President Joe Biden’s Fiscal Year 2023 budget proposal includes 36 tax increases on American individuals and business totaling $2.5 trillion over the next decade. This includes 11 tax increases on the oil and gas industry at a time when the price of gasoline is at record highs. It also includes tax increases on businesses that will give the U.S. a higher corporate tax rate than Communist China and other foreign rivals.
However, this does not include all the tax increases being pushed by Democrats because this budget omits the cost of tax increases within their stalled Build Back Better Act. Instead of detailing these tax increases, the Biden budget includes a placeholder asserting that any new spending will be fully offset. As noted by Bloomberg, the administration’s proposed spending plan would cost $1.75 trillion and included $2 trillion in tax increases.
Here is the full list of tax increases in Biden’s FY 23 budget:
1. Raise the corporate income tax rate to 28 percent: $1.3 trillion tax increase
After accounting for state corporate taxes, Biden will give the U.S. a 32 percent corporate rate, a tax rate significantly higher than Communist China’s 25 percent tax rate.
This tax increase will be passed along to families in the form of higher prices of goods and services. For instance, a 2020 study by the National Bureau of Economic Research found that 31% of the corporate tax falls on consumers. Annual inflation increased by 7.9 percent in February, the highest reading in 40 years. Americans are seeing the price of energy, food, and transportation increase and this tax will only make this problem worse.
In addition, a corporate tax increase will harm workers in the form of lower wages and fewer jobs. In a 2017 report, Stephen Entin of the Tax Foundation argued that 70% of corporate taxes are borne by labor. Other economists argue that anywhere from 20% to 50%, to even 100% of the tax hits workers.
This tax increase won’t just hit large businesses. 1.4 million small businesses organized as C-corporations will get hit by Biden’s corporate tax rate hike, as noted by a study from the U.S. Chamber of Commerce.
A corporate tax increase will also threaten the life savings of families by reducing the value of publicly traded stocks in brokerage accounts or in 401(k)s. Individual investors opened 10 million new brokerage accounts in 2020 and at least 53% of households own stock. In addition, 80 million to 100 million people have a 401(k), and 46.4 million households have an individual retirement account.
2. Increase the top income tax rate to 39.6 percent: $186.8 billion tax increase
This tax increase will hit small business that are organized as sole proprietorships, LLCs, partnerships and S-corporations. These “pass-through” entities pay taxes through the individual side of the tax code.
A significant portion of business income is paid through the individual side of the tax code. As noted in a Senate Finance Committee report, “in 2016, only 42 percent of net business income in the United States was earned by corporations, down from 78.3 percent in 1980.”
3. Double the capital gains rate to 40.8 percent and the imposition of a second death tax by imposing capital gains taxes on unrealized assets at death: $174 billion tax increase
The U.S. currently has a combined capital gains rate of over 29 percent, inclusive of the 3.8 percent Obamacare tax and the 5.4 percent state average capital gains rate. Under Biden, this rate would approach 50 percent. This would give the U.S. a capital gains tax that is significantly higher than foreign competitors.
Under Biden’s plan, Californians will pay a top capital gains tax rate of 54.1 percent (37% + 3.8% + 13.3% California state rate = 54.1%).
The budget will also impose the 40 percent capital gains tax on the unrealized gains of every asset owned by a taxpayer when they die. This will be imposed in addition to the existing 40 percent Death Tax and will disproportionately fall on family-owned businesses, many of which are asset rich, but cash poor.
These businesses are already forced to liquidate structures, equipment, land, and other assets because of the Death Tax. Repealing step-up in basis will compound this problem and force family-owned businesses to sell a significant portion of their business or go into significant debt to pay their tax liability.
Taking away step-up in basis has already been tried and failed. In 1976 congress eliminated stepped-up basis but it was so complicated and unworkable it was restored in 1980.
As noted in a July 3, 1979 New York Times article, it was “impossibly unworkable”:
“Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law’s effective date until 1980 while it struggled again with the issue.”
4. Impose a 20 percent minimum tax on “billionaires”: $360.8 billion tax increase
This tax, called a “billionaire minimum income tax,” would impose an annual 20 percent tax on taxpayers with income and assets that exceeding $100 million, a $360 billion tax increase.
This tax is just the latest attempt by the Democrats to reshape the tax code and pass a tax on unrealized gains. This new tax is similar to the wealth taxes pushed by radical progressives such as Senator Elizabeth Warren (D-Mass) and Bernie Sanders (I-Vt.).
It would create a “mark to market” regime that would force Americans to pay taxes every year on the paper gain in the value of assets (i.e. stocks, collectibles, real estate). Currently, taxpayers only pay the capital gains tax when an asset is sold. This makes sense because the asset is illiquid until it is disposed of. This tax on unrealized gains would create a new tax system that requires taxpayers to pay tax on the value of an asset based on the value of these assets on a particular arbitrary date. It would empower the IRS, encourage taxpayers to move assets overseas, and could grow to hit millions of Americans over time. It would also harm the economy, impose retroactive taxation, and has failed everywhere it has been tried before.
5. Apply the Undertaxed Profits Rule: $239 billion tax increase
This would help enact the 15 percent global minimum tax effort by disallowing foreign based companies operating in the U.S. deductions if that taxpayer pays a rate below 15 percent. The proposal assumes other countries adopt this tax on U.S. businesses, which would impose a tax when the U.S. business pays an effective rate below 15 percent.
6. Prevent basis shifting by related parties through partnerships: $61.7 billion tax increase
7. Tax carried interest capital gains as ordinary income: $6.6 billion tax increase
Carried interest is the tax treatment for investment made by private equity investors. Private equity is an investment class structured as a partnership agreement between an expert investor and individuals with capital.
Private equity seeks to invest in companies with growth potential and, as a result, has the potential to deliver strong returns. In fact, according to a recent study, private equity returned gains exceeding 15 percent over 10 years.
Because of these strong gains, private equity is a popular and reliable investment strategy for Americans across the country. The largest investor in private equity is public pension funds, which have collectively invested an estimated $150 billion in private equity. As noted by one study, 165 funds representing 20 million public sector workers have invested an average of 9 percent of their portfolios in private equity.
Raising taxes on carried interest capital gains could eliminate 4.9 million jobs and cause pension funds to lose $3 billion per year, according to a study by the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.
The financial security these returns provide to American savers, including firefighters, teachers, and police officers, will be threatened if lawmakers raise taxes on carried interest capital gains.
8. Repeal deferral of gain from like-kind exchanges: $19.6 billion tax increase
The budget proposes disallowing taxpayers from utilizing 1031s if they have gains exceeding $500,000. 1031s are not a tax loophole as some claim but are important tax provisions promoting reinvestment and liquidity. Repealing this provision would harm smaller real estate investors by forcing them to forego new investments or go into debt to finance transactions.
1031s are typically used for smaller real estate transactions. According to the National Association of Realtors, 1031s were used in about 12 percent of real estate sales. Almost 85 percent of these transactions were from smaller investors such as sole proprietorships or S corporations.
Repealing 1031s would harm investment in property. It would increase holding periods as taxpayers would be encouraged to retain assets longer to avoid paying capital gains taxes. In fact, due to the added complexities of financing projects and taking on debt, an estimated 40 percent of real estate transactions would not have occurred without 1031s.
9. Repeal expensing of intangible drilling costs (IDCs): $10.7 billion tax increase
The expensing of IDCs allows companies to recover costs such as labor, site preparation, equipment rentals, and other expenditures for which there is no salvage value. IDCs often represent 60 to 80 percent of total production costs. This tax hike could result in the loss of over a quarter million good-paying jobs by 2023. As a recent letter by Rep. Jodey Arrington (R-Texas) and over 50 members of Congress explains, IDCs are neither unique nor lavish tax breaks for the oil and gas industry:
“IDCs are not credits, loopholes, or subsidies. They are ordinary and necessary deductions, and a far cry from the lavish tax credits flowing to wealthy green energy investors and electric vehicle owners. Our tax code is designed to levy taxes on net profits, not on dollars used for operational costs or capital expenditures. Every business since the inception of the tax code, has used cost recovery provisions.”
Biden is proposing to repeal many oil and gas tax provisions even though the cost of gasoline and energy is increasing, with the cost of gas at a seven-year high.
Not only would these tax increases further increase the cost of energy, they will also threaten millions of high-paying manufacturing jobs that the oil and gas sector supports. Biden routinely claims he is a champion of high-paying manufacturing jobs, yet these tax increases undermine this claim.
10. Repeal enhanced oil recovery credit: $1.56 billion tax increase
This provision would repeal the 15 percent credit for eligible costs attributable to enhanced oil recovery (EOR) projects like the costs of depreciable or amortizable tangible property or intangible drilling and development costs (IDCs). This credit is a bipartisan provision to incentivize carbon capture and sequestration, ultimately leading to less greenhouse gas emissions.
11. Repeal credit for oil and natural gas produced from marginal wells: $1.9 billion tax increase
This repeals a credit for oil and natural gas produced from marginal wells, which is limited to 1,095 barrels of oil or barrel-of-oil equivalents per year.
12. Repeal exception to passive loss limitations provided to working interests in oil and natural gas properties: $83 million tax increase
13. Repeal percentage depletion with respect to oil and natural gas wells: $13 billion tax increase
Percentage Depletion allows taxpayers to deduct the cost of oil and gas wells as a statutory percentage of the gross income of such property. This provision is used by small, independent, and family-owned oil and gas companies, and royalty owners like farmers and ranchers.
14. Increase geological and geophysical amortization period for independent producers: $10.2 billion tax increase
The amortization period for geological and geophysical expenditures incurred in connection with oil and natural gas exploration in the United States is two years for independent producers and seven years for integrated oil and natural gas producers. This proposal would increase the amortization periods, which would shrink the deduction available to taxpayers.
15. Repeal expensing of exploration and development costs: $932 million tax increase
16. Repeal percentage depletion for hard mineral fossil fuels: $2.3 billion tax increase
Repeals a provision of the tax code that allows companies to deduct 10 percent of their sales revenue to reflect the declining value of their investment.
17. Repeal capital gains tax treatment for royalties: $595 million tax increase
Royalties received on the disposition of coal or lignite currently qualify as a long-term capital gain. The budget repeals this, requiring this income to be taxed at the higher ordinary income rate.
18. Repeal the exemption from the corporate income tax for fossil fuel publicly traded partnerships: $1 billion tax increase
Partnerships that derive at least 90 percent of their gross income from depletable natural resources, real estate, or commodities are exempt from the corporate income tax. Instead, they are taxed as partnerships. This proposal would repeal this provision for publicly traded fossil fuel partnerships, requiring them to be taxed as corporations.
19. Repeal the Oil Spill Liability Trust Fund (OSTLF) excise tax exemption for crude oil derived from bitumen and kerogen-rich rock: $404 million tax increase
Because crude oil derived from bitumen and kerogen-rich rock are not treated as crude oil or petroleum products, it is exempt from the Oil Spill Liability Trust Fund tax of $0.09 per barrel of crude oil. This proposal would repeal this exemption.
20. Eliminate the tax exemption for crude oil derived from bitumen and kerogen-rich rock from the superfund: $873 million tax increase
This proposal would extend the Superfund excise tax to other crudes such as those produced from bituminous deposits as well as kerogen- rich rock. It would also extend the Oil Spill Liability Trust Fund (OSLTF) tax to include these crudes as well. It would also eliminate the eligibility of the OSLTF for drawback.
21. Eliminate drawback for the Oil Spill Liability Trust Fund: $698 million tax increase
22. Conform definition of “control” with corporate affiliation test: $11.2 billion tax increase
This would modify the definition of “control” for purposes of Section 368(c) of the tax code to be at least 80 percent of total voting power and at least 80 percent of the total value of stock of a corporation.
23. Eliminate tax deductions for expenses associated with relocating business operations overseas: $149 million tax increase
24. Expand access to retroactive qualified electing fund elections: $39 million tax increase
This would modify passive foreign investment company rules.
25. Expand the definition of foreign business entity to include taxable units: $1.76 billion tax increase
26. Repeal amortization of air pollution control facilities: $901 million tax increase
Under current law, expenses related to certain pollution control facilities can be amortized over 60 months or 84 months. The budget would repeal this provision, requiring these expenses to be depreciated over 39 years.
27. Modify income, estate, and gift rules for certain grantor trusts: $41.5 billion tax increase
Biden’s proposal would require that the remainder interest in a Grantor Retained Annuity Trust (GRAT) at the time the interest is created have a minimum value for gift tax purposes equal to the greater of 25 percent of the value of the assets transferred to the GRAT or $500,000. Also, it would prohibit any decrease in the annuity during the GRAT term, would prohibit the grantor from acquiring in an exchange an asset held in the trust without recognizing gain or loss for income tax purposes, and would require that a GRAT have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years.
Because so many family farms and businesses use Grantor Retained Annuity Trusts (GRATS) and other estate planning tools, this change would upend many of these taxpayers’ estate plans, forcing family businesses, farms, and ranches to hire expensive lawyers and accountants to rework their plans.
28. Require consistent valuation of promissory notes: $6.4 billion tax increase
A promissory note is a debt instrument that requires one party to pay another party a certain sum of money, containing other details like the interest rate, principal amount, maturity date, etc.
As described in Biden’s Greenbook:
“Biden’s proposal would impose a consistency requirement by providing that, if a taxpayer treats any promissory note as having a sufficient rate of interest to avoid the treatment of any foregone interest on the loan as income or any part of the transaction as a gift, that note subsequently must be valued for Federal gift and estate tax purposes by limiting the discount rate to the greater of the actual rate of interest of the note, or the applicable minimum interest rate for the remaining term of the note on the date of death…
… In addition, the term of the note would be treated as being short term regardless of the due date, or term loans would be valued as demand loans in which the lender can require immediate payment in full, if there is a reasonable likelihood that the note will be satisfied sooner than the specified payment date and in other situations as determined by the Secretary.”
29. Require 100 percent recapture of depreciation deductions as ordinary income for certain depreciable real property: $6.3 billion tax increase
30. Retroactively repeal the conservation easement deduction for partnerships: $18.6 billion tax increase
This would disallow certain partnerships and other pass-through entities from claiming the conservation easement deduction if it exceeds two and a half times the basis. Under this proposal, taxpayers could be retroactively disallowed a deduction from donations made as far back as January 2016 – imposing tax increases on taxpayers retroactively for tax years 2016, 2017, 2018, and 2019 and imposing tax increases prospectively.
Retroactive tax policy should be rejected. The tax code must be applied with consistency, certainty, and fairness. Taxpayers cannot reasonably or confidentiality comply with law if they believe the federal government will change these laws after the fact.
31. Limit use of donor advised funds to avoid private foundation payout requirement: $64 million tax increase
Donor advised funds (DAFs) are re giving accounts created and maintained by individual donors. Many DAF donors keep money in these funds for long periods of time in order to strategically plan their giving and allow it to appreciate over time, enabling them to make even larger donations.
This provision clarifies and modifies the definition of qualifying distributions.
32.Extend the period for assessment of tax for certain Qualified Opportunity Fund investors: $95 million tax increase
33. Establish an untaxed income account regime for certain small insurance companies: $9.6 billion tax increase
34. Expand pro rata interest expense disallowance for business-owned life insurance: $6.8 billion tax increase
35. Correct “drafting errors” in the taxation of insurance companies under the Tax Cuts and Jobs Act of 2017: $787 million tax increase
This proposal issues two “corrections” to “drafting errors” in the Tax Cuts and Jobs Act of 2017. The first correction would change the capitalization rate of net premiums for group life insurance contracts from 2.05 percent to 2.45 percent and the capitalization rate for other non-annuity specified life and health contracts from 7.70 percent to 9.20 percent and would be implemented as if it was part of the original TCJA. The second correction would include the international and nonproportional reinsurance lines of business in the list of “long-tail” lines of business that are explicitly identified in the statute.
36. Define the term “ultimate purchaser” for purposes of diesel fuel exportation: $139 million tax increase