Senate Approves $3.5 Trillion Budget

The Senate approved a $3.5 trillion budget on August 11, 2021, laying the groundwork for Congress to create legislation increasing taxes on corporations and certain taxpayers.

The budget does not include specific tax increases. Instead, it directs the tax-writing Senate Finance Committee and the House Ways and Means Committee to “reduce the deficit by not less than $1,000,000,000 [$1 billion] for the period of fiscal years 2022 through 2031.”

The tax-writing committees will determine which specific provisions will be used to raise revenue. It will likely take weeks (if not longer) before the details are made public.

The budget also provides guidance to the tax-writing committees on where to raise revenue, with a focus on the following:

• Corporate and international tax reform
• Tax fairness for high-income individuals
• IRS tax enforcement
• Health care savings
• Carbon Polluter Import Fee

Are Tax Increases Coming?

These options dictate that tax increases are not the only choices in raising revenue. The tax-writing committees can also propose increasing revenue irrespective of what the budget recommends. 

The tax-writing committees are likely to increase revenue beyond the $1 billion directed in the budget. President Joe Biden proposed $2.4 trillion in tax increases, so the revenue increase will likely fall somewhere between the budget’s instruction and the president’s proposal. Some expect that the tax increases will total between $1.3 trillion to $1.4 trillion over a 10-year period.

Specifics on the president’s tax proposals can be found here. They include raising the corporate tax rate to 28%, increasing the top individual income tax rate from 37% to 39.6% and taxing long-term capital gains and qualified dividends at ordinary income tax rates for taxpayers with adjusted gross income of more than $1 million. 

Where Will Revenues Likely Be Spent?

The budget also directs the Senate Finance Committee to make the following “investments”:

• Paid Family and Medical Leave
• ACA expansion extension and filling the Medicaid Coverage Gap
• Expanding Medicare to include dental, vision, hearing benefits and lowering the eligibility age
• Addressing health care provider shortages (Graduate Medical Education)
• Child Tax Credit/EITC/CDCTC extension
• Long-term care for seniors and persons with disabilities (HCBS)
• Clean energy, manufacturing, and transportation tax incentives
• Pro-worker incentives and worker support
• Health equity (maternal, behavioral, and racial justice health investments)
• Housing incentives
• SALT cap relief

Lastly, the budget stipulates that tax increases should not fall on people earning less than $400,000 a year, small businesses or family farms.

Tax-Related Amendments to the Budget

The Senate voted on dozens of amendments to the budget, and some were adopted. However, many of them are nonbinding, meaning they will not be turned into law simply because they were adopted. A budget does not get signed into law so its provisions (amendment or otherwise) do not become law.

For example, the Budget Committee can instruct the tax-writing Senate Finance Committee to write legislation that increases income taxes on certain taxpayers. The Senate Finance Committee can choose to follow those directions or ignore them. If it abides by the Budget Committee’s directive, then tax increases on those taxpayers will have the potential to become law.

In addition, there were several non-binding tax-related amendments that were adopted to the budget. They include:

• Maintaining current law tax treatment of like kind exchanges
• Preventing tax increases on small business
• Means-testing electric vehicle tax credits
• Removing the prohibition on states and territories against lowering their taxes
• Protecting taxpayer information
• Protecting business owners, farmers and ranchers against changes to step-up in basis at death

These amendments may influence how the tax-writing committees write their tax legislation.

Next Steps

The House of Representatives must approve the budget before congressional committees can act on its directions. The House is currently out of session and expected to return on August 23, 2021, to vote on the budget.

A vote on the $1.2 trillion Bipartisan Infrastructure Bill, which the Senate approved on August 10, 2021, is not anticipated until sometime in the fall. However, some House Democrats want to vote on the Bipartisan Infrastructure Bill on August 23, so the timing of the vote on the Infrastructure Bill could be in question.

As for the budget, assuming the House approves it, the committees are expected to begin publicly vetting the legislation.. It is currently expected that such resulting legislation will be finalized in the fall, at the earliest. And, timing the vote for passage of the budget to match the government’s September 30 year-end is important. If not timely passed, a gap funding measure would be required which could create more uncertainty to the overall budget passage.

Once the legislation is complete, it can pass both chambers with the support of a simple majority. This means that it can pass with only congressional Democrats supporting it.. The fact that only Democratic support is needed to approve the legislation gives it a better chance for becoming law, but nothing is guaranteed on Capitol Hill.