Could a Reconciliation Bill be Tied to the Infrastructure Bill?

• August 16, 2021
• Nathan Logan

Aside from the major news of the $1 trillion infrastructure bill that passed the Senate, the Senate also approved a $3.5 trillion budget plan. This budget plan may be setting the stage for future tax policy changes. Like the infrastructure bill, a budget resolution also needs to go through the House where it’s future is less certain. If the budget is approved by the House, congressional democrats would work to draft an expanded package to attempt to address the rest of President Biden’s economic agenda but House Speaker Nancy Pelosi has said she will not take up the infrastructure bill without a second, larger package in the form of a reconciliation bill. A reconciliation bill, while all speculation at this point, could include many tax policy measures to help fund the President’s agenda in the areas of education, health care, child care, and climate initiatives, just to name a few. Possible high profile tax policy items in a reconciliation bill could include:

• Raise the top marginal tax rate for individuals back to 39.6%. It was previously cut to 37% under the Tax Cuts and Jobs Act and is currently scheduled to revert to 39.6% in 2026.
• Impose ordinary income tax rates on capital gains for those with income over $1 million.
• Impose capital gains tax at death for those with gains more than $1 million. Currently many heirs enjoy a step up in basis so they can sell items, like stock, and pay little to no capital gains tax. Eliminating the step up and taxing the gains would create the need for many heirs to sell inherited property to afford the tax.   
• Possible elimination of the state and local tax deduction cap of $10,000 for individuals who itemize. Many states already have passed, and more are passing workarounds so that this cap is less of an issue.
• Extend the increased Child Tax Credit for years (possibly 5).
• Increase the corporate tax rate from 21% to 25% or 28%.
• Increase tax enforcement. The tax gap (tax owed minus tax paid timely) was thought to be approximately $584 billion in 2019 by the Treasury’s estimate. Much of this gap is thought to be due to underreported income.

These next couple of weeks will surely include much debate on Capitol Hill as to how discussions can proceed on the infrastructure bill, budget plan and possible reconciliation bill.

Source: CNBC, Reuters, The New York Times

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