Joe Biden is set to become the next president of the United States. The president-elect put forth an ambitious tax plan prior to the election, but Americans shouldn't count on their tax situation changing anytime soon.
The president cannot unilaterally change tax policy but instead can only urge Congress to act. And while the Democrats will control the House of Representatives, the Republicans will likely retain control of the Senate. Republicans currently have a 50-to-48 lead going into 2021. There are two runoff elections scheduled in Georgia in January, and the Republicans are slight favorites to win at least one, if not both. Unless the Democrats win both seats and count on Vice President Kamala Harris as a tiebreaker, the Senate will remain in Republican hands.
And that means the government will most likely remain divided until at least the 2022 elections. So it's worth looking at what this would mean for tax policy.
Divided government most likely means no major changes to the tax code
Tax policy is one of the major areas of division between Democrats and Republicans. While Republicans support lower taxes across the board, including for corporations and high earners, Democrats generally prefer to address income inequality by raising taxes on corporations and wealthy Americans and using the resulting revenue to accomplish key priorities, such as improving access to healthcare and strengthening the nation's retirement benefits program.
Because taxes are such a divisive issue, major changes to the tax code are most likely off the table with divided government. In fact, while Biden has promised to work across the aisle with Republicans and it's possible he could draw on relationships built over his years in the Senate to assemble a coalition of moderate lawmakers to vote in favor of tax modifications, there's a major obstacle standing in his way: Sen. Mitch McConnell (R-Ky.).
McConnell, as Senate majority leader, determines what bills are brought to the floor for a vote. If Republicans retain control, McConnell will remain in this leadership position -- and he's referred to himself as the "grim reaper" of Democratic proposals. The conservative stalwart likely won't even allow a vote on any major tax legislation that raises income taxes, payroll taxes, or capital gains taxes, or that rolls back any provisions of the Tax Cuts and Jobs Act, which was one of President Trump's signature accomplishments.
There's no impetus for change
If McConnell effectively has veto power over Biden's agenda, there will be little the incoming president can do to force a change to the tax code, and there's no immediate outside force that would necessitate major changes to tax law, either.
Under President Barack Obama, the "fiscal cliff" prompted a bipartisan tax deal. The fiscal cliff existed because of a confluence of prior laws that would've resulted in spending cuts and tax increases going into effect automatically unless Congress stopped them. Since neither Republicans nor Democrats wanted this to occur, lawmakers had no choice but to act. They ultimately reached a deal resulting in substantial changes to the tax code, including the imposition of a higher tax rate for top earners.
There's no such impending force in sight that could prompt a similar compromise bill over the first two years of Biden's term. While some of the tax cuts put in place by the Tax Cuts and Jobs Act are set to eventually expire, that won't occur until 2025. Republicans will likely hold out on any modifications at least until the 2022 election and more likely until 2024 in hopes of taking the White House back.
Does that mean nothing will change?
Although tax rates for individuals and corporations are unlikely to change and Biden likely won't be able to modify capital gains or estate tax rules, there may be some minor modifications to tax rules during his presidency. In fact, there are some proposals that have at least some bipartisan support, including:
- Offering more generous tax benefits to incentivize retirement contributions.
- Expanding the Earned Income Tax Credit, which is a refundable tax credit for the working poor that encourages participation in the labor market.
- Expanding the Child Tax Credit.
And while Biden's proposal to increase taxes on the wealthy to shore up Social Security isn't likely to be popular with those on the right, the program is facing an impending funding shortfall that the coronavirus has exacerbated. It will need to be addressed sooner rather than later. It's unlikely lawmakers will act in the next two years, but it's possible there may be some attempts to compromise on this issue as delaying only makes finding a solution harder. If there is a compromise, it could include some increased payroll taxes.
What can Biden do by executive order?
He can't make many substantive changes to the tax code by executive order, but he can direct the IRS to write new regulations or alter existing regulations that address ambiguities in the tax code.
For example, under Trump, the IRS issued guidance disallowing a work-around to a cap limiting the amount of state and local taxes that are deductible. The Tax Cuts and Jobs Act limited deductions for state and local taxes (SALT) to $10,000, and some high-tax states put forth various proposals to get around the cap, which IRS regulations thwarted. With many Democrats opposed to the SALT cap, it's possible Biden could direct the IRS to rewrite the rules and allow some of those work-arounds.
Biden has also indicated he wants to boost funding to the IRS to enable the agency to better pursue tax dodgers. The IRS has been the subject of numerous budget cuts, which some argue have enabled tax cheats to avoid paying billions. The new president may be able to redirect existing funding via executive order to go after tax evaders or push for more money in any proposed budget deal Congress makes.
Don't expect modifications to your taxes in 2021
Even if the next president is able to make changes via executive order or get bipartisan support for some tax modifications, it's unlikely any changes will take effect next year since legislation and changes to regulatory rules both take time. In fact, the Tax Cuts and Jobs Act was not signed into law until December 2017, even though the Republicans enjoyed unified control of the government after Trump was elected in 2016. And it did not go into effect until 2018.
That means even if the Democrats do manage to win a majority in the Senate after the Georgia runoff elections, Biden's ambitious tax plans probably won't affect your pocketbook until 2022 or later.