THE ELECTION AND WHAT TO DO NOW!

This Client Alert is sent in advance of our annual comprehensive Client Update, which will be sent after the November elections.  This will allow us to provide a more focused update that addresses likely tax and related reform.  Should there be a further shift to Democrat leadership, there will be a likelihood of significant changes to current individual income, corporate, gift, and estate tax laws. If there is a shift to Republican leadership, the likelihood is status quo or further tax reductions, while addressing government spending. However, given the slim majorities in the House and Senate, aggressive tax policy changes may still face uphill battles.  Nevertheless, clients are taking the prospects for reform seriously.  Many are positioning themselves to utilize their estate, gift, and generation-skipping tax exemptions during 2024, but with methods that provide options of electing to rescind or otherwise reverse the use of their exemptions well into 2025. This type of planning will involve a close monitoring of the consequences of the elections and proposed tax reform, so that informed decisions can be made to use exemptions or to preserve them, and even liquidate trusts funded in 2024 as late as October 15,  2025. As a result, we felt a review of the legislative process for passing federal tax law may help everyone better understand how and when proposed tax changes may occur.

Step 1: The President Proposes Tax Legislation
Most recommendations for new tax legislation come from the President and are based on recommendations from the Treasury Department, the IRS, or individuals in business or professional fields. The Treasury Department often has the primary responsibility for drafting proposed legislation.

Step 2: The House Committee on Ways and Means Marks-Up the President’s Proposal to Draft Legislation
Our Constitution states that all legislation concerning taxes must “originate” in the House of Representatives. Accordingly, all tax legislation begins its journey through Congress in the House Committee on Ways and Means. The committee holds hearings to listen to testimony on how the legislation will affect the overall economy and specific interest groups. Once the hearings are concluded, the committee members meet in a session to “mark-up” or revise the proposal and turn it into “draft legislation.”

Step 3: The Full House Passes the Draft Legislation and It Becomes a Bill
The draft legislation is introduced to the full House of Representatives for consideration. If passed by simple majority of the representatives (218 out of 435), the “bill” now moves to the Senate.

Step 4: The Senate Finance Committee Reviews the Bill
The first stop for the tax bill passed by the House is the Senate Finance Committee. The Senate Finance Committee operates similarly to the House Committee on Ways and Means but instead of looking at the President’s initial proposals, the finance committee focuses on the tax bill passed by the House. After holding its own hearings, the committee sends the marked-up House bill along with a report explaining the markups to the full Senate for floor action. The entire Senate debates the bill as reported by the Senate Finance Committee. During the debate, the senators may further amend the bill before bringing it to a vote. However, the bill can meet resistance through a tactic known as a filibuster. Senators use a filibuster to prevent a measure from being brought to a vote by extending debate on the measure. The rules permit a senator, or a series of senators, to speak for as long as they wish, and on any topic, they choose, unless three-fifths of the senators (currently 60 out of 100) vote to bring the debate to a close. While there was a recent push to repeal the “filibuster,” a repeal was not accomplished, and filibuster remains a stall tactic.

However, additional maneuvers have cleared the way for some legislation to avoid filibusters. For instance, budget bills can pass through the Senate by a procedure known as “budget reconciliation.” Budget reconciliation has generally been used to shrink the deficit through spending reductions, revenue increases, or a combination of the two. Because reconciliation was originally intended to reduce the deficit, the rule states that only provisions directly impacting government spending or taxes can be passed through reconciliation. This means anything going through reconciliation must directly impact the federal budget—and if it doesn’t, then the Senate can’t pass it through reconciliation. This rule is referred to as the Byrd rule after Robert Byrd, a senator from West Virginia who was its principal sponsor. 1 The Byrd rule has been law since 1990, and it has been used successfully dozens of times to block so-called extraneous (unrelated) provisions that should not be passed through reconciliation. One of the six criteria used to determine whether a provision in a bill violates the Byrd rule is whether the provision increases the deficit beyond a certain number of years.  Hence, this is the reason why many tax cuts last for only a short number of years (often 10) and have sunset provisions, where the prior law becomes effective.

With budget reconciliation, the Senate can use the fast-track process to consider legislation that brings spending and revenue in line with the budget resolution. Debate on a reconciliation bill is limited to 20 hours so it cannot be filibustered on the Senate floor. This reconciliation process allows such legislation to be passed in the Senate by a simple majority vote. Most recent legislation was passed through the budget reconciliation process.

If the Senate passes the House version of the bill without further amendments, the bill gets sent directly to the president for signature. However, if the Senate passes its own amended version of the bill, then the bill with the Senate amendments is sent back to the House of Representatives for review. Unless the House agrees to accept the Senate version, a conference committee is appointed to iron out the differences between the two bills.

Step 5: The Conference Committee Acts
A conference committee (a joint committee composed of senior House and Senate members that originally considered the legislation)  reviews the two versions of the bill and returns its own version back to both the House and Senate for vote. If this new version is passed, the revised bill is sent to the President. If it is not passed, that bill is dead.

Step 6: The Executive Branch Takes Action
Once the President receives the bill, the President will receive additional advice from the Secretary of the Treasury and other federal agencies before making a decision. If the president signs the bill, the IRS will take action to carry out the provisions of the tax bill.

If the President vetoes the bill, the bill is returned to the House with a statement of what was objectionable in the bill and then the House must (1) attempt to override the veto (which requires a two-thirds vote of both the House and the Senate) or (2) make the requested changes.

Looking Forward 
The Democrat led Senate recently introduced a tax reform bill that significantly increases all kinds of taxes and that seeks to tax wealth prior to sale.  https://kempelaw.com/client-update-senate-introduces-estate-and-gift-tax-reform-to-pay-for-housing/  During Kamala Harris’s campaign she has recently adopted these proposals. Trump has suggested he would cut more taxes and extend the 2026 sunsetting of his 2017 Tax Cuts and Jobs Act reforms, which were passed by the reconciliation process. However, for Trump to do so, he would need Senate and House cooperation, which would make preventing the sunset of his 2017 legislation uncertain, without majority control of the House and Senate.

In our narrowly divided House and Senate, moving tax legislation through by the budget reconciliation process could be a way forward for either parties tax proposals. Who is elected President is not the only race to watch. While much of Harris’s platform is concerned with raising revenue, there will likely also be major spending provisions in her proposed tax legislation, such as is in the recently introduced Senate bill that provides major low-income housing subsidies. Considering the Byrd rule, the time frame for some of the new legislation may be limited and given that there are other important matters facing a new administration, immediate action on tax changes may not happen. That said, given the history of tax legislation, it seems inevitable that some significant changes to our tax laws will be proposed during either a Harris or Trump administration. Whether they are made is much less certain.  As a result, we are encouraging clients to create nimble plans that can either now use or otherwise preserve exemptions, for another day.

If you are interested in learning more about possible tax law changes and how the changes may affect you, please contact us.

Joe Kempe

1The Byrd rule defines a provision to be “extraneous” — and therefore ineligible for reconciliation — in six cases: (1) It does not have a budgetary effect; 2) It has a budgetary effect, but the effect is not what the budget resolution called for; (3) It’s outside the jurisdiction of the committee recommending it; (4) It does have a budget effect but is “merely incidental” to the nonbudgetary components of the provisions; (5) It increases the deficit beyond a certain number of years (usually a period of 10 years); or 6) It is about Social Security.

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