2020 Election Aftermath: The Future of U.S. Tax Policy

David Stewart: 0:02

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: election aftermath. With former Vice President and now President-elect Joe Biden heading to the White House in January, we're going to take a look at what a change in administration means for U.S. tax policy. Back in September, I spoke with Tax Notes reporters Alexis Gravely and Jonathan Curry about each of the presidential candidates' tax plans. Now they're both back to discuss the last two months of President Trump's term and what we can expect from the incoming Biden administration. Later on, we'll hear from Tax Notes senior reporter Paul Jones about the outcome of some tax-related ballot measures across the U.S. But first, Alexis, Jonathan, welcome back to the podcast.

Alexis Gravely: 1:48

Thanks for having me.

Jonathan Curry: 1:49

It's great to be back, Dave.

David Stewart: 1:50

Now a note before we get started that we're recording this on Wednesday, November 11, which is to say that election results have not yet been certified, but Joe Biden is projected to have secured an electoral college victory. Alexis, can you briefly remind us what were some of the big tax policy ideas Biden put forth as a candidate?

Alexis Gravely: 2:08

The crux of Biden's tax plan is that corporations and those making over$400,000 need their taxes increased. And those could come in the form of a higher corporate tax rate, a higher rate for the top individual income tax bracket, and also taxing capital gains the same as ordinary income. And those were just a few of the things that he proposed as revenue raisers. There are plenty more. And then that revenue would be used to pay for other parts of his platform. And then for those making less than$400,000, Biden has insisted that their taxes won't go up. And that appears to be true, at least not anytime soon. Some models have predicted that middle-income tax payers would end up shouldering part of the burden of an increased corporate tax rate, but the Tax Policy Center, for example, doesn't project that would happen until around 2030. And so, in the meantime, Biden has proposed a number of tax credits for low- and middle-income folks to help out with things like childcare, healthcare, and housing.

David Stewart: 3:13

Now, Biden has said that his top priority for this new presidency is handling the coronavirus. Has he mentioned any tax policy tools to combat the pandemic or the current economic downturn?

Alexis Gravely: 3:24

So, explicitly there hasn't really been a lot there. And in mid-September, he added to his platform a proposal to expand the child tax credit and make it refundable for the duration of the pandemic. And that's already been passed by House Democrats in the HEROES Act. So, he was just sort of signing onto it by adding it to his platform. And as far as I know, that's really the only specific reference that he's made to tax policy and COVID. Now, I checked out his transition document, and that lays out his plans for COVID and the economy. It doesn't say things like,"We're going to use tax credits to do X, Y, and Z." But some of what he's listed on his agenda could be accomplished using tax policy because some of the things have been mentioned before. So, for example, in his agenda, he has this part, which says,"Provide a restart package that helps small businesses cover the cost of operating safely, including things like plexiglass and PPE." And to me, that sounds similar to something that House Republicans proposed in legislation they introduced at the end of October. Theirs was a healthy workplace tax credit, and it would essentially do the same thing. It would provide a refundable credit for businesses to use on those COVID mitigation expenses. So, I think if we see some of Biden's agenda items turn into actual legislation, we'll be able to see more clearly how his plans for the pandemic and tax policy can intersect and be intertwined.

David Stewart: 4:57

Since you bring up the transition documents, that brings me to my next question, which is about the transition team. It seems that Biden has begun to roll out his transition team. Have we learned anything about the tax people who might be involved in the new administration?

Jonathan Curry: 5:09

So, one of the key members of his transition team for Treasury is Lily Batchelder. She's an NYU law professor currently. She has written about a lot of subjects in the tax world, but she's especially known as a thought leader when it comes to taxing the wealthy. So, I think it will be interesting to see if and how that"tax the rich" angle is imprinted on Biden's tax team.

David Stewart: 5:28

As of today, there's a strong possibility of Biden coming into divided government upon inauguration with Democrats controlling the House and Republicans controlling the Senate. Last time we spoke, Alexis, you said that you were optimistic that Biden could pass some of his tax plans given his long history in the Senate. Do you still feel that way?

Alexis Gravely: 5:45

Admittedly, I am feeling a little less optimistic. And I think part of the reason is because since we last spoke, we've seen Congress unable to come together and deliver COVID relief. And a lot of economists have been saying for the last several months that that relief is essential. So, in my view, if they aren't able to pass something that's deemed necessary and they aren't able to do it in a bipartisan manner, then I can't see them coming together to do something like raise taxes, which Republicans are almost certainly not going to be fans of. Now, that's not to say that we aren't going to see any tax legislation for the next four years. A lot of folks have been pointing out that some of the tax policy changes made in the Tax Cuts and Jobs Act are set to begin at the end of 2021 and into 2022. And a lot of those built-in changes are tax increases. And so, there are most likely going to be lawmakers who aren't going to view these changes as ideal, especially if the economy is still recovering. And we could see a bipartisan push to reform or stop them from going into effect. But is Biden going to get to raise the corporate income tax rate on day one? I don't think that's going to happen.

David Stewart: 7:05

Well, let's turn to President Trump's final two months in office. Jonathan, what do you expect to see, if anything, from the White House in terms of tax policy or any sort of changes between now and inauguration day? And are we likely to get some sort of coronavirus package?

Jonathan Curry: 7:19

My crystal ball is telling me no, sadly. Back in October, Trump put the kibosh on negotiations over a coronavirus relief package and effectively ruled out any pre-election action on that front. At the time, though, he did promise that a deal was going to get done right after the election. Where things stand now, it kind of seems that in his mind, the election isn't really over. And so, I just don't expect there's going to be a lot of bandwidth for negotiating a deal in the current environment. Now that we do have tax extenders expiring at the end of the year, but Congress has a habit of waiting until those have already expired to really get down to bothering with them. So, if you ask me now, I'm going to go with I don't really see a whole lot of tax action within the next few weeks.

David Stewart: 7:56

All right. When you were here in September, you talked about this executive memorandum Trump signed about payroll taxes. Can you remind our listeners about that?

Jonathan Curry: 8:04

Yeah. The payroll tax deferral. In my mind, it's basically the 2020 of tax policy. It was bizarre and totally unexpected. In August, negotiations with Congress over a big coronavirus relief package had been stalled. And so, President Trump decided to get the ball rolling with some unilateral executive action. One of the ways that they decided to do that was through an executive order to defer the withholding and payment of the employee share payroll taxes, which is about 6.2 percent. Then the actual memo itself that Trump issued was pretty vague. I mean, it was just said that the deferral period would last from September 1 through December 31, and that it would apply to employees earning less than$4,000 biweekly. But overall the White House punted to Treasury to let them fill in the details of how it's all going to work. The idea behind it, though, was that they were going to defer those taxes now and then sort of, kind of twist Congress's arm and force them to forgive the taxes on the backend. But where things stand now, Congress doesn't really seem to be showing much sign of playing ball on that. And so, for now it's just a deferral and those deferred taxes they're going to be due between January 1 and April 30 of next year. So after that, if you haven't paid it back, penalties and interest start accruing.

David Stewart: 9:10

So, with Biden taking over the White House in January, what happens to this memorandum?

Jonathan Curry: 9:14

It does seem to have been more of a political move and not a practical one. The businesses which are on the hook administratively for withholding these payroll taxes, they said this would be an administrative nightmare and that it was basically unworkable. To my knowledge, very few businesses in the private sector actually took the White House up on this offer. Although I would love to see numbers on that one day. But the deferral did go into effect automatically for federal government employees and the military. And so, they'll have to reckon with that. It'd be interesting to see if federal employee unions if they decide to put pressure on the Biden administration saying, you know,"We need help to forgive this." It'll be interesting to see what happens. At the moment, Biden has been critical of the payroll tax deferral memo that Trump issued. And so, I don't see a lot of movement so far to forgive them.

David Stewart: 9:54

Well, looking back over the last four years, what would you say is Trump's tax legacy?

Jonathan Curry: 9:57

So, on tax it's definitely the Tax Cuts and Jobs Act, the 2017 tax law. You'll probably have noted by now that these are regularly called the Trump tax cuts. They're not called the McConnell tax cuts or the Paul Ryan tax cuts. And in my mind, the TCJA really is emblematic of Trump's overall approach to governing from these past four years. Number one, it was big. He got Republicans to ditch revenue-neutral tax reform, which was sort of the gold standard of tax reform that was always kind of eluding lawmakers. And they ended up with a nearly$2 trillion tax cut instead. It was marked by huge promises and exaggeration. Trump and his advisors were talking frequently about how the tax cuts would pay for themselves with extra economic growth. And that this economic growth would explode. And we'd have economic growth rates of four or five or even 6 percent GDP each year, which didn't happen. It was also very partisan. I mean, as soon as they ditched revenue neutrality, the idea that there'd be any Democratic support was effectively tossed in the trash. And then, finally, it was and continues to be somewhat of a chaotic law. The legislation was rushed through at the end of 2017 and it showed in the fact that there was the need for technical corrections, plus a ton of guidance from Treasury to fill in the blanks. And also for procedural reasons, many of its provisions are set to expire or phase out in the coming years. And so, kind of the chaos of passing the law is going to rear its head again in a couple of years. That's going to cause quite a few huge political battles.

David Stewart: 11:15

All right, well, this has been fascinating. Alexis, Jonathan, thanks for being here.

Alexis Gravely: 11:18

Of course. Happy to be on the show.

Jonathan Curry: 11:20

Thanks, Dave. Been a pleasure

David Stewart: 11:24

Now we'll turn to what happened with state ballot measures across the U.S. Please note that we recorded this on Monday, November 9. So, some of the vote tallies may have changed. Joining me now by phone from his home in California is Tax Notes senior reporter Paul Jones. Paul, welcome back to the podcast.

Paul Jones: 12:33

Thanks. It's good to be here.

David Stewart: 12:34

What sort of issues went before the voters in the states this year?

Paul Jones: 12:37

There were a whole range of issues. It really ran the gamut. We had proposals to create progressive income taxes. We had proposals to increase accountability for how tax dollars are spent. We saw efforts to provide more tax breaks in a couple of states to veterans or their spouses. And of course, there were efforts to increase taxes on tobacco and vaping. And a couple of states have approved measures to legalize and tax recreational marijuana.

David Stewart: 13:02

Let's start off with one of the more talked about tax-related ballot measures, California's Proposition 15. What's in that proposal? And where do things stand today?

Paul Jones: 13:11

Proposition 15 was a pretty ambitious proposal and the proponents of it worked on it for a couple of years. But it looks like it was killed by voters by about 52 to 48 percent. California obviously has a property tax law on the books, Proposition 13, which I think is pretty well-known. And that restricts taxation of property, including by assessing properties based on their latest value at sale with a small upward adjustment each year. And commercial properties are subject to that as well as residential properties. And critics of Proposition 13, who've argued that it's negatively affected the state's ability to fund services such as education, argued that commercial properties should be taxed based on their fair market value, their current value, and not under the rules originally set by Proposition 13. And really for several years, they've been pushing for some sort of a split-roll proposal. And in 2018 they got a ballot measure qualified, and then they set it for the 2020 election and then decided to tweak it. So, they had to get a completely separate ballot initiative, pretty similar to the one that they had already qualified for the ballot. And that was what went before voters November 3. And you have educators, the state's democratic party, a lot of public sector unions, progressive groups, all pushing for this measure. They were hoping that if commercial properties worth over$3 million or whose owners had more than$3 million worth of commercial holdings in the state, that if those properties were taxed at their fair market value, it would generate about$12 billion. That was sort of the upper tier estimate. About$12 billion more for education and local governments in the state. But it was defeated. Again, 52 percent opposed to 48 percent in favor after all of this energy, this effort. And I think it really just sort of indicates that Proposition 13 continues to have a real hold in California, over 40 years since Proposition 13 passed. And this was targeted at businesses and commercial properties. And there's still this strong resistance in the state to modifying that. Opponents obviously included tax watchdogs. One of them, the Howard Jarvis Taxpayers Association, is sort of one of the guardians of Prop 13's legacy. And they were arguing this would potentially hurt small businesses that have to rent commercial property to operate. And that also the costs would be passed on to consumers. And they're pretty satisfied. I spoke with John Coupal, the president of the Howard Jarvis Taxpayers Association, last week. And he said that he'd used this as a sort of reconfirming that voters support Prop 13.

David Stewart: 15:37

Now turning to state income taxes. I understand that Illinois and Arizona both weighed in on changes and got differing results. Can you tell us a little about that?

Paul Jones: 15:46

What happened in Arizona isn't necessarily surprising, but it is notable. The state's public education system received a lot of cuts after the 2008 recession and that money was never quite restored. The state has approved increases for education-- the legislature and the governor within the past couple of years. But educators have argued that it doesn't provide sufficient funding or pay to teachers. And that it therefore has a very difficult time attracting and retaining really well-qualified educators. And they had been pushing for a couple of years now to increase taxes on higher earners. In 2018, they got a ballot measure on the ballot with sufficient signatures, but it was taken to court because opponents argued that it was described in a misleading way. And the Arizona Supreme Court agreed and took that off the ballot. And then this year, they got Proposition 208 approved for the ballot and opponents again sued, but this time the state Supreme Court upheld it and kept it on the ballot. And now it looks like voters have passed it. This would impose a 3.5 percent income tax surcharge on income over$250,000 for individuals and over$500,000 for joint filers. And that essentially is an increase from 4.5 percent being the top income tax rate per state to 8 percent for that income. So that's a pretty significant increase. And this is a major win for educators and really progressives in Arizona. Arizona is obviously not a state that's known for being particularly progressive when it comes to tax matters. The governor, Doug Ducey, has actually run on a pledge that he wouldn't increase taxes and the decision by voters to approve this. I think, again, it was about 52 to 48. This time, 52 percent in favor to 48 percent opposed, I think really indicates that the proponents of Proposition 208 made their case to voters that they need more funding for education and notably that it should come from higher earners. The opponents are arguing that this is going to hurt the state's economy. It's going to make it less attractive to wealthier residents. We'll have to see if that pans out. But there was polling showing the Prop 208 was going to pass. But it is still notable that Arizona has decided to support this measure in my opinion. And so, moving on to Illinois, this is also interesting. In Illinois, Governor Pritzker was pushing hard for a constitutional amendment to allow progressive income taxation in the state. And in fact, the legislature had already approved a bill that was going to establish six tiers if voters approved that constitutional amendment. And I think that our reporter Aaron Davis has been covering that closely. He's got very good coverage of that. And it was people earning over$250,000 who were going to actually see an income tax increase. And this fight was in part between Pritzker and another billionaire, Ken Griffin. And so, there was sort of a billionaire versus billionaire dynamic to this measure's race. But ultimately about 55 percent of voters voted in opposition to this. So, despite a warning by Governor Pritzker that without this, they were going to have to make deep cuts or make even a general increase to the flat income tax. They were going to have to find billions of dollars that they were hoping would come in through approval of a progressive income tax, voters still just decided that they didn't want to go with making this significant change and allowing for progressive income taxation in the state.

David Stewart: 19:01

Another ballot measure that we saw was kind of an interesting one out of Alaska, where there was a plan to increase taxes on production at three legacy oil fields on the North Slope region. So what's happening up there?

Paul Jones: 19:13

Yeah, that was Alaska's ballot measure 1. And I think it was about 65 percent had voted against it as of the last tally and 35 percent had voted in favor of it. And that measure was really sort of backed by some of the former officials with Gov. Bill Walker, who was the previous independent governor, some of the people in his administration, some Democrats in the state. Their interest was to increase taxes on particularly some of these larger companies that own areas in the legacy fields of the North Slope. And they wanted to increase their production taxes. The state of Alaska has had deficits for years now. The lower price of oil has really hit it hard. And it's even had to figure out ways to take some of the earnings from its sovereign wealth fund in order to balance budget. And that's in addition to cuts. So, some of the moderate to progressives in the state have looked at, for a couple of years now, this idea of going after oil companies for a little bit more revenue. During Governor Walker's administration, they actually reduced a lot of the incentives for oil companies, including ending cash payments for certain credits that would be paid to oil companies for exploration. And now, there was this effort to try and actually go after major producers and just generally increase taxes on them. And it just didn't take with voters. As I said, as of the last tally was about 65 percent in opposition. And the state's Chamber of Commerce, the Alaska Oil and Gas Association, major oil companies all spent an enormous amount of money opposing this. And their argument was this will make Alaska less attractive to these companies. Not just, I think, because it would increase taxes on some of the major companies there. But in addition, that Alaska has been making changes to its oil tax regime, not regularly but frequently. And so, they were claiming that this is creating an image of an unstable business environment for oil companies. And I think that given how dependent Alaska is on oil, maybe that resonated with voters, that they decided just not to tinker with that regime any further.

David Stewart: 21:12

I suppose we can't talk about state tax ballot measures without recognizing this, what appears to be, a growing trend toward legalizing and taxing recreational marijuana by ballot measure. So, what sort of changes have we seen this year?

Paul Jones: 21:25

We've seen a number of states approve marijuana. There were several that approved medical marijuana. But we also saw voters in Arizona, going back to that state, approve Proposition 207. That would apply, I think it was a 16 percent tax on the retail price of marijuana in the state. Montana voters also opted to legalize recreational pot. That was, I think, by about a 57 percent in favor vote margin. And that will apply a tax of 20 percent rate. And then, New Jersey also legalized recreational marijuana as did South Dakota. And it just seems like as more and more states have legalized marijuana, recreational marijuana or medical marijuana, there's just this sort of effect that it's becoming easier and easier to convince people that it's worth a try. And of course, the proponents of legal marijuana also argue that this will generate significant revenue that can be used to fund general operations and also specifically efforts to help people dealing with addiction to marijuana and sometimes also other substances as well. So, it does seem like there's sort of an ongoing trend here of state voters being more and more receptive to the idea that the best approach to dealing with marijuana is to legalize it and then also tax it in order to use that revenue to address some of the negative effects of marijuana and again, other substances as well.

David Stewart: 22:43

Paul, I thank you very much for being here.

Paul Jones: 22:45

It's always a pleasure. Thanks.

David Stewart: 22:47

And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now from her home is Acquisitions and Engagement Editor in Chief Faye McCray. Faye, what will you have for us?

Faye McCray: 22:58

Thank you, Dave. In Tax Notes Federal, Lee Kelley, Kandyce Korotky, Jeffrey Zink, and Alex Zhang argue that the economic– as opposed to the physical– destruction of property is enough to trigger section 1033 relief. Ken Brewer and Nicolaus McBee acknowledge that Treasury expanded the application of the relation-back doctrine, allowing taxpayers to use many more foreign tax credits. In Tax Notes State, Jonathan Iversen discusses the impact the pandemic has had on the oil and gas industry in Alaska. Tram Le discusses initiatives designed to reduce compliance burdens associated with state and local sales taxes for remote sellers. In Tax Notes International, Kimberly Clausing analyzes 2017 country-by-country reporting data released by the United States. Eng Kiat Loh examines loss carryback during the pandemic. And on the Opinions page, Nana Ama Sarfo interviews tax attorney Loren Ponds about her path from Georgetown to the OECD to the House Ways and Means Committee staff where she helped write the TCJA.

David Stewart: 24:00

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online@TaxStew, that's S-T-E-W. And be sure to follow@TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.