Taxes and timing: The latest on retroactivity

The Biden administration has another opportunity to show its hand on the nature and timing of proposed tax changes when it publishes its fiscal year 2022 budget request and the accompanying Green Book explanation of its revenue proposals. Both documents are expected to be released May 27, and then the focus will shift to congressional negotiations.

Jim Alex, RSM’s national tax go-to-market leader, and Fred Gordon, senior director on the firm’s tax policy team, joined Public Affairs Leader Dan Ginsburg on RSM’s “Tax Policy Now” to preview the documents, focusing specifically on the potential for tax changes that become effective retroactively. Below is a transcript of their conversation, edited for clarity:

Dan Ginsburg: We have seen a flurry of action with the Biden administration since the beginning of the year, starting with targeted stimulus relief in the American Rescue Plan, followed by the American Jobs Plan and, most recently, the American Families Plan. Let’s now turn to what we expect to see and when. 

Fred, what do you know about effective dates and retroactivity?

Fred Gordon: According to senior Treasury officials, we can expect to see the release of the Treasury Green Book—basically, a description of the Biden proposals in greater detail—and the full presidential budget for fiscal year 2022. And according to this Treasury official, those will likely contain proposed effective dates.

This is a similar practice, Dan, to prior administrations’ Green Book descriptions, where they put forth effective dates language for the Congress to consider. So yeah, this will be a very, very big development. Lots of folks will be definitely interested in hearing what they have to say.

Dan: So, help us run through a couple possible timing scenarios that might come forward.

Fred: I’ll start with the one I think most folks are concerned about, and that’s the potential for retroactivity—and by that I mean Jan. 1 of this year.

If you look at the current legislative environment right now, we’re focused on an infrastructure bill. Ideally, (there’s) bipartisanship, activity by July 4, etc. These are things that take long amounts of time to work through the system. As that happens, it pushes us later into the calendar year. And I raise that because the deeper you are into the year, the less likely it is that you’ll see something that takes you back to the beginning of the year in terms of the applicability.

Now, it has been done before, in 1993 under President Bill Clinton. He actually signed a law into enactment in August of that year; they actually applied that on Jan. 1. These were tax increases and estate and gift tax increases. It was really, really messy. Lots of folks—Democrats and Republicans combined—did not like the retroactive nature of the measure. It barely passed at the end of the day—but it did. So it’s out there. But, again, do I see that type of scenario happening this go-round? Extremely unlikely.

Some other possibilities real quick: We could actually see something perhaps tied to an official action, such as the introduction of a bill into committee. So that wouldn’t be a Jan. 1type of event, but something more in between. We’ve seen that discussion come up more and more around the potential capital gains tax increase.

Dan: Got it. Jim, let’s take a little step back a bit. Why don’t you give us your thoughts on effective date timing and the likelihood of retroactivity? What are you seeing?

Jim Alex: With regard to effective dates and the possibility of retroactivity, in short, we need to stay vigilant with regard to these issues. From a policy perspective, it’s as much about political judgment, tax and revenue issues with regard to the fisc, and, candidly, an element of political will. Will the president advocate having something like a retroactive effective date? It’s a matter of political will. We saw this, as Fred said, in 1993, but it came at a political cost to President Clinton, where he almost lost his tax package measure in the Senate. And, indeed, Vice President Al Gore had to cast his deciding vote.

So, the scenarios we have could be Jan. 1, 2022; it could be sometime during this year. Or it could be retroactive to Jan. 1 of this year—that’s an unlikely scenario. But, again, we have to stay vigilant with regard to this issue, and we could know fairly shortly, according to Treasury, as to where they stand on effective dates and the possibility of retroactivity.

Dan: So it sounds like things are heating up a bit. We’re already starting to see some activity toward gaining some clarity around this.

Jim: We are, but we need to see more. Once we have these statements, we need to start seeing and hearing from our conversations on the Hill that Treasury and the White House are getting more engaged with regard to possible tax increases and the timing of those tax increases.

The big goal here is the fiscal year start. Obviously, this is a budget matter at the end of the day, so the goal is conceivably sometime in September, with a focus on Oct. 1 this fall and the start of the new fiscal year.

Dan: Infrastructure is obviously in the news a lot this week and for the last several and probably for the upcoming few. If something is passed on infrastructure, talk to us about the implications there for taxes.

Jim: There certainly is the discussion of bringing together—at least from the White House—with regard to tax increases and the spend. So we’ll have to see if that manifests. The focus, again, will be on getting it done over the summer and into the fall with an Oct. 1 goal and not carrying the chance of tax increases into next year, 2022, which is an election year. Congress does not want to be possibly increasing taxes during an election year.

Dan: So, bottom line, still lots to figure out. Although it sounds like what we’re hearing from the White House and Treasury is that there is a good chance we’re going to hear within the next week something more definitive on effective dates. So we’re getting closer to clarity there.