Treasury Secretary hints investment tax increases in Biden's budget will not be retroactive

June 16, 2021

Treasury Secretary Janet Yellen on Wednesday suggested a proposed tax increase on investments that was included in President Joe Biden's budget request will not have a retroactive effective date if it become law.  

“I don’t see a prospective change in rules pertaining to the taxation of future realization with capital gains as being a retroactive feature,” she told the Senate Finance Committee during a hearing on Biden’s budget request.

The Biden Administration last month introduced a $6 trillion budget request that included a call for taxing long-term capital gains and qualified dividends at ordinary income tax rates for taxpayers with adjusted gross income of more than $1 million. “This proposal would be effective for gains required to be recognized after the date of announcement,” according to the Green Book. The proposal was announced on April 28, 2021.

Committee member Senator John Cornyn (R-Texas) pressed Yellen on what was meant by the above sentence in the Green Book.

"What date does this refer to: ‘the date of announcement,'" he asked.

Yellen responded that she “would have to get back to you on this." She then stated her aforementioned view about investment tax increases.

In the past, Congress has viewed an effective date that is the same as when a bill is introduced is not retroactive. An effective date before the date of introduction is normally considered retroactive. 

Still, Congress has not passed legislation that would increase capital gains or dividend taxes, which must occur before President Biden could enact it into law. At this point, the focus of congressional leaders is on an infrastructure proposal, which does not include a tax increase on investments.

Aside from fielding several questions on Biden’s budget, Yellen also took some heat on provisions excluded from the document, like a repeal of the SALT cap.

“I was disappointed to see that the SALT deduction was not discussed anywhere in the president’s tax proposals,” said Committee member Senator Bob Menendez (D-NJ).

Menendez noted that Yellen during her confirmation hearing vowed to study the SALT cap issue and yet it was not addressed in Biden’s budget.  

“I expect much more,” the Senator said.

Yellen did not respond to the Senator’s statement but she did comment on a section within the budget that would strike tax preferences for fossil fuels.

The subject was raised by Committee member Senator John Barrasso (R-Wyo.), who noted that Biden opposes indexing the gas tax to inflation because it would affect people earning less than $400,000 a year. The Senator questioned why the president would rescind tax preferences that benefit gas companies, which would likely increase gas prices and negatively affect the same cohort of taxpayers.

Yellen essentially responded that Biden does not think gas companies need tax incentives.

“The president sees no policy justification for subsidizing fossil fuels,” she said.

Regarding the IRS, the Biden’s budget provides $13.2 billion for the next fiscal year, a 10.4% increase from the current fiscal year. It also provides an addition $417 million for enforcement. Yellen hopes that Congress will approve this level of funding so the agency can have the resources needed to close the Tax Gap, which is the difference between the taxes that are owed and what is collected, and is expected to grow over the coming decade.

“We’ve been using one estimate that it will amount to $7 trillion over the next decade. It largely reflects shortfalls in collections from high income individuals and corporations,” she said.

The Treasury Secretary also fielded questions on the recent agreement reached by the G7 to move forward with a global minimum tax.

Senator Mike Crapo (R-Utah), the Committee’s Ranking Member, noted that countries like China, India and Ireland have already come out against the proposal and questioned how the tax would work without their buy-in. Yellen responded, essentially saying that getting opposition countries onboard was a work in progress.

“We do need a global agreement on this, but we don’t need every country to go along with it,” Yellen said, adding the enforcement provisions in OECD’s Pillar 2 proposal would essentially penalize countries that tax below the global minimum.

The Treasury Secretary also stressed a global minimum tax needs congressional approval for it to become effective.

“Anything that affects U.S. tax law must be enacted by the U.S. Congress, so Congress plays a critical role,” Yellen said.

So far, none of Biden’s budget proposals have become law. The President’s budget is also not a bill and Congress is not bound to include any of its provisions in legislation. Instead, budgets are a statement about a president’s legislative priorities. They are aspirational documents, and in many cases, their tax proposals never become law.

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