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President Joe Biden highlighted the need for drug price strategy changes Tuesday, in Washington, during the 2022 State of the Union address. (Photo: White House)

Financial Planning > Tax Planning > Tax Reform

Wealthy Business Owners Are at Center of Fight Over Biden’s Tax Plan

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What You Need to Know

  • At issue are a handful of measures that would largely tax the owners of pass-through businesses.

Law firm partners, family business owners and other high-earning individuals who have stakes in companies are at the center of a last-minute lobbying battle over President Joe Biden’s slimmed-down economic plan.

Senate Majority Leader Chuck Schumer and Senator Joe Manchin, a West Virginia Democrat, are negotiating a tax increase proposal to fund the climate, health and deficit reduction plan. But the deal isn’t done and business groups are urging them to scale back the proposed levy hikes while progressives are urging Democrats to preserve the tax increases for wealthy individuals.

At issue are a handful of measures that would largely tax the owners of pass-through businesses, including limited partnerships and LLCs. These proposals, including a surtax on people with ultra-high incomes and an expansion of the existing 3.8% Medicare tax to pass-through profits, are the main measures in the House-passed economic agenda that would tax the rich.

Progressives fear that dropping these measures would mean that wealthy Americans would face little-to-no tax increases in a bill initially envisioned as a major tax hike on top earners.

The millionaires’ surcharge is “the only tax increase specifically designed to tax the very wealthy,” the Patriotic Millionaires, a progressive group of wealthy Americans, said in a letter to senators Wednesday. “It would be very unfortunate and a missed opportunity if Congress were to pass such important legislation and not specifically increase tax rates on billionaires and the ultrarich.”

The millionaires’ surtax, which would put a 5% surcharge on incomes over $10 million and an additional 3% levy on incomes over $25 million, is at risk of being cut from the package. Other tax hikes, such as raising the top tax bracket or increasing capital gains rates, were eliminated from the negotiations last year amid concerns from some vulnerable Democrats.

Still, business groups say that the planned tax increases would hurt small businesses.

Last week, Schumer announced a proposal to extend Medicare solvency through tax hikes. The plan would expand the existing 3.8% net investment income tax to the profits pass-through entities distribute to their owners, so long as those individuals earn more than $400,000. Under current law, the investment tax only applies to individuals and estates.

“We estimate up to 1 million small and family-owned businesses, representing over half of all pass-through business activity, would be at risk of having their rates increased under this policy,” hundreds of business groups, including the US Chamber of Commerce, wrote in a letter this week. “This small business tax hike would hurt the ability of businesses that survived the worst global pandemic in a century to remain viable in the coming months.”

Republicans have used this proposal as an opening to attack Democrats, particularly those who face close races in the mid-terms this fall. In battleground states of Georgia, Nevada, Arizona and New Hampshire, the majority of workers are employed by pass-throughs, Minority Leader Mitch McConnell said on the Senate floor on Tuesday.

“And in West Virginia — just to pick another state out of the blue, in West Virginia a whopping 95% of businesses are pass-throughs,” McConnell said about Manchin’s state.

Schumer has said he wants to pass the bill by early August, a tight deadline for legislation that has languished for months. Manchin has suggested the negotiations could go up to the Sept. 30 deadline, when the Democrat’s ability to fast-track the bill in the Senate expires.

– With assistance from Laura Litvan.

(Photo via White House)

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