Springtime in our nation’s capital can always be marked by three tell-tale signs: cherry blossoms blooming, 8th graders descending from around the country and a presidential budget request.
The president releases a budget request every year detailing his tax and spending priorities. The request is always an aspirational document, a policy wish list of sorts. It’s not a binding accord by any means. For any of the provisions included to make their way into law, they must be introduced by a lawmaker, considered and marked up in committee and then proceed through the remainder of the I’m Just a Bill jingle.
To that end, on March 11, President Joe Biden released his budget request for the fiscal year 2025, which begins on Oct. 1. This year’s budget request is being pitched as a continuation of the president’s efforts to build the economy from the bottom up and middle out.
At times, when the same party as the White House safely controls Congress, budget requests can serve as a blueprint for lawmakers to carry out the president’s agenda. But usually, especially during a divided government like we’re in now, a proud legislative branch gives the request little consideration before charting its own course on taxes and spending. However, these budget requests are invaluable for discerning the president’s priorities. And in an election year, the budget request can provide a first glimpse at the president’s campaign agenda.
This year’s plan calls for trillions in tax increases on the wealthy and corporations to fund new social programs. Although these new programs and proposed tax increases have little to no shot of advancing this year in a divided government, they illuminate what Biden plans to focus on this fall and potentially in a second term. It’s more than likely that Democrats in Congress will also look to this document as they crystalize their campaign pitches ahead of a highly contested election season.
Expanding Social Programs and Taxing the Rich
The central theme of the tax components of the president’s budget can only be characterized as “tax the rich.” The request proposes $4.9 trillion in tax increases primarily targeting corporations and the wealthy through increased corporate rates, a new billionaire’s income tax on those with more than $100 million in wealth, and other provisions targeting high salaries and capital gains.
As you may be aware, a majority of the tax cuts for individuals enacted in the 2017 Tax Cuts and Jobs Act (TCJA) expire at the end of next year, and members of both parties have an expressed interest in renewing those provisions, especially those that benefit the middle class. In Washington D.C., that means an opportunity to modify the Tax Code is imminent. To pay for extending the tax cuts, which both parties have prioritized amid soaring debt and deficits in recent years, lawmakers will need to generate trillions in new revenue, either through tax increases or spending cuts. That makes what the key players in this election are saying about taxes crucial for organizations and individuals with a stake in tax reform to understand.
If the Democratic party and President Biden are reforming the Tax Code, it’s unlikely they would pass on the opportunity to try to enact or expand social programs. This is the exact blueprint they followed, with little ultimate success compared to their original aims, with the Build Back Better Act during the early days of the Biden presidency. And by the looks of the spending provisions in the budget, they’re continuing down that road. But that’s not the only possible scenario.
Republicans’ Fiscal Agenda
While it’s still very early, current political polling and a favorable map in the Senate with few Republicans facing complex re-election bids this fall suggests the Republican Party could have more power in Washington, or at least in the upper chamber, this time next year when work on tax reform will be well underway in the halls of Congress.
At the top, former president and presumptive GOP nominee Donald Trump has put out few concrete tax plans. However, he has said he would make the expiring individual provisions from his most significant legislative accomplishment (the TCJA) permanent if given another term. However, he’s offered few details on how he would do this and has yet to point to a straightforward economic platform. We’ll likely see more on this in the months ahead.
Over in Congress, there’s broad support for extending the expiring provisions and paying for that extension, as the party has all but abandoned the 2017 talking point that tax cuts pay for themselves. However, there may be some disagreement on how broad to go. Members in leadership on tax-writing committees have said that lawmakers should evaluate the Tax Code in its entirety, rather than just working on the expiring provisions, to consider what works, what doesn’t and what levers they can pull to raise revenue to pay for the cuts.
With all of the Tax Code on the table for reforms, a desire to pay for extending the expiring cuts, and significant turnover on the Republican side of the aisle over the last seven years, even a GOP-helmed effort akin to the 2017 bill may look different this time around.
The Opening Salvo for Tax Reform
While it may have little near-term impact, President Biden’s budget request illuminates a likely starting point for Democrats when Washington takes up tax reform efforts next year. Should we have a divided government for that endeavor, the budget also elucidates the type of proposals – both on the revenue and spending side – Democrats would want included to secure their support.
The Republican outlook is still a bit opaque. But we know the party won’t offer a clean extension of the expiring provisions without pay-fors.
With all that in mind, it’s essential to remain apprised of how the Tax Code may change in the coming years and what that means for wealth planning. If Biden’s request drives home anything, the contours of tax reform will be broad. Get ready.
For more information on tax policy in 2024 and 2025, see “Setting the Table for Tax Policy This Year and Next.”