As Americans gain more clarity about the outcome of the 2020 presidential and congressional elections, the prospects for federal tax policy in 2021 will also become clearer. A Biden administration may need to work with a Senate Republican majority (pending the results of the runoff elections in Georgia) and a democratically controlled house to resolve various tax policy issues in the coming year, including another round of pandemic-related economic relief and decisions on what to do about upcoming Tax increases that are built into applicable law?
One of the first priorities of a new Congress and Biden administration is to re-examine the economic relief currently being negotiated by the Trump administration and spokeswoman Nancy Pelosi (D-CA). While there is a chance an aid package may come together in the next two months, it is more likely that the next Congress and Biden administration will have to revisit this discussion and reach a compromise on key areas of disagreement. This includes the size and shape of state and local aid, whether to provide more generous federal unemployment benefits, and the potential size and scope of the relief for businesses.
Policy makers must also decide whether to extend the provisions of the CARES law that expire at the end of the year, e.g. B. the waiver of the penalty for early withdrawal from retirement accounts if not regulated by Congress and the Lame Duck Administration. There is also a Democratic interest in providing relief through an Extended Child Tax Credit (CTC) or Earned Income Tax Credit (EITC), proposals that President-elect Biden also included in his tax plan ahead of the election. There is likely to be a debate about how important such proposals are to pandemic relief, whether changes to these loans should be temporary or permanent, and how these extensions would serve to spark bipartisan interest.
In addition, there are several tax enhancers – temporary tax rules that Congress may decide to extend – that will expire at the end of the year. These extenders include excise tax relief for brewers, wineries, and distilleries, as well as other industry-specific regulations. These extenders will expire in late 2019 under an agreement to push many of them forward by late 2020.
Federal political decision-makers will not only have to worry about pandemic relief and tax increases in the next year. From the end of 2021, the numerous changes to tax policy in the Tax Reduction and Employment Act (TCJA) will begin. These tax changes are likely to dominate the tax policy discussion for the next half decade, as both parties may have an interest in reforming or repealing the tax changes built into current law.
In 2022, companies will have to amortize research and development costs over a five-year period, rather than the immediate deduction that companies currently use. Extending the R&D amortization schedule would reduce investment and economic growth in a time of weak economy, while undermining the competitiveness of American R&D. If policymakers cancel this upcoming amortization of R&D spending, long-term economic output will grow 0.2 percent and about 47,000 additional full-time jobs would be created according to the Tax Foundation's General Equilibrium Model.
In addition to amortizing R&D expenses at the end of 2021, companies that use debt financing will have a stricter limit on the deduction of interest expenses, which differs from the current limit of 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA) ) to 30 percent of earnings before interest and taxes (EBIT). This will increase the effective tax rate on debt-financed investments, and companies that invest more could be at greater risk of hitting the threshold.
These two changes in trade tax will be followed by an exit from expenses for short-lived assets from 2023. A permanent bonus amortization of these assets would increase long-term production by 0.9 percent and create around 183,000 full-time positions. General equilibrium model of the tax foundation.
The TCJA's individual income tax rules will also expire in late 2025, bringing back a higher individual income tax rate of 39.6 percent, a lower standard deduction, a return to personal exemption, and a less generous CTC.
Ideally, policymakers would decide how to deal with these impending tax changes in the years to come and avoid temporary tax changes that bring the can to its knees. This would help provide taxpayers with security and a better tax environment for business investment and economic growth. It should also be a priority to prevent these built-in tax increases from undercutting recovery.
Eventually, the Biden government will likely need to rethink how to deal with its sweeping tax proposal aimed at increasing taxes on higher incomes. Biden's tax plan depended largely on a democratic turnaround in the 2020 elections. Current economic conditions make tax hikes an unattractive option in the short term, and a Republican-owned Senate makes it less likely that Congress would be interested in large tax hikes.
President-elect Biden and Congress should focus on areas of commonality and find incremental places to improve tax law. A non-partisan law recently introduced to support retirement planning is a good model of what gradual reform might look like. The 2020 election results suggest that compromise and incremental reforms will be the most promising approach to moving tax policy forward over the next few years.
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