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Midyear Tax Outlook: Will Proposed Tax Changes Stop Being Proposals?

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Jeremy Milleson

Director, Investment Strategy

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Investors have been warned of new and higher taxes from the Biden administration. The political climate makes some possibilities easier, others harder, and all more confusing.

Our tax outlook for the rest of 2022 may read a bit like a broken record in places. Many of the proposals we highlighted earlier this year are still on the table, and many of the headlines we’ve read over the last year continue to be recycled. But while many of the storylines remain the same, the environment surrounding these storylines has changed drastically. Today we’ll highlight which proposals are still on the table and how political and economic conditions have changed.

What’s in the Biden administration’s 2023 budget proposal?
Treasury secretary Janet Yellen recently discussed the Biden administration’s proposed 2023 budget, specifically its changes to the tax code, with the Senate Finance Committee and the House Ways and Means Committee. These proposed tax changes would come on top of those in the Build Back Better Act, passed in the House in November 2021 and still awaiting approval in the Senate. 

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How likely is Biden’s economic agenda to pass?
From the beginning of President Joe Biden’s mandate, countless articles have been written about West Virginia senator Joe Manchin being the key to any Democratic legislation making it through the 50–50 Senate. It should therefore come as no surprise that Senate Democrats are currently in negotiations with Manchin to reach a deal on a scaled-back version of Biden’s economic agenda. We still don’t know the specifics of what would be removed in a pared-down economic package. If the details can be worked out, the Democrats will also need the approval of Arizona senator Kyrsten Sinema, which has proved challenging as well. 

Meanwhile, time to reach a resolution is running short. The Democrats need to pass the bill prior to the expiration of the budget resolution at the end of September, which would allow them to advance the bill with only a simple majority. On top of that deadline, many Democrats would prefer to pass the bill prior to the August recess, and looming midterm elections may make any large tax changes unlikely in 2022.

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How has the economic environment changed?
We expected the Biden administration’s tax changes to run into resistance—but not just from Congress. Market conditions changed rapidly over the first six months of the year, which may decrease the likelihood of potential changes. The stock market was strong as we entered 2022, with the S&P 500® up 28.71% for the year and inflation still considered transitory. The Fed quickly and aggressively moved to raise the federal funds rate as inflation moved from transitory to persistent to protracted. The economy has moved from moderating growth to worries of a potential recession. Global markets have responded accordingly: The S&P 500® is down 19.96% through June, and developed international markets, as measured by the MSCI EAFE Index, are down 19.57%.

The Biden administration has called tackling inflation and reducing costs for families its top economic priority, introducing the Biden–Harris Inflation Plan on May 11. Some of the plan’s key objectives include lowering the costs of energy, prescription drugs, health care services, childcare, food, and housing. Another component is reducing the federal budget deficit, which rose each year under the administration of President Donald Trump. Biden has pledged to “make the wealthiest Americans and the largest corporations to pay their fair share.” While the plan doesn’t provide many specific details, it does mention a potential new minimum income tax for billionaires, which has remained on the table since Biden’s initial budget proposal.

The bottom line
Even before Biden became president, we were discussing the types of tax changes his administration could make. However, these changes have remained proposals, and we’re still reading about ongoing negotiations between Manchin and other Senate Democrats. With the clock ticking to pass a bill, midterm elections in the fall, and the drastic shift in financial conditions, significant tax changes in 2022 may be unlikely. Whether or not there are significant changes this year, preparation is important. At Parametric we constantly review how these changes may impact our clients and—if they’re enacted—study ways to adjust our processes accordingly.

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