Chances of President Biden convincing Congress to pass his tax hike on the wealthy—a package that one estimate says will impose a rate of up to 61% on rich taxpayers—appear to be dwindling, as Democrats in high-tax and farming states signal their opposition.
The revenues the capital gains taxes would generate are central to paying for Biden’s ambitious $6 trillion budget plan. That plan seeks to raise the top tax rate on capital gains to 43.4% from 23.8% for households with income over $1 million. Biden would also change the tax rules for unrealized capital gains held until death, doubling the rate to 40% with an $11.7 million exemption. The taxes would be retroactive to April.
While the plan is ambitious, all 50 Democrats in the Senate must vote yes if Biden hopes to pass his budget using reconciliation, and that would require Vice President Kamala Harris to cast the tie-breaking vote.
“Given the current opposition in Congress with the margins just about as tight as they could be, if even one Democrat senator opposes this proposal, it won’t go anywhere,” Garrett Watson, senior policy analyst for the Tax Foundation, told Financial Advisor magazine. “It’s a significant departure of what we have now and would increase the tax rate on wealth to nearly twice the effective tax rate any asset faces today.”
Watson called Biden’s plan to tax unrealized gains at death and levy the estate tax at the same time “quite unique. Traditionally estate tax law has allowed for a step-up in the basis of transferred assets so that they were not hit by the capital gains tax and the estate tax at the same time. Combining both taxes results in an effective tax rate of 61%,” Watson added
The Tax Foundation issued a report recently that laid out why it sees Biden's plan raising the rate to 61% for some taxpayers.
“For an asset worth $100 million (all of which is a capital gain for the sake of simplicity), the two changes would mean an immediate capital gains tax liability of $42.9 million at the time of death. Upon paying the capital gains tax at death, the value of the $100 million asset falls to $57 million for the purposes of the estate tax. After subtracting the $11.7 million exemption, the 40% estate tax rate is levied on the remaining $45.3 million in assets to produce an additional estate tax bill of about $18.1 million,” Watson wrote in a Tax Foundation blog. The total tax bill on the $100 million asset under Biden’s capital gains plans is $61 million, or 61%, he concluded.
The hikes are so steep a growing number of Democrats facing re-election are balking at the proposal. Sen. Mark Warner (D-Va.) told reporters he wants to maintain a lower tax rate for capital gains than for ordinary income. Lawmakers from farm states, such as Sen. Jon Tester (D-Mo.) and Rep. Cindy Axne (D-Iowa), object to Biden’s doubling capital gains at death. And Sens. Joe Manchin (D-W. Va.) and Kristen Sinema (D-Ariz.) don’t like Biden’s proposed $15 federal minimum wage mandate.
“Right now, Democrats have a pretty mixed reception to Biden’s proposal and Republicans are very skeptical or oppose it,” Watson added. “Even in the House, Democrats only have a half-dozen vote lead and if they lose them over their demand for a SALT repeal or reduction, that could be a problem.”
If the White House decides to pare back the tax on unrealized gains at death, that will also likely restrict how high it can raise capital gains taxes, Watson said. If you raise the rate too high, a significant portion of people will decide not to sell and will hold on to assets. Tax avoidance reduces revenues.