President Biden’s proposal to eliminate the step-up in basis for calculating inheritance taxes is getting the cold shoulder from both Democrats and Republicans, Schwab’s top Washington D.C. lobbyist told advisors today.
Michael Townsend, Schwab’s vice president of legislative and regulatory affairs, called the Biden administration proposal to end the step-up in basis for inherited assets “really controversial. It is not at all clear that this can get through Congress and you may see them at some point go after the estate tax rate and try to take it up a little bit, but right now the prospects for eliminating step-up in basis are looking fairly rocky in Washington,” Townsend said during Schwab’s "Midyear Market Outlook" press conference.
The Biden White House designed the tax hikes to pay for the president’s two new spending bills—the American Jobs Act and the American Families Act. Combined with Biden’s March Covid-19 relief bill, the total tab for all three packages is $6.4 trillion over 10 years, or $50,000 per American household, according to the Congressional Budget Office.
To offset some of that expense, Biden wants to change the tax rules for unrealized capital gains held until death, doubling the rate to 40% with an $11.7 million exemption. He also wants to raise the top tax rate on capital gains to 43.4% from 23.8% for households with incomes over $1 million. The taxes would be retroactive to April.
“This is seen as the moonshot starting point proposal from the White House. There is plenty of room to come back and negotiate that,” Townsend said. “And there is sort of a sweet spot around 28% or 29%, somewhere in there, for a capital gains tax for the wealthiest filers.”
Wall Street and investors are worried that Biden will make any tax increases on capital gains retroactive, but the likelihood is dimming, Townsend said. “There really is not a lot of discussion about them being retroactive to the beginning of the year,” he said.
“It’s in the president’s budget. They proposed that the capital gains tax increases be retroactive to the announcement of the proposal which was April, but even that is something that has not gotten a lot of support on Capitol Hill, so I think it unlikely that we’re going to see any of these proposals being enacted retroactively.”
Biden also proposed increasing the corporate tax to 28% to pay for the $2.2 trillion American Jobs Plan. But “already there is strong push back from a number of prominent Democrats on the Hill that that’s too much of an increase. It seems like 25% is a more realistic outcome,” Townsend said.
Biden's original plan would increase the corporate tax rate from 21% to 28%, which is estimated to raise roughly $1.5 trillion over 10 years, according to the University of Pennsylvania's Wharton School.
To soften the blow and find common ground with Republicans, Biden this week proposed focusing instead on a minimum corporate tax rate of 15%, which would bring in another roughly $340 billion.
But both corporate tax hikes would disrupt former President Trump’s 2017 corporate tax cuts and are therefore non-starters for many Republicans.