Episode 22: Joe Manchin Blocks The Build Back Better Bill Again

The Biden Administration Corporate Tax Proposal

In this episode we cover, how Joe Manchin blocks The Build Back Better Bill again, Hungary wants to be left alone, more proposed Low Income Housing Credits, and the 3.8% tax expansion proposal is criticized by the real estate industry.

Episode Transcript:

Hello and welcome. This is Ron Cohen with our weekly update. I’m a tax partner with the firm of Greenstein Rogoff Olsen and company here in beautiful downtown Fremont, California. We’re about 12 miles north of San Jose and 35 miles or so south of San Francisco. Today’s episode here. We’re going to cover. The build back, better bills being re revisited and Joe Manchin.

Senator Joe Manchin appears to have blocked it again, at least for now. The country of hung wants to be left alone. We’ll talk a little bit about international taxes more proposed, low income housing credits. I have a few comments about that. Are in proposed bills and the 3.8% expansion of the proposed Medicare tax or net investment income tax got roundly criticized by the real estate industry.

But again, it may not matter if the Bill’s dead because of Joe Manchin’s recent comments. I want to give a hat tip to the firm of Deloitte we’ll put in the show notes the link to Deloitte’s update. Of course, they have a whole staff of people that work on this sort of thing full time. And as we also look at the wall street journal and other reporting agencies, but we just want to make sure it’s clear that we give credit where it’s due in providing this information.

A couple of caveats first take no reliance on anything you hear in this podcast before you do a transaction. Or you file a tax turn. You need to speak to a tax professional, give them all the facts, let them look at all the documents, come to a professional opinion and then you can rely on it.

But we’re just, jawboning here going through some, some stories trying to be a little entertaining and it’s no official opinion of me or my firm. Plagiarism’s okay. In the tax world, we’re not writing any novels. Don’t think any of this is an individual thought in the tax world, everybody’s copying the law and the regulations and what other planners have said and so forth.

So we’re not trying to be original. We try to stay away from politics. Although in writing tax law, a lot of political issues come up because it is law passed by Congress. So mention it in the context of tax proposals, however try to stay away from the extreme level of national politics we have in this country today.

All right. Our firm we do about 1400 tax turns of various sorts planning, and we specialize in family office services for those kinds of wealthy individuals and family groups that need. Those kinds of services. I want to, as a premise state, I’m no cheerleader for the tax system. I’ve been doing this about 41 years.

I think the tax system as currently composed in the United States is an invasion of our privacy. It’s tedious. It’s onerous asks way too many questions parses out things way too much detail for little benefit to the treasury. And we all should be able to do our tax returns sooner. Easier.

I want to make comment about that in a moment. The last caveat here, we always try to get an, a plus on tax turns, even though again, we’re no cheerleader for the tax system, we got to do it right. And not. A minuses or BS or CS, always an a plus follow the rules, follow the file. The best returns you can.

So our website’s www.groco.com. My phone number is 510-797-8661. I’m at extension 237, but there’s plenty of partners and other people here at the firm that can help you out call anytime. All right. Just finishing up that point about No cheerleader for the tax system.

I don’t think I’ve mentioned in this podcast for a while. If you go to Europe and you talk to them about April 15th or whatever filing date they have and how everybody, you know, gets all their records together and either does it themselves on turbo tax or goes to their tax professional, gets their returned filed, got to get in in by the due date.

Got to make sure all the money’s in it, in there at the right time. Most of Europe and even some Asian countries will look at you. Like you’re crazy. Cause in those C. They’re all wired up. They get your w two S and your 10 90 nines and all kinds of other pension reporting. And they send you a letter about a month before the due date that says, here’s what we think your tax is.

We’ve gotten all these reports. They list out the reports, they list out the amounts of income. We’ve done our tax calculation and here’s the amount of tax if you and it shows either a balance due. Which hopefully isn’t too bad or a refund, usually the case. And if you agree with this, just sign this letter, send it back.

In case of England, it’s called the inland revenue, send it back to the inland revenue. We’ll record it. And you’ll get your refund. Usually direct deposit, short period after, but none of this run to H and R block or whoever. And you know, fill out the returns yourself. It’s and that covers about 85% of the people.

So that’s why I say there’s, there’s a number of things that could be done to make this much less onerous. To the overall population. And then our, our clients usually are made up of people in the top five or 7% of the population. They have all kinds of comp complications. They own businesses. They have complex investments.

And, and so they, they have to do the returning as I, as I should have mentioned in, in like the UK, if you disagree with what they came up with for as the tax number, they say, Hey, no problem. Go to. What they call a chartered accountant out there in, in, in England or some other type of tax prepare, fill out the form, send it in and no harm, no fall.

As long as it’s prepared correctly, that will be your return. You don’t have to sign the letter. Well, like I say about 85% of people would have a 10 minute tax season if we adopted those that process. And I think we should. Okay. Moving on here. And on July 15th, the build back better. Bill tried to come back again in a slim down form.

The, the Senate is trying to deal with deal with the revised version, but then Senator Manchin from West Virginia rejected very important parts. Of the bill with regard to a corporate tax cycle and climate change proposals. And so once again, it appears to be dead for the time being, but from the people I listen to and so forth, they’ll they will probably take another try at getting some version of build back better through.

So let’s talk about what happened in the last week efforts by. Senate majority leader, Charles Schumer from New York and Democrats, Joe Manchin from West Virginia to reach a consensus on an iteration of the build back better legislation. That includes robust climate change provisions, Medicare prescription drug pricing, reforms, and substantial tax increases on corporations and wealthy individuals appears to fall have fallen apart after Manchin told Senate Democrat leaders.

That he could not support the bill as it was currently written other than bits about healthcare. And he wouldn’t accept the final package that includes climate change provisions or tax hikes. Manchin announcement was reported to the Washington post, according to the post and others, subsequent press reports, Manchin told democratic leaders.

That he would only back a final product that includes certain Medicare prescription jug reforms and an extension of the enhanced affordable care of enhanced affordable care act premium assistant credits that are scheduled to expire at the end of next year. Those of you using the. Affordable care act as your health insurance bought insurance through the marketplace.

There are a whole slew. I could spend an hour going through that about how people get these credits to offset their health insurance costs. And to those people involved, it’s extremely important. Some of those are set to expire and Senator Manchin is rightly concerned about that. Okay. Manchin did not comment publicly on his decision, but as spokesman told reporters on July 14th, that the Senator believes it’s time for leaders to put political agendas aside, reevaluate and adjust to their, the economic realities.

The country faces to void steps that add fuel to the inflation fire close quote. And certainly he was all over that last November. On the original build back, better bill commenting that he thought the government was spending way too much money and it would trigger inflation. So one with any objectivity cannot look back and say, well, he, he was right.

Remember the house approved the roughly $1.75 trillion build back better package last November. But the measure stalled in the Senate after Manchin announced shortly before Christmas, that he would not support. The bill in its current form at the time he expressed reservations about the inflationary impact of the legislation and warned against the use of what he described as budget gimmicks, which there were a few.

Since then Senate Democrats have worked to craft a narrower compromised package, focused on Manchin, stated priorities of clean energy and climate change provisions, Medicare drug pricing a deficit reduction and a rollback. Of certain tax breaks enacted in the 2017 tax cut and jobs act that president Trump pushed through that would move through the chamber under a fast track reconciliation rules that would circumvent a near certain G O P filibuster and allow for passage by a simple majority vote.

I can’t get into all the technicalities of it, but I, I, I just will say, I really don’t like that. If you meet certain procedural rules, You can pass a tax bill by 50 by a mere majority, you know, 50 plus one in the Senate under these reconciliation rules, basically making the argument that this is similar to an appropriations bill.

It’s not a tax change. Normally tax change, need six 60 or two thirds, two thirds vote, or it might be 60 votes, but, but it’s much higher. And so those trying to push the bill back better, bill in any form are trying to get it through when they only have to get 51 votes in the Senate, rather than the full two thirds, majority.

Given that no Senate Republicans are expected to support the measure. The pressure has been on Schumer to keep the 50 Senate Democrats United and rely on their votes. Plus the tie breaking vote of vice president com Kamala Harris to get the bill across the finish line Manchin’s announcement that he will withhold support for climate change and tax increase provisions to deprive Schumer of a working majority and forces Democrat leaders to consider.

Possible next steps, which could mean advancing a healthcare focused package or letting the reconciliation instructions go unused. Now, in other words, then they have to go, come back and get a two thirds vote, which they know they can’t do. I’m not taking a political position. That’s just the reality of how the mechanism works.

Issues around clean air energy incentives remain unresolved as did discussions on potential revenue. Raising provisions, such as the proposed surtax on certain high come high income individuals and a new 15% minimum tax on corporations for their financial income. Versus their current taxable income.

Again, another thing we could spend a half an hour on, but that’s a very bad proposal in my view for those of you accountants and out there who understand the difference between book accounting or gap accounting and tax accounting, to then come back and say, well, there are differences. Your taxable income can be lower.

Then your accounting income, which has been the rule for a hundred years and say, well, and by the way, if there is a difference, we’re going to tax you 15% on that difference. It’s a very illogical unnecessary improperly written provision. However, Manchin continued to tell reporters without going into specifics, that negotiations were proceeding.

Okay. So that is what I’ll leave you with on the revised build back better bill, other than to say Senator John tester of Montana, who is pretty far to the left I came out and said that that his re Reddit sense. Towards a tax hike in the current economic and political environments.

Quote, I don’t think raising taxes is a winner anywhere. Okay. Tester said there’s some positive things you can talk about, but the bottom line is that no taxes never are a winner. We need to be very careful. There is a view with the Biden administration that somehow if they raise taxes, it will allow government to spend more money on the right types of things that will ultimately.

Lower inflation and I’ll leave to you to decide if you think there’s any logic to that analysis at all. Okay. So build back better, seems to be dead because again Senator Manchin, we haven’t heard from Senator cinema. Of Arizona. I have read that. Of course her view is if it’s going to die on its own with Joe Manchin’s comments, she, she won’t weigh in because why weigh in you can’t win one.

Someone’s not going to dislike your decision one way or the other. And if the Bill’s already going to get killed by the statements of Senator Manchin, if Senator Schumer’s unable to convince him, then she’ll just stay quiet on it. So. That is where that that’s a big piece. I, I want to come back and just point out that this, the, the, the, again, the build back better bill was 1.7 trillion, 1.7, $5 trillion.

The administration said, well, it really wouldn’t cost anything because of the way. That the money would be spent and the growth in the economy, it would trigger. There was great controversy about that. It got stalled last of November. It seems like it stalled again. Now it had tremendous amount of estate planning issues that seemed to have gone away permanently.

It had issues about the step up and basis that it seems, seems to have gone away permanently. And we’ll just leave it at that and I’ll be watching to see what happens. We’ll let you know. Of course, as, as we get closer to elections in Washington, everything seems to shut down because then the political view seems to be well, let the people decide who they want to represent.

And then they’ll take another look at tax bills after the election, which is you know, pretty straightforward, obvious approach. So, so tax bills always tend to stall and get put aside as, as, as you get closer to election. Okay. Turning to the international side of it. Hungry one of my favorite countries it’s facing a backlash.

After pulling its support for a global minimum tax. Now, now let me give you a, a background on that. There’s a view by the us state department and department of treasury, along with their counterparts in the European union, that it’s not right for one country to have a significantly.

Tax rate compared to all the other modern Western economies, because that lower tax break rate would tend to pull businesses to that other country to the detriment of the remaining. People in in the group you will remember, you know, would they have meetings at the G 20 and the G 10 and the G whatever.

That’s where they think about these things, where they line things up on spreadsheets and try to decide what’s, what’s good for many countries in the world. So a as a PO, as some background for decades, Policy makers thought it was great and fair that Ireland have a 12% corporate tax rate, 12.5%, which was well below.

Most of the other countries in Europe that had a 20% or 30%, or even some had 40% rates. The policy makers thought, well, Ireland needed some help. And indeed there is a significant. Silicon valley type business environment in Ireland, employing tens of thousands of people specifically, cause Ireland had that 12.5% tax rate.

Ireland’s you know, the weather’s not the greatest. It’s not there’s no geographical reason for high tech companies to assemble there. But the tax rate pulled them in. And that’s the way it was for a long time. Well, in the last several years, there’s been a view of, well, no more of that. We want to keep the tax rates kind of on even keel between many countries for various both fiscal and social reasons.

Hungary is facing threatening backlash from the us and from its European neighbors. But Republicans in Congress have praised the countries, hold out against the O E C D’s agreement and have blasted the Biden administration for what they characterize as a transparent attempt to bully Hungary into a hasty action.

Right. So hungry. Well, it’s hungry, right? I mean the nice people, some nice cities, whatever it’s right next to the Ukraine. It’s not Palo Alto, California, right? There’s not a lot of natural reasons for companies to be there. So Excuse me. So Hungary has decided to keep its tax rate low.

And in fact we have some clients in the Czech Republic and in that area of the country, that they are generally very low on corporate income taxes rates. But they’re trying to get the rates raised up so that nobody has an unfair advantage. After SCU scheduling the EU most recent attempt to implement a global minimum tax developed through the O E C D.

Hungary is facing a threatened backlash from the United States and from its European neighbors in the wake of Hungary’s sorry, give me one second. This. A little choppy here in the wake of Hungary’s unexpected veto on June 17th of the EU vote on a draft directive to implement the 15% minimum tax on companies with a global revenue of more than 750 million euros pillar.

Two of the global tax agreement reached by 140 nations last October. The us treasury department announced its intentions to terminate the tax treaty with Hungary that has been in place for decades. A treasury spokesman said that the us has grown increasingly unhappy, but the treaty as Hungary’s 9% corporate rate makes the agreements benefits lopsided.

Okay. So given that we’re talking about little hungry over there, I’ll just say that. Okay. Let’s switch it around. What if hungry? Turned around and said, okay, the us, your tax rate has to be higher. So that we can compete better to sell things into your country. Of course we would go well, that’s ridiculous.

We’re not going to listen to you at all. I mean, countries have to figure out a way to feed their own people and stimulate business with the limited resources. A lot of small countries have. I just think it’s some kind of invasion of sovereignty for anybody or any group to be telling a country what rate they should tax their businesses at.

But that’s what the EU and the United States is trying to do a little hungry. Who’s fighting back. Okay. The biggest issue I, I would want to pontificate here is, is a lack of UN a lack of certainty or creating uncertainty. When you have a corporate tax rate, whether it be higher or lower, whatever.

I think even the United States, our, our biggest failing is we need to keep it. The, we need to keep it. Even not just for years, but for decades, right? Because big companies make multi-billion dollar investments. They make those investments based on assumptions about what tax rates will be, what profits they can earn off those investments based on the cost of doing business in those areas.

And when people make those bets with their investments, both companies, themselves, building factories, individuals, making, buying stocks. And then the country comes in and says, well, you know, we’re going to raise our tax rate or, or we want to lower our tax rate or or some outside group, like the EU or the us treasuries telling some other country to raise its tax rate that creates uncertainty because whether it goes through or not, People who might make investments and build new factories and employ thousands and thousands of people.

Aren’t sure what the deal is. And even Adam Smith, back in the 17 hundreds, one of the first economists made the point that when he comes to tax rates, the most important thing that you do is make the taxes predictable by keeping the rates. Stable. So I’ll leave little hungry alone based on that and move on.

Okay. So here in the us, we’ve had a lot long history of low income housing credits. If you buy, if you go and build apartment buildings or housing and certain designated low income areas, you can apply, you can apply for, and we’ll get certain. Tax credits where the builders can use those credits to offset the income tax they would other, I wise owe on building those properties and like a lot of government programs, the state of California and our case here in California, goes in, piggybacks on those rules, say, well, if the federal government’s going to give you a low income tax credit, we’re going to give you a California low income tax credit.

And then with no disparaging remarks here, a lot of those. Units that are built end up being section eight housing. So now you have a, a triple play. You have a federal credit helping to build the property. You have a state credit helping to build the property. And then the people living the property are getting a subsidy for their rent.

And we can argue all day, whether that’s good or bad. I’m just trying to review the the facts of the matter. And whether the question I would have is whether. If you go back and look over 30 years and I went and tried to look at the, at the rules and what was being said, when they’re proposing this bill, can you look back 30 years and say, you know the, the projects that were funded this way have done well, people are living there.

The houses are appreciating. It’s really corrupt, created good economic situation, both for both the builders and the homeowner. And, and that’s good for all of us and it was worth taking taxpayer money. And of course the federal government has no money. So, and all money is either taxes that came in or went out.

And usually it’s more to the point. These days, it’s extra borrowed money that were borrowed in the bond market. And before you give the credits to various groups to build low income housing, can we prove that. That approach to helping in building those properties by having federal state and personal section eight subsidies actually help make both for the user of the property and for the community better.

If so. Okay. I, I think certainly looking around the bay area there’s arguments that no, no, it failed. But you can make the decision of that. My job here is just to let you know that they’re working on giving more, 9% credits for low income housing projects. Again, there’s some more California credits that pop in on top of that.

And then the residents themselves, in many cases, qualify for section eight rental assistance. And actually it’s another layer. Four layers is that a lot of these properties are bought with a F H a or veterans bill financing. So if they’re buying like a condo it was built with federal credits. It was built with state credits.

It, it might be if it’s rented, it’s. With section eight subsidies or it’s being sold as a condo of some sort there’s a the interest rate is bought down on those loans through various federal projects. And there, I believe there’s some state subsidies for mortgages too. In some cases not saying it’s good or bad, just noting they, they want to do more of it.

Okay. As part of, of the revised bill back better bill. We can now say that it appears this provision, which has had a number of my clients very concerned is for the meantime, for the current period dead, which was a revision to the net in investment income tax. We talked about last week about the John Edwards ed John Edwards rule.

I won’t go through all that again, but the whole point was with SCOR. Specifically on the John Edwards rule and the pass through entity partnerships and so forth in certain cases the individuals were able to avoid. Certain kinds of taxes that help fund the Medicare fund, which is why they want to increase it.

Because the Medicare fund is looking like in five or 10 years, it may not be able to pay all of its current obligations. So they’re saying in those cases where you wouldn’t otherwise under current rules have to pay the 3.8% net investment income tax on your income because. As you may know if it was active.

In other words, it’s a job that you get up in the morning and you go and you work on and you run the business as opposed to a passive business where all you did was put money in and you just watch it grow. If it’s an active business, you didn’t pay the 3.8% net investment income tax, which came in after 2011.

When the affordable care act for health insurance came in, if it was passive, you did pay 3.8%. Well, now they’re saying with respect to the investor, the owner I’ll just read it here. The house bill, the house passed the build back better legislation would have expanded this tax to include. In addition to all investment income, all traded business income for individuals.

With more than $500,000 modified, adjusted, gross income. That’s for a joint filer, 250,000 for married filing separately and 400,000 for individual taxpayer. So that’s a lot of tax 3.8% didn’t have to pay in the past. Nothing changed about your business. They just defined the taxable base with respect to the net investment income tax called the net investment income tax to be transmuted into a tax on active.

Trader business income, which if for tax policy geeks, that’s usually not how that’s not good. That’s not, we, we, we expect trader business income to be generally left alone. Well, the real estate industry has really yelled started to yell about this. Prior to again, Senator Manchin shutting it down on July 14th for the time being house writer, Adrian Smith of Nebraska Republican asked to witness Edward J Pinto of the American enterprise Institute housing center about the possible effects of such a proposal on new home prices.

Pinto replied that any provision that increases marginal tax rates. Would be counterproductive, especially for small businesses, this particular provision, he said would hit home builders and contractors and would decimate that’s his word, not mine, the housing industry, making homes and apartment buildings more expensive in a similar exchange with representative George Murphy, Republican North Carolina Pinto contended that the provision would lead to increases in construction costs.

That would in turn, drive up rental prices. Right? So people who own things and rent ’em out, they’ll flow that cost through as well as. The purchase of new homes, Pinto characterized the proposal as quote, going in the wrong direction. Close quote. All right. So again, a number of my clients were concerned about this tax, because it would’ve applied to them.

And so far we’re safe because it got shut down on July 14th. We’ll see it. This provision has a continuing history. It’s clearly in the playbook. Of the, again, not to get too political, but it’s in the playbook of the democratic party for whenever the next tax proposal comes along, they’ll pull it out and try it again.

And, and, and there’s some good reason to it in that Medicare is running out of money. And one can argue that, well, this might be a place where to they could collect additional funds, but from a tax policy standpoint, it is not nice to put higher taxes than the marginal rates we already have to pay on active trader business income.

That’s not the way it’s been for at least 60 years. And I’m sad to see this provision continue to resurface tax bill after tax bill proposal. Okay. So today is July 18th, 2022. I just sent you that because all these changes and interpretations. Change all the time. So make sure if you’re relying on anything that you, you go back and check if it’s still applicable.

We’re working on various returns for partnerships that are, are due September 15th and the, the big line share of individual returns for complex taxpayers who put ’em on extension till October 15th. We’re trying to chip away at those. Get those out the door and avoid a. Last minute panic in October.

And then I did want to mention one more thing. Sorry, we’re running a little long here, but there was a tax law change for corporations back in 2018, but it was deferred and it was deferred until the year 2022, in which case research and development cost, which can be really, really substantial.

For years and years and years, your research and development costs for tax purposes could be written off, immediately taken as a deduction. There were some differences for alternative minimum tax purposes, especially with California, again, way too complex to get into in this arena. But You would generally write them off for tax purposes, the tax job, the tax cut and jobs act 2017 said starting in 2022, you have to capitalize mean treat those R and D expenses as an asset, which really means you cannot deduct them.

And then you have to amortize them. Over, I believe it’s eight years double check me on that. But we’re telling all of our corporate clients be careful, all that R and D expense, you just routinely wrote off without a second thought. The laws changed unless it gets repealed with it. Doesn’t look like it will.

It’s a revenue razor for the government, right? The government likes things to be capitalized and deducted over time because that accelerates. Tax payments. And again, so if you are a corporation with significant R and D costs, keep in mind, the law has significantly changed starting this year, 2022.

Okay. Well, again, this is Ron Cohen tax partner. Here at Greenstein Rogoff Olsen and company. Our phone number’s 510-797-8661. I’m in extension 237. Our websites www.groco.com. We’re always happy to take initial phone calls and I generally will talk to anybody for, for a little bit for free to see if our services make sense to you.

So feel free to call anytime and we’ll talk to you next week. Thank you.

Ron Cohen,

CPA, Partner at Greenstein, Rogoff, Olsen & Co., LLP  CPAs & Advisors
Email: rcohen@groco.com

Tax update with Ron, episode 30

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