In the aftermath of passing COVID-19 relief, President Biden has turned his attention to developing proposals to invest in infrastructure and the American people.
The infrastructure proposal, or the American Jobs Plan, is an approximately $2 trillion proposal to revitalize the physical, electric, and digital infrastructure, while modernizing facilities and driving workforce development. To pay for these investments, President Biden released a Made in America Tax Plan that would raise the corporate rate to 28% from 21%, enact a 15% minimum tax on large corporation’s book income, and establish a global minimum tax to discourage offshoring.
Last week, President Biden unveiled his second proposal, the American Families Plan, which seeks to expand access to education, childcare, and medical leave. To pay for this plan, the president proposes, among other things, increasing the personal rate for top earners from 37% to 39.6%; raising the capital gains rate for households making over $1 million to 39.6%, likely coupled with the 3.8% net investment tax, bringing the federal rate to 43.4%; and eliminating carried interest tax treatment.
To help inform what these tax proposals mean and where we go from here, Carta joined with the National Venture Capital Association (NVCA) to host a panel discussion, “The Tax Outlook for VC in 2021.” We were joined by Justin Field, Head of Government Affairs, NVCA; Rohit Kumar, Washington National Tax Services Co-Leader, PwC US; and Arshi Siddiqui, Partner, Akin Gump.
Below is a summary of that conversation.
The starting point
President Biden has laid out his legacy agenda in these proposals, which seek to expand economic opportunity; address climate change; compete with China; and invest in the American people. For the venture capital community, there are positive aspects that focus on investment in technology, such as language that mirrors the Endless Frontier policy that funds innovation, but the avenues to pay for such investments hinge on increasing taxes on capital gains and curtailing carried interest treatment.
That said, we are at the beginning of the story. This is the president’s marker. It is up to Congress to take that vision and navigate the political calculus. The end product will likely be different from the President’s plans.
Democratic leadership plans to focus first on the infrastructure package and is empowering the committee chairs to negotiate and craft that language. This process differs from the leadership-driven process we witnessed during last year’s negotiations over COVID-19 relief. And importantly, this process also enables more input from stakeholders as more policymakers will be involved.
Although these are two separate proposals, Congress will pull ideas—both investments and tax changes—from either proposal to craft the political compromise.
Striking a bipartisan compromise will be difficult, but Republicans may be interested in an initial, more traditional infrastructure bill, assuming it is a more moderate proposal that is closer to $1 trillion and is not paid for by tax increases, but rather user fees and compliance revenue. Even if the first package is bipartisan, it is likely that any follow-up package will be more partisan and require Democrats to use “ reconciliation,” a parliamentary maneuver that enables legislation to be enacted with only a simple majority—which, in this case, Democrats have on their own (50-50 Senate split, with Vice President Harris casting the deciding vote).
Capital gains and carried interest: The American Families Plan proposal raises the capital gains rate to 39% and eliminates carried interest treatment. If policymakers equalize the capital gains rate with ordinary income, the carried interest component is irrelevant, but President Biden is focused on eliminating its structural advantage. This reflects the dynamic that some policymakers want to address the differential of how the tax code treats low- and middle-income workers versus those at the top.
With this action, the Administration is making the judgement that the tax preference for long-term capital gains for households over $1 million does not outweigh the costs. It may be top-earning households writing the check, but the actual burden may extend to households below that $1 million threshold. What that looks like and how policymakers respond will be key to passing the bill.
From a framing perspective, the venture capital and startup ecosystem must illustrate that it is the solution to the challenges that the Biden Administration is seeking to solve—economic opportunity, climate, and competition. Tax-advantaging long-term capital gains is one of the most pro-competition policies, as it incentivizes investment into nascent startups that require long-term capital investment to compete against incumbents. As that framing is refined, it will be important to amplify that message on the benefits of venture to policymakers.
The other unknown is when such policies may become effective, if they are enacted. This will be determined by the “transition rules,” which are often the final piece negotiated in the legislation. Generally, making tax changes retroactive is difficult. But we could see capital gains having an effective date that triggers upon bill introduction rather than passage. It is too early to tell, but something to watch.
Qualified small business stock: Curtailing QSBS is not on the table currently, but it is still early in this process, with more details to come as Congress crafts the bill. The next milestone is whether changes to QSBS are included in the Treasury Green Book, which details the Administration’s revenue proposals; it will likely be issued by Memorial Day. If the issue is not in the Green Book, it s unlikely that Congress will organically raise it.
Net operating losses (NOLs) and research and development: There’s both opportunity and risk here. We will likely see continued focus on legislation such as the IGNITE American Innovation Act, which provides credits and refunds for certain net operating losses and R&D investment, or the American Innovation and Jobs Act, which improves the treatment of the R&D tax credit. Many policymakers understand the importance of NOLs, especially in a downturn—but NOLs have been politicized, and the venture community should be educating Congress.
The final assessment
The president outlined his vision, and now Congress will take over. The outcome will look different than the proposal, and the debate will be shaped by those who show up. This will be a long process that will benefit from extensive engagement between the venture and startup ecosystem and lawmakers.