Senate Leaders Float New Taxes To Pay For Build Back Better Plan

Leaders in the U.S. Senate are still trying to gather enough votes to consider the Biden administration’s Build Back Better budget reconciliation. (As a reminder, the House passed this legislation last month.) To help pay for the package, last week Senate Finance Committee Chairman Ron Wyden (D-Ore.) floated a set of proposals that would change tax policy for pass-through entities contained in Subchapter K of the Internal Revenue Code.

According to MSCI’s partners at the National Association of Manufacturers, pass-through entities account for millions of employees and billions of dollars in capital investment. The current structure of pass-through partnership law offers manufacturers a critical way to start and maintain a business, especially for small and medium-sized manufacturers. Altering the tax rules for pass-throughs could change that calculation by increasing the complexity on forming partnerships as well as creating confusion for existing partnerships.

MSCI expects more details about Sen. Wyden’s plans to emerge this week. Stay tuned to Connecting the Dots for information.

Overall, as the S-Corp Association has explained, the Build Back Better plan would raise taxes on businesses organized as S corporations, partnerships, and sole proprietorships by more than $500 billion over ten years. The S-Corp Association also has explained how the legislation posed an existential threat to many S corporations. Not only would the bill raise their tax rates to some of the highest in the world, it would impose limits on deducting active business losses that are worse than those that apply to passive losses. This policy could force large pass-through businesses into the C corporation model.

MSCI has worked with partners at several business trade associations to oppose the tax increases and the onerous labor and employment provisions that are included in this legislation. As currently written (without Sen. Wyden’s changes), on the tax side, for corporations, the outline calls for:

• Creating a “book tax,” or new 15 percent corporate alternative minimum tax in the form of a tax on financial statement income;
• Placing new limitations on companies’ ability to deduct interest on business loans;
• Imposing a new excise tax on stock buybacks; and
• Implementing a higher global minimum tax that would be more complex and that would subject more foreign income to the tax.

For pass-through entities, the outline calls for several new surtaxes, including:

• A 3.8 percent net investment income tax applied to business income greater than $400,000 (single) or $500,000 (married);
• A five percent surtax on individuals with adjusted gross incomes (AGIs) totaling more than $10 million; and
• An additional three percent surtax on AGIs totaling more than $25 million.

Regarding labor and employment policy, the bill includes:

• Penalties for violations under the National Labor Relations Act;
• Personal liability for company officers and directors for labor violations; and
• Mandatory neutrality agreements for direct care grants.

Read the National Association of Manufacturers’ full summary of the legislation here.

MSCI asks that its member company leaders and employers use this link from the National Association of Manufacturers or this link from the U.S. Chamber of Commerce to send a letter to their lawmakers asking that they oppose this legislation.