President Biden's FY24 Greenbook - Observations on Some Items

On March 9, 2023, President Biden released his FY 2024 budget (and related docs) and Greenbook that describes his tax proposals. It repeats many proposals that were in his FY2022 and/or FY 2023 Greenbooks (see comparison and links here for the FY22 and FY23 plans).

Themes, similar to recent years, include increasing corporate taxes such as increasing the 21% corporate rate to 28%. Unlike a House proposal last year (which was later dropped from Build Back Better), for graduated rates, are not proposed. The proposed 28% flat rate is still below the pre-TCJA maximum of 35%. As noted in President Biden's recent State of the Union address, he would increase the recently enacted corporate buyback excise tax from 1% to 4%. I believe the logic is to not only raise some revenue, but to address what some corporations do with corporate tax savings and a buyback might be used instead of a taxable dividend payout.

Observation: While individual tax increase proposals continue to be aimed at those with income above $400,000, the corporate tax increase proposal will indirectly affect all individuals. Eventually, all corporate tax is paid by some combination of shareholders, customers and employees. To keep a promise of not increasing taxes on individuals with income below $400,000 (which is about 98% of individuals!), this proposal should be skipped. 

There are several proposals to reform international taxation. I'm not an international tax expert so I can't opine on them, but it does seem that there is a need to revisit the changes by the TCJA, recent changes to foreign tax credit regs that many have noted have problems, and consider what other countries are doing including regarding OECD Pillars I and II.

The Greenbook continues for the third time to call for repeal of all fossil fuel preferences. In 2021 when the House Democrats worked on Build Back Better this was not included. This also needs discussion as it is odd that our tax law has rules that both encourage development and use of carbon-free energy and fossil fuels. Phasing out the 13 preferences for fossil fuels over a period of years would make more sense than outright repeal, and less disruption to the industry.

The Greenbook calls for restoring the top individual tax rate of 39.6% in 2023 instead of 2026 as called for by the Tax Cuts and Jobs Act of 2017. Less than 1% of individuals have income high enough to be in this bracket. 

Observation: Given challenges of tax changes in a split Congress, why not just wait for this higher rate to automatically return on its own in 2026? 

The Greenbook also calls for having the Net Investment Income Tax (NIIT) of 3.8% currently applicable to NII of high income individuals to apply to all pass-through income of high-income individuals (including President Biden and his S corp income). He also proposes increasing the rate to 5% for individuals with income over $400,000. He would also redirect NIIT revenue to the Hospital Insurance Trust Fund which has been having problems.

Observation: The NIIT was created by the Affordable Care Act and the 3.8% rate ties to Medicare taxes. Why the revenue wasn't for the HITF in the first place seemed odd. So this seems to make sense. What should the NIIT apply to? Personally, I'd like to see this reviewed along with the regular and capital gain tax rates for individuals (non-corporate taxpayers) to instead have some uniformity of definitions (there are at least two different definitions of NII in the Code), examine the logic of having special rates for investment income oddly defined (NII applies to both investment income and some passive business income - why?), and see if there can be fewer tax rate structures for individuals.

President Biden continues to call for capital gains and qualified dividends of individuals with income over $1 million to be taxed at ordinary rates + the NII. And he continues to call for treating appreciated property transferred by gift or death as realization events.

Observations: Why not tax all of some capital income at the same rates as wage and interest income? Yes, gains on capital assets can also include inflationary gains, but with so many people using tax prep software, the capital assets could be adjusted for inflation before gains are calculated and all of the income taxed as the same rates. That was what we had under President Reagan's Tax Reform Act of 1986 - all income taxed at the same rates, but there was no inflation adjustment for assets held over one year. I think that is worth exploring.  Arguably, taxing all of this income at the same rate could remove the need for the NIIT and possibly allow for lower regular tax rates.  And taxing gains at date of death makes sense. Why should that income forever be excepted from income tax? For example, if someone with stock that has billions of dollars of unrealized gain sells it today, all of that gain is subject to income tax. But if that wealthy stockholder dies today, none of that billions of dollars of gain is ever taxed because when transferred to their estate, it is not treated as a realization event and heirs get the stock at FMV rather than the decedent's basis. What is the logic for this and this enormous tax break primarily benefits a small number of very wealthy individuals. And, President Biden has exceptions including for transfers to charity, transfer to the surviving spouse, and a $5 million exclusion per person. With that large exclusion, over 99% of individuals would not be subject to the tax, but the very wealthy folks in the very top of the 1% with billions of dollars of gain at death would pay tax.

President Biden calls for a larger and refundable/advanceable child tax credit (CTC) to benefit those with children under age 18 for 2023 through 2025. This sounds like what we had for 2021.

Observation: The higher 2021 CTC is estimated to have reduced child poverty by about 30%. The additional funds for families helped improve their household economics and arguably also helped the economy. This also needs discussion and perhaps there is some bipartisan support as all members of Congress had many constituents whose lives were improved with the extra dollars. In 2026, the CTC drops from $2,000 back to $1,000 (but the personal exemption returns along with a smaller standard deduction and higher individual tax rates). Discussion is needed to what the tax picture should look like for individuals at all income levels, with those in the top 10% of income broken down to smaller categories given the tremendous income gap in that top 10% (actually the income range even in the top 1% ranges from about $450,000 to over $450 million!)

And there is more - the Greenbook is 226 pages. I encourage you to look at the Table of Contents and proposals of interest to you.  I have a list of items that were in the last two Greenbooks if you'd like to compare (there is a lot of similarity).

Will anything be enacted? Probably not given the party split in Congress.  But there might be some areas of bipartisan agreement and some of the revenue raisers in Biden's plan, particularly if viewed as a "loophole" closer, might get picked up to help address other changes.  For example, there is bipartisan support to restore current deductibility for R&D expenses which we had in the law for 1954 through 2021 until the TCJA required capitalization starting in 2022. One example of what I'd call a loophole closer that is in the Greenbook again is to have the wash sale rules also apply to digital assets. There really isn't any reason why someone can sell Disney stock at a loss and buy it back and have to defer the loss, but sell bitcoin at a loss and buy it back (so stays in the same portfolio position) but does get to claim the loss now rather than defer it.

What have you looked at in the FY2024 Greenbook?

What do you think?

Finding Appropriate Tax Dollars for Health Reform

President Obama's revenue proposals for FY2010 released on May 12, 2009 (the "Greenbook") include 30 revenue raising proposals where the taxes generated are to be dedicated to the "Health Reform Reserve Fund." It is estimated that over 10 years, these 30 provisions will generate $325.6 billion. These 30 proposals are a wide gamut of provisions including capping the tax benefit of deductions of high income earners at 28%, new information reporting requirements, new enforcement tools, new penalties, repeal of LIFO, and estate tax modifications. It does not appear that any of the 30 revenue-raising provisions are related directly to health care. (The list of specific provisions can be found on pages ii - iii and 130 of the Greenbook.)

I find this approach troubling for two reasons:

1. The current tax rule that exempts the value of employer-provided health insurance from income (even though the employer takes a deduction for it) is a very generous provision of our federal tax system. The Joint Committee on Taxation estimates that for 2007, the exclusion resulted in a cost to the income tax system of $145.3 billion plus $100.7 billion to the Social Security system. Why are we ignoring this tremendous tax expenditure and ignoring the reality that federal dollars, via this exclusion, are being spent to favor employees with employer-provided health insurance while the government struggles to find dollars to help more people be insured. The dollars spent on the generous exclusion could be used more equitably to benefit more taxpayers. One approach would be to require high income individuals receiving the benefit to pay tax on part of that benefit. This should still make the benefit worthwhile (such that they would be unlikely to cancel their health insurance thereby jeopardizing the employer's ability to afford health insurance for all employees). President Bush had proposed eliminating the exclusion and replacing it with a standard deduction to also help cap the dollar amount of the benefit employees receive. A starting point towards bringing employees (the insured) into health care spending decisions would be to at least start having high income employees pay tax on a portion of their benefit. Also, the benefit is worth a lot more to high income individuals because they are in a high tax bracket.*
2. If a tax change is going to be earmarked to generate funds for a specific purpose (other than increasing the General Fund), there should at least be some connection between the items changed and the program to be funded. For example, if gasoline excise taxes were to be increased to fund the Highway Trust Fund, that would make sense.

* Note - the exclusion for employer-provided health insurance is a tremendous benefit because the employee never comes out-of-pocket to pay for anything. For example, if Amy's employer pays $10,000 of her health insurance annually, Amy saves a $10,000 outlay that she would otherwise have to make if she bought her insurance on her own. If Amy had to pay tax on 10% of this benefit and is in the 35% tax bracket, she would pay tax of $350 ($10,000 x 10% x 35%). She still gets a tremendous benefit because she gets $10,000 of coverage and it only costs her $350.

There have been hearings on various aspects of health care reform and the tax law. Several people testifying have noted concerns about reducing the health insurance exclusion as it may lead to some employers dropping plans and increases in the number of uninsured. People have also noted flaws in the health care system that need to be addressed because they increase costs for employers and individuals purchasing insurance.

Certainly, there are issues that need to be addressed in health care which cause us to have such high costs without the highest quality health care relative to other countries. I hope the discussions do look at other models of health care that don't tie it to employment and requiring employers to purchase health insurance for employees. We are entering an era of employees not tied to a single employer for their entire career and I think we'll see more individuals be self-employed entrepreneurs. Their health insurance costs will always be high due to the tremendous federal subsidy via the tax law that goes to employees getting health care coverage from their employers. Also, if other countries don't use our model, US employers face greater costs of doing business which will hurt their ability to compete in the global economy.

Health care reform is not easy due to the many broken pieces we currently have including inequitable government subsidies, the reliance on an employer-provided system that exists due to the historic artifact of wage controls in the 1940s, and an unwillingness to be more transparent, overt and focused on the need to generate at least some of the funds for health care reform from the current subsidy. Also note that the current tax subsidy for employer-provided health care is 8 times larger than what President Obama expects to raise from the 30 tax increases. This means that even a relatively small change in the subsidy - and even just for higher income individuals, would be sufficient to cover what he needs for the health care reform reserve fund.

I hope we can move to a more honest effort to generate funds for health care that include finding ways to reduce costs and to spread tax dollars more equitably to benefit more individuals. Let's start with connecting new funds for health care reform from the existing generous subsidy for health care.

What do you think?