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The White House

Financial Planning > Tax Planning

Biden Floats Net Investment Income Tax Hike in New Budget

By Allison Bell

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The Biden administration is more optimistic now than it was a year ago about how much extra revenue increasing taxes on high-income and wealthy Americans can raise.

The administration has brought back many of the increase proposals included in the budget proposal for federal fiscal year 2024 in the new budget proposal for fiscal year 2025.

One revenue raiser would change the rules for the net investment income tax, or “Medicare surtax.” The rate for the tax would increase to 5%, from 3.8%, and the administration would eliminate the ability of business owners to avoid paying the surtax on profits from “pass-through” businesses.

The NIIT changes could save $797 billion over the 10-year period from 2025 through 2034, analysts predict in the new proposal. That total is 25% higher than the $640 billion 10-year total analysts put in the proposal for 2024.

The projected 10-year revenue boost from increasing the highest tax rate high-income people pay and changing capital gains tax rules has increased 19%, to $535 billion.

Federal fiscal year 2025 will start Oct. 1.

Insurance provisions: The administration has also brought back proposals to limit use of business-owned life insurance and life insurance policies designed to limit taxes by failing to qualify as life insurance policies; to change estate and trust rules; and to limit tax benefits for private placement life insurance policies and similar contracts.

The new PPLI restrictions could save $6.9 billion over a 10-year period, according to the budget analysts.

The analysts have increased their 10-year revenue estimate for a provision changing trust tax rules about 10%, to $84 billion.

The budget backdrop: Economists note that U.S. budget deficits are different from household debt: The United States has $144 trillion in net wealth it can use to support its debt.

But the federal government has been posting large losses. It’s expected to lose $1.9 trillion on $5 trillion in revenue this year, compared with a loss of $1.7 billion on $4.4 trillion in revenue in 2023.

The budget process: A president’s budget proposal is part of the tug-of-war between the White House and Congress that shapes federal spending. Actual spending and revenue-raising may have little to do with the presidential budget.

The budget proposals also tend to describe many revenue-raising provisions only in general terms. The U.S. Treasury Department describes the provisions in more detail in “Greenbook” reports. The department has not posted the fiscal year 2025 Greenbook, but the new budget provisions appear to be based on the provisions in the 2024 Greenbook.

The White House. Credit: Adobe Stock

Allison Bell

Think_Allison

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