The Ten Biggest Tax Increases in the Build Back Better Bill
December 22, 2021
The House of Representatives passed the long-anticipated Build Back Better Act on November 19th, 2021. The bill contains many of the Biden Administration’s favored proposals, amounting to hundreds of billions of dollars in new spending on education, infrastructure, climate change initiatives, and other priorities.
For example, the Build Back Better Act, as currently constructed, includes funding for universal preschool, expands Affordable Care Act subsidies, and electric vehicle subsidies of up to $12,500 per vehicle.
In nominal terms, the bill would result in the biggest tax increase in U.S. history. As a percentage of GDP, it still ranks as the fourth largest increase. That said, the costs fall almost entirely on corporations and on the top 1 percent of earners – specifically, those earning about $885,000 per year and up.
Here is a list of the most significant tax increases in the Build Back Better Act, their size, and when they may become effective, under the bill as currently written:
1. Corporate Alternative Minimum Tax. (IRC § 55, 59, new § 56A) The bill includes a 15 percent alternative minimum tax on the adjusted financial statement income (“book income”) of large corporations. This measure, effective for tax years beginning after December 31st, 2022, is expected to raise $318.9 billion for the government.
2. Application of net investment income (NII) to trade or business income of certain high-income individuals. (IRC § 1411). Effective as of the beginning of 2022, all trade or business income will be subject to a 3.8 percent surtax. The bill eliminates an exception for certain non-grantor trusts participating in businesses. It also eliminates net operating losses as a factor in determining NII. This provision will raise an estimated $252.2 billion.
3. New surcharge on high-income individuals. (new IRC § 1A, technical changes to §§ 453A, 876, 877, 904 962, 1291, 1301, 1398, 1446, 6015, 6225, and 7519). This provision will impose a new surcharge on high-income individual taxpayers as follows:
- 5% on adjusted gross income in excess of $10 million;
- 8% on adjusted gross income in excess of $25 million ($12.5 million for married couples filing separately.
This surcharge would be effective beginning with the 2022 tax year, and raise an estimated $227.8 billion for the Treasury.
4. Limitations on excess business losses of noncorporate taxpayers made permanent. Modifications to carryforwards. (IRC § 461(l)) If passed, this provision will become effective retroactively, beginning with tax year 2021. It will raise an estimated $160.3 billion for the Treasury, if passed as is.
5. Modifications to deduction for foreign-derived intangible income. Global intangible low-taxed income. (IRC § 172, § 250). This provision would generate approximately 144.3 billion in new revenues to the government. Generally, these provisions would begin with the 2033 tax year.
6. Excise tax on stock repurchases. (new IRC § 4501). The Build Back Better Act as currently passed by the House imposes a tax on share repurchases of corporate stock, effective January 1st, 2022. Expected to raise $124.2 billion.
7. Modifications to base erosion and anti-abuse tax. (IRC § 59A). Effective tax years beginning on or after January 1st, 2022. Expected to raise $67.1 billion.
8. Modifications to inclusion of global intangible low-taxed income. (IRC § 951A). This provision generally applies to tax years of foreign corporations beginning after December 31st, 2022, and tax years of U.S. shareholders in which taxable year of foreign corporation ends. For example, if the corporation has a non-calendar fiscal year ending in October, the tax ramifications would flow through to your individual tax return for that year.
9. Limitations on deduction for interest expenses. (IRC § 163(o), 163(j)). This provision would raise an estimated $27.9 billion. If passed, this measure becomes effective for the 2023 tax year.
10. Adjusted basis limitation for divisive reorganization. (IRC § 361). This measure raises an estimated $17.8 billion.
These ten provisions together are expected to generate $1.397.5 trillion for the government over the next decade. Additional more minor provisions will generate about $78.6 billion, for a total tax increase of $1.476 trillion.
These other provisions include:
- Expansion of constructive sale and wash sale rules to digital assets. (IRC § 1091). Effective for tax years beginning after December 31st, 2021. Raises approximately $16.8 billion.
- Modifications to foreign tax credit limitation. (IRC § 904, 905, technical changes to §§ 250, 864, 901, 907, 6511).
- Modification to portfolio interest exemption. (IRC 871).
- Deduction for foreign source portion of dividends limited to Control Foreign Corporations (CFCs); modifications to rules for determining the status of foreign corporations as CFCs and for income inclusion under CFC rules. (IRC 245A, new § 951B).
- Several measures were cut from the bill as it wound through the House of Representatives. Important measures that didn’t make the final version include:
A top marginal income tax rate increase to 39.6%. However, some of these households that dodged this bullet may become subject to the high-income surtax mentioned above.
- Capital gains rate increase from 20% to 25%. However, see the surtax on net investment income described above.
- An accelerated reduction in gift, estate and generation-skipping transfer tax exemptions.
From here, the bill goes to the Senate, which is expected to make a number of changes, and possibly roll back some of the spending measures. But we’re not expecting any major changes to these tax increase provisions.
Once passed, the bill will go into reconciliation, with leaders hammering out the differences between the House and Senate versions. Once that’s done, both chambers will vote on identical versions of the bill. Once that’s done, the bill heads to the President’s desk, where he is almost certain to sign it.
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