President Biden released his $6.9 trillion fiscal year 2024 budget request, viewed as the White House’s opening salvo in government spending negotiations. The plan, which represents the President’s policy wish list and is nonbinding, aims to reduce the deficit by $3 trillion over the next ten years, building on last year’s request that sought to reduce the deficit by $1 trillion over that period, likely as an appeal to moderates. The proposal focuses on benefits for working families and the middle class and includes language prioritizing equity throughout, indicating it remains a focus for the White House in 2023. Overall, the request would increase defense spending by 3.2 percent and non-defense spending by 7 percent.
The deficit reduction strategy relies primarily on a package of tax increases worth $4.5 trillion that primarily target corporations and the wealthy, with the White House reaffirming its commitment not to raise taxes on people earning less than $400,000 annually. Several familiar tax proposals from past Biden budget requests made it into this year’s plan, including creating a 25 percent minimum tax on households worth more than $100 million that would apply to income and appreciated assets, raising the corporate income tax to 28 percent from 21 percent, raising payroll taxes on filers making more than $400,000 annually, and raising the capital gains tax rate for investment to 39.6 percent from 20 percent.These proposals are unlikely to win support from GOP deficit hawks who have indicated they won’t support tax increases in budget negotiations this year. As you’ll recall, House Republicans have threatened that they won’t address the debt ceiling without cutting federal spending, and the President’s budget request could be viewed as an opening offer from the White House as government spending and debt limit negotiations continue to ramp up.The budget proposal also includes many priorities Democrats failed to pass last Congress, which include increased investment in early childhood care and education programs, expanding insulin price caps, funding for paid family and medical leave programs, drug price negotiation reforms, and restoring the expanded child tax credit.
Tax Changes and Revenue Raisers
A number of familiar tax proposals from past Biden budget requests made it into this year’s plan, which would raise federal revenues by approximately $4.5 trillion over the next ten years. Although the plan is being billed as focusing on deficit reduction, likely as an appeal to moderates, several of the revenue raisers proposed by the White House are long sought-after priorities from the progressive wing of the Democratic party.
On the individual side, the budget proposes creating a 25 percent minimum tax on households worth more than $100 million in net worth (referred to as the Billionaire’s Income Tax), raising the top marginal tax rate from 37 percent back up to 39.6 percent, and hiking the capital gains tax rate for filers with more than $1 million in income to 39.6 percent from 20 percent. It would also close the carried interest loophole for private equity and increase the net investment income tax and Medicare payroll tax from 3.8 percent to 5 percent for those making more than $400,000 a year.
On the business side, the request would raise the corporate income tax to 28 percent from 21 percent and eliminate subsidies for oil and gas companies. The proposal would also double the effective global intangible low-taxed income (GILTI) rate to 21 percent to avoid incentivizing firms to shift profits offshore and raise the tax on corporate stock buybacks to 4 percent from 1 percent.
The budget forecasts 0.6 percent annual growth to GDP this year and 1.5 percent GDP growth in 2024. These projections align with the Federal Reserve’s predictions and are more pessimistic than last year’s budget proposal, which forecasted 2.5 percent GDP growth this year.
The White House expects inflation to continue to fall from its current 6.4 percent annual rate to 4.3 percent in 2023, eventually settling around 2.3 percent in 2025, close to the Federal Reserve’s target rate of 2 percent. The budget attributes lowering inflation levels to the WhiteHouse’s policies that have lowered prescription drug and healthcare costs. According to Bloomberg, these GDP and inflation projections generally line up with the consensus among economists.
Implications for the Charitable Sector
On the whole, the budget is light on proposals that seek to directly impact the sector. However, it does include several expanded benefits and programs that would assist nonprofit beneficiaries. These include restoring the enhanced child tax credit, expanding the earned income tax credit, and extending Affordable Care Act subsidies that make healthcare coverage more affordable. The budget also proposes expanding access to low-cost child care, increasing low-income housing tax credits, and funding increases for programs that counter food insecurity. Finally, the goal of promoting equity is present throughout the budget, a key priority for many in the sector.
The flip side of the coin is that to fund these new programs, Biden proposed significantly raising taxes on the wealthy, a group that makes up a large and growing portion of all charitable giving. Although, it is hard to predict how increased and expanded taxation would impact the wealthy’s charitable giving.
Importantly, the proposals included that directly impact the sector are not necessarily ones that will be a welcome sight. The budget proposal includes two provisions that were part of the Accelerating Charitable Efforts Act, which was introduced in the 117th Congress and would reform the tax treatment of foundations and donor-advised funds. Biden’s plan would limit the ability of private foundations to count distributions to donor-advised funds (DAF) toward their 5 percent payout requirement unless funds are distributed from the donor-advised fund by the end of the following tax year. It would also prevent payments made by private foundations to a disqualified person from counting toward their mandatory 5 percent payout, largely impacting family foundations. The private foundation to DAF provision was included in Biden’s budget request last year, but the family foundation provision is new.
The addition, and repeat inclusion, of these provisions suggests that the ACE Act proponents may be making headway in the Administration. Even though the bill has yet to be reintroduced in Congress, proponents will likely view the inclusion of these provisions as a win and seek to build off it in efforts of getting the bill reintroduced and building support on the Democratic side of the aisle. Furthermore, the inclusion of these specific provisions could point to their saliency among relevant players in Washington, signaling that they could play a more central role in future iterations of the ACE Act or similar legislation. Stay tuned. We will be closely monitoring how the Biden Administration’s embrace of these proposals lands on Capitol Hill.
Major Tax Changes Included:
- Increase the corporate tax rate from 21 percent to 28 percent
- Increase the excise tax on stock buybacks from 1 percent to 4 percent
- Double the global intangible low-taxed income (GILTI) tax rate from 10.5 percent to 21 percent
- Adopt the Undertax Payment Rule to replace the Base-Erosion Anti-Abuse Tax (BEAT)
- Eliminate the qualified business asset investment exemption for multinationals
- Eliminate the foreign-derived intangible income (FDII) deduction
- End the carried interest “loophole” for private equity, subjecting fund managers income to the income tax rate, rather than the capital gains rate
- Eliminate subsidies for oil and gas
- Increase the top marginal tax rate from 37 percent to 39.6 percent for single filers making more than $400,000 a year, or joint filers making more than $450,000 a year
- Increasing the long-term capital gains tax rate for those making at least $1 million in income annually from 20 percent to 39.6 percent
- End stepped-up basis making death or a gift a realization event for the purposes of capital gains taxes. *Donations to charity would be exempt
- Creates a 25 percent Billionaire’s Minimum Tax for households worth $100 million or more. The tax would include unrealized capital gains
- Increase the Net Investment Income Tax from 3.8 percent to 5 percent for individuals earning over $400,000 and apply it to pass-through income
- Increase the Medicare tax from 3.8 percent to 5 percent for individuals earning more than $400,000
- Limit the amount individuals making over $400,000 can hold in a Roth Individual Retirement Accounts
- Limit the tax break used by real estate investors for “like-kind exchanges”
- Modify the tax rules food grantor trusts
- Increase the child tax credit to $3,600 for children under six and $3,000 for older children, up from $2,000, and make it fully refundable, easier to access, and provide monthly payments
- Make permanent the expanded premium tax credits for the Affordable Care Act included in the Inflation Reduction Act
- Make the increases to the earned income tax credit (EITC) for childless workers permanent and restore the credit for taxable year 2023
- Make the adoption tax credit fully refundable
- Expand and enhance the low-income housing tax credit (LIHTC)
- Make permanent the new markets tax credit
- Create a neighborhood homes credit to fund to support building or renovating affordable housing
- Increase the employer provided childcare tax credit for businesses