at where we are,” Cantwell said, as part of a broader argument for establishing a 30 percent ITC to incentivize the purchase of efficient heavy duty trucks.

GOP defends fossil fuel incentives, criticizes corporate rate hike

Demonstrating the partisan divide on energy tax issues that has persisted for years, several of the panel’s Republican members argued that many tax incentives for renewable energy and energy efficiency have run their course, and are no longer necessary to help developers compete in the energy marketplace.

Tax News & Views Page 12 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. Some GOP members also spoke forcefully against proposals by Chairman Wyden and others to repeal tax incentives that Wyden says unfairly benefit the fossil fuel industry.

Republican taxwriter John Barrasso of Wyoming, who also serves as ranking member of the Senate Energy and Natural Resources Committee, said he was “baffled by the efforts of President Biden and his supporters in Congress to destroy entire industries in America, and to force tens of thousands of fossil fuel energy workers into the ranks of the unemployed.”

Several panel Republicans homed in on two incentives in particular – the deductions for intangible drilling costs (IDCs) and so-called “percentage depletion” that apply to independent producers – as worth keeping on the books.

Sen. Bill Cassidy, R-La., contended that “all these folks who are providing great paying jobs for Americans…are dependent upon [the IDC deduction] which doesn’t go to [major integrated oil companies] but does go to these very small companies in some cases and they are the ones providing this employment.”

Meanwhile, other Republicans took aim at the Biden administration’s proposed business tax increases (that would offset the cost of the American Jobs Plan) as policies that could have a deleterious effect on US energy production and energy independence.

“Considering offsetting the cost of energy provisions with a corporate tax rate increase or increasing international taxes, especially during a pandemic, is counterproductive and a non-starter on my side of the aisle,” said Sen. Crapo.

— Alex Brosseau Tax Policy Group Deloitte Tax LLP

Wealth tax, ‘book’ income tax, stricter audits of upper-income taxpayers would raise $6 trillion, Warren says

Sen. Elizabeth Warren, D-Mass., used a Finance subcommittee hearing she chaired this week to promote her proposals for a wealth tax, a tax on corporate “book” income, and increased funding for the IRS to devote more resources to auditing wealthy taxpayers.

Leading an April 27 hearing of the Subcommittee on Fiscal Responsibility and Economic Growth on “creating opportunity through a fairer tax system,” Warren said the three proposals would raise more than $6 trillion over 10 years – “enough to pay for every single penny of President Biden’s American Jobs Plan, then pay for every single penny of his American Families Plan, and still have more than $2 trillion left over.”

Returning to her 2020 presidential campaign platform, Warren argued in favor of her Ultra-Millionaire Tax Act of 2021 (S. 510), which would levy an annual 2 percent surtax on the net worth of households and trusts valued at $50 million to $1 billion and a 3 percent surtax on those valued higher than $1 billion. She says the plan would not raise taxes on 99.9 percent of Americans and that polls show a majority of individuals – Democrats, Republicans, and Independents – support such a tax. URL: https://www.congress.gov/bill/117th-congress/senate-bill/510/text

“Our tax system is broken. There is one set of rules for wealthy individuals, and another set for the richest people,” Warren said.

President Biden did not back a wealth tax during the 2020 presidential campaign nor did he include one in the American Families Plan he unveiled earlier this week. Instead, his plan would increase taxes on upper-income taxpayers through proposals to hike the top individual income tax rate to 39.6 percent, tax certain capital gains at ordinary rates, tax carried interests as ordinary income, and eliminate the step-up in basis for certain inherited assets. (See separate coverage in this issue for additional details on these and other provisions in the president’s latest tax package.)

Supporting Warren’s wealth tax at the hearing was Abigail Disney, an heir to the Walt Disney family fortune, who said that such a tax would merely slow the growth of her vast holdings – which annually increase primarily through dividends, capital gains, and interest taxed at lower rates than ordinary income – rather than take anything away from her. Disney also agreed with Warren that the proceeds of a wealth tax should be invested in programs such as those included in President Biden’s American Jobs Plan and American Families Plan.

“My American dream also includes a lot of people who aren’t currently having the benefit of things like roads and schools and parks and good health care and so forth,” Disney said. “So to me, it’s part of the American dream to step up and pay my fair share.”

Law professor David Gamage of Indiana University also endorsed Warren’s wealth tax and argued that the president’s latest proposals to tax wealthy individuals would not go far enough to make the tax code more equitable.

“President Biden’s proposed reforms of limiting the capital gains tax rate preference and limiting the special provision offering step-up of basis upon death should be thought of as important steps toward fixing the personal tax system with respect to the ultra-wealthy, but not as complete solutions,” he said.

Taxing ‘book’ income

To address another of what she characterized as “tax loopholes,” Warren also advocated for her proposed Real Corporate Profits Tax – something she championed during her presidential campaign and has said she plans to introduce as legislation.

Tax News & Views Page 14 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. This proposal would levy a 7 percent flat tax on profits greater than $100 million that corporations report to their shareholders, which Warren argues would ensure that large companies that “make billions of dollars in profits and pay little or nothing in federal income taxes” would be unable to entirely avoid US taxes. Among the current-law provisions Warren cited as allowing multinational corporations to “rig the tax system” are the tax treatment of stock options and foreign profits.

Indiana University’s David Gamage said he would recommend going even further towards book tax conformity than the senator’s own proposal. Under the 28 percent corporate tax rate the president included in his Made in America Tax Plan (the financing component of his American Jobs Plan), the 7 percent Real Corporate Profits Tax would mean 25 percent conformity, Gamage explained, while 50 percent conformity likely would be optimal.

President Biden’s Made in America Tax Plan takes a slightly different approach to taxing “book” income. Specifically, Biden has called for a 15 percent minimum tax that, based on a description in a Treasury Department report, appears to apply to corporations with net “book” income of at least $2 billion, while allowing the benefit of foreign tax credits and business tax credits such as those for investment in R&D and renewable energy. His plan would also give companies credit for taxes they paid above the 15 percent threshold in prior years. URL: https://home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf

Heightened audit focus

Warren also renewed her recent calls to classify the enforcement component of the Internal Revenue Service’s budget as mandatory spending to enhance the agency’s ability to focus its audit efforts on the high-income sector. (IRS Commissioner Charles Rettig endorsed that proposal at a recent Finance Committee hearing on the 2021 tax filing season. For prior coverage, see Tax News & Views, Vol. 22, No. 20, Apr. 16, 2021.) URL: https://dhub.blob.core.windows.net/dhub/Newsletters/Tax/2021/TNV/210416_3.html

Providing a consistent, reliable funding stream for the Service’s enforcement efforts would help it “[make] sure the rich and powerful get caught when they break the law,” she said.

The president, for his part, proposes in his American Families Plan to boost the Internal Revenue Service’s budget by some $80 billion over 10 years to expand its audits of high-income individual taxpayers and corporations.

Republicans push back

Witnesses invited by the subcommittee’s Republican ranking member, Sen. Bill Cassidy of Louisiana, pushed back on Warren’s characterization of companies’ behavior, arguing that the tax-reducing methods she described are completely legal.

“My main message is that corporations and individuals remit the taxes they do, including in situations some perceive as unfair, frequently because of explicit allowances in the tax code,” said Jeffrey Hoopes, an associate

Tax News & Views Page 15 of 16 Copyright © 2021 Deloitte Development LLC April 30, 2021 All rights reserved. professor of business at the University of North Carolina. “In other words, the largest holes in our national tax revenue bucket are ones Congress has, itself, poked, and not the product of elaborate tax planning schemes, as is a current misperception.” According to Hoopes, “[i]f members of Congress seek to change the tax system, they should do so in ways that make the tax code simpler, rather than layer on additional taxes that will add complexity to the tax code, be difficult to administer, have unintended negative consequences, and, ultimately, likely be eventually eliminated, making our tax system less stable.”

Scott Hodge of the Tax Foundation and Kyle Pomerleau of the American Enterprise Institute also argued against a wealth tax and a tax on corporate book profits. As alternative means of raising revenue, Pomerleau recommended that Congress consider some combination of raising the gas tax, levying a vehicle-miles-traveled tax, implementing a border-adjusted carbon tax, and imposing a value-added tax like all other OECD countries.

— Storme Sixeas Tax Policy Group Deloitte Tax LLP

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