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Summary and Analysis: White House FY2024 Budget Request Tax Proposals

Brownstein Client Alert, March 13, 2023

This tax policy alert includes an overview of the Biden administration’s fiscal year (FY) 2024 budget request to Congress (“Budget”), key takeaways on various revenue proposals and a comprehensive summary of proposals included in the Treasury Department’s General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals, commonly known as the “Green Book.”

Click here for a comprehensive summary of tax proposals in the Green Book.

BUDGET OVERVIEW

On Thursday, March 9, President Joe Biden released his $6.9 trillion Budget and various accompanying documents. Separately, the Treasury Department released its Green Book, which provides more detailed descriptions of the tax proposals in the budget along with associated revenue estimates.

For FY2024, the Budget would result in an estimated federal deficit of approximately $1.8 trillion—an increase of more than 30% compared to FY2023 levels. The Budget also proposes $880 billion for defense and approximately $992 billion for non-defense discretionary spending. To improve tax administration and enforcement, the Budget recommends $14.1 billion for the Internal Revenue Service (IRS), a $1.8 billion or nearly 15% increase over the FY2023 enacted funding.

The Budget includes proposals for significant new federal spending on entitlement programs and tax relief for families and workers over the next decade, resulting in a proposed annual budget of about $10 trillion by 2033. To offset these spending increases, the Budget revives several tax proposals offered in previous budget requests or in the FY2022 budget-reconciliation process. The Budget also incorporates new proposals to increase taxes on large corporations and individuals with over $400,000 in annual income. If enacted in its entirety, the Budget would raise $4.7 trillion in additional tax revenue over the next decade compared to baseline budgetary estimates.

Last Friday, Treasury Secretary Janet Yellen appeared before the House Ways and Means Committee to answer lawmakers’ questions concerning the Budget. As expected, Republicans strongly opposed the Biden administration’s proposed tax increases. Treasury Secretary Yellen will again defend the Budget in a hearing with the Senate Finance Committee this Thursday, March 16.

Below is an overview of key figures in the president’s Budget.

Type	FY2023 Actual	FY2024 Proposed
Total Receipts	$4.812 trillion	$5.036 trillion
Total Spending	$6.206 trillion	$6.883 trillion
Deficit	$1.394 trillion	$1.846 trillion
Federal Debt	$25.716 trillion	$27.738 trillion

KEY TAKEAWAYS

1) Biden Doubles Down on Tax Increases Already Rejected by Democrats. Despite already achieving a significant legislative victory in the passage of several tax increases through the Inflation Reduction Act (IRA), the Biden administration is reviving more previously proposed taxes on large corporations and high-income individuals. Many of these proposals were initially included in early versions of the FY2022 budget-reconciliation bill, but they were ultimately rejected by Democratic lawmakers as internal negotiations significantly whittled down the scope of the Build Back Better Act, which ultimately became the Inflation Reduction Act.

With control of Congress now split between Republicans and Democrats, these tax increases are even less likely to receive serious consideration. Moreover, a new House rule that requires the support of three-fifths of the chamber to approve any new tax increases will further diminish the possibility that any of these proposals are adopted in the 118th Congress. Even if revenue increases are included in a prospective debt-limit agreement or other future bipartisan efforts, it is unlikely that these broadly unpopular proposals would be part of such legislation.

Examples of already rejected tax proposals included in the Budget are several rate hikes that were opposed by Sen. Kyrsten Sinema (I-AZ) last year, including an increase in the corporate rate to 28%, an increase in the top marginal income tax rate to 39.6% and an increase in the top capital gains tax rate to 39.6%. Moreover, the Budget appears to impose these corporate and individual income tax rate increases retroactively for FY2022—a feature that further reduces the possibility for these proposals to attract support from lawmakers. Other proposals offered by the Biden administration would increase taxes on carried interests and limit the use of certain tax-favorable retirement accounts, both of which were previously rejected by Sinema. The Budget also would repeal several tax benefits afforded to the fossil-fuel industry, including intangible drilling cost and percentage depletion deductions, even though these proposals were previously opposed by several moderate Democrats in both the House and Senate.

2) Yellen Refuses to Abandon Efforts to Adopt the Global Tax Agreement and Other International Tax Reforms. The Budget includes several proposals to further align the United States with Pillar Two of the global minimum-tax regime negotiated through the Organisation for Economic Co-operation and Development (OECD). While recent guidance from the OECD suggests that the U.S. Global Intangible Low-Taxed Income (GILTI) rules will temporarily be treated as a qualifying system under Pillar Two, Treasury Secretary Yellen has frequently advocated for efforts to modify the U.S. tax code further to meet the requirements of Pillar Two on a more comprehensive basis. The Budget would make a number of additional modifications to the treatment of U.S. multinational corporations to increase taxes on companies that are perceived as avoiding domestic tax liabilities through foreign operations and investments. The Budget would accomplish its international-tax objectives by enacting the following significant proposals, among others:

Modify the GILTI Rules to Conform to Pillar Two. The proposal would make several changes to conform U.S. tax law to the OECD-proposed global minimum tax, including repealing the 10% qualified business asset investment exemption; reducing the section 250 deduction; adopting a “jurisdiction-by-jurisdiction” calculation of GILTI and foreign tax credits; and repealing the GILTI high-tax exception, among other changes.
Adopt an Undertaxed Profits Rule (UTPR). The proposal would repeal the Base Erosion Anti-Abuse Tax (BEAT) and replace it with a UTPR. The UTPR is intended to align the U.S. international-tax rules with the OECD Pillar Two concept. The proposal would include a new domestic minimum top-up tax that would be triggered by a foreign country’s adoption of a UTPR and prevent U.S. revenues from shifting to other countries. The proposal also would modify the administration of tax incentives to ensure that U.S. taxpayers would continue to benefit from credits and deductions that are intended to promote U.S. jobs and domestic investment. The UTPR would apply to financial reporting groups with global revenue equal to the dollar equivalent of €750 million (approximately $798 million) or more.
Repeal the Deduction for Foreign-Derived Intangible Income (FDII). The proposal would repeal the current 37.5% deduction for FDII. In addition, the revenue generated from repealing FDII would be used to provide additional incentives for domestic research and experimentation expenditures. The budget does not specifically address the current five-year amortization of research expenses.
Modify Taxation of Dual-Capacity Taxpayers. The proposal would prevent dual-capacity taxpayers, primarily taxpayers in the oil and natural-gas and gaming sectors, from claiming certain royalties as taxes paid, thus limiting the amount of Foreign Tax Credits claimed by these businesses.

3) Proposals Offer Biden Administration’s Opening Stance in Budget Negotiations. The Biden administration is promoting the Budget as its opening position in the renewed bipartisan focus on the nation’s current and projected fiscal outlook. Although the Budget would significantly increase the annual deficit by about 30% to $1.8 trillion in FY2024, the Biden administration has readily noted that the proposal would reduce the 10-year deficit by an estimated $2.9 trillion compared to baseline budgetary estimates. This net spending reduction is primarily the result of approximately $4.7 trillion in additional tax revenue over the next decade. Biden has noted that these proposals are not intended to increase taxes on individuals earning less than $400,000 in annual income. Biden has focused attention on proposals in the Budget like his modified ”billionaire tax,” which would impose a 25% minimum tax on the realized and unrealized gains of individuals with more than $100 million in assets.

Although these tax increases would fund some deficit reduction, the Budget also presents the Biden administration’s vision for a significant increase in overall government spending over the coming decade. Specifically, the Budget proposes an increase in annual spending until 2033, when total annual federal appropriations would reach just over $10 trillion—more than 60% higher than current government spending. Biden defended this approach during a recent speech, arguing that these new taxes “will allow [him] to raise enough money to do the things [he has] been able to do.” This increase in both spending and revenue will likely form the basis for the Biden administration’s approach to upcoming negotiations with GOP lawmakers on crafting the FY2024 appropriations and averting a default on account of the looming debt ceiling.

Previewing the GOP’s budget negotiating position, House Speaker Kevin McCarthy (R-CA) called the Budget “a reckless proposal doubling down on the same far-left spending policies that have led to record inflation and [the] current debt crisis.” Republicans are expected to release their own FY2024 budget proposal in the coming weeks. In contrast to the Biden administration’s use of tax increases to limit the deficit and fund new spending, the GOP plan likely will include significant reductions in non-defense spending. However, McCarthy has indicated that Social Security and Medicare cuts will be “completely off the table” in budget negotiations.

4) Tax Relief for Families, Students and Medicare Take Center Stage in the Leadup to 2024 Campaign. Several of the Biden administration’s tax priorities concerning families and students were noticeably absent from the FY2023 Budget proposal because they were already included in early versions of the FY2022 budget-reconciliation bill. Since most of these proposals were ultimately left out of the final reconciliation deal, they have been reintroduced in this year’s Budget. Many of these revived proposals were among Biden’s campaign promises in 2020, and they will likely lay the groundwork for the proposed agenda of his expected 2024 presidential campaign. These proposals include:

Expand the Child Tax Credit (CTC). In 2022, Democrats removed provisions to expand the CTC from the budget reconciliation package over disagreements with Sen. Joe Manchin (D-WV) on the resurrection of a work requirement. The Budget reproposes several changes to the CTC that were previously enacted for 2021 through the American Rescue Plan Act (ARPA), without the inclusion of any of Manchin’s requested stipulations. The proposal would increase the CTC value to $3,600 for qualifying children under age 6 and to $3,000 for all other qualifying children, as well as raise the maximum age for the CTC from 16 to 17. These changes would be effective for tax years 2023, 2024 and 2025. The proposal also would make the credit permanently refundable and allow taxpayers to claim the credit as monthly advanced payments.
Make Permanent and Expand the Exclusion of Student Debt Forgiveness. The proposal would make permanent the current exclusion from gross income for certain discharged student debt. This exclusion currently only applies to loans discharged before 2026. Additionally, a new proposal would extend tax-preferred treatment to certain loan repayment programs and scholarship plans that are fully taxable under current law.
Increase Incentives for Low-Income Housing. The Budget includes a pair of incentives for constructing or rehabilitating low-income housing, namely an expansion of the Low-Income Housing Tax Credit (LIHTC) and the creation of a Neighborhood Homes Credit (NHC) for the construction or substantial rehabilitation of affordable, owner-occupied housing located in distressed areas.

The Budget aims to satisfy the Biden administration’s promise to extend long-term Medicare solvency by directing revenue from the Net Investment Income Tax (NIIT) to fund the Medicare Hospital Insurance (HI) Trust Fund, which is currently set to be depleted before 2030. The proposal would include an increase in the current NIIT rate from 3.8% to 5% for taxpayers with over $400,000 in annual income and expand the tax to apply to active passthrough income. With these proposed changes, the Biden administration estimates that the solvency of the HI Trust Fund would be extended by at least 25 years. However, these proposals were previously rejected by both Democratic and Republican lawmakers out of concern that NIIT expansions would significantly raise taxes on small businesses.

5) Budget Proposals May Offer Insight into the Administration’s Regulatory Priorities. With control of Congress split, the administration is increasingly pivoting to its regulatory agenda while looking for sparce opportunities to advance its legislative agenda. The new proposals in the Budget offer insight into areas the administration may seek to address through regulation. For example, while legislative attempts to modify income, estate and gift tax rules for certain high-income and wealthy individuals have failed, the administration may seek to tighten rules governing estate-planning tools like grantor trusts through the regulatory process. The Budget also would impose new special distribution rules on high-income taxpayers who utilize certain retirement tools and limit the use of rollovers and conversions to Roth retirement accounts. These proposals signal the Biden administration’s continued interest in limitations on wealthy individuals who utilize certain tax-favorable retirement accounts.

The IRS released its current Priority Guidance Plan (PGP) in September of last year, with the most recent update released on Feb. 21, 2023. The PGP offers some insight into Budget priorities that have found their way into the regulatory agenda, as well as other targets of the administration’s oversight.

TREASURY DEPARTMENT AND THE INTERNAL REVENUE SERVICE

The Budget requests $16.3 billion in discretionary budget authority for the Treasury Department and IRS, a $2.1 billion increase over the agency’s FY2023 enacted level. Of this total funding request, $14.1 billion would be devoted to tax administration and enforcement through the IRS, a $1.8 billion or nearly 15% increase over current baseline funding. The Biden administration is proposing the expanded spending request on top of the IRA’s appropriation of $79.6 billion in additional funding for the IRS over the next decade. With the proposed portion of IRA funding allocated to FY2024, the Budget requests a total of $18.3 billion for the IRS in the next fiscal year. The remaining $2.2 billion requested by the Budget would fund the non-IRS Treasury Department bureaus and departmental offices, including the U.S. Mint, Office of the Comptroller of the Currency and Bureau of Engraving and Printing, among others.

For FY2024, the Budget is intended to support several of the Treasury Department’s and the IRS’ strategic priorities, which include:

Resources for Underserved Communities. The Budget proposes an increase of $642 million for taxpayer services over FY2023 enacted levels, which would be used primarily to improve customer service outreach to taxpayers in rural and impoverished communities. The Budget also calls for $341 million for the Community Development Financial Institutions Fund, which offers loans to help businesses in underserved communities access financial support in conjunction with the New Markets Tax Credit.
Business Systems Modernization. The Budget would provide $290 million for IRS business systems modernization, an account not funded through the FY2023 enacted budget. The proposed revival of baseline modernization funding would supplement an average of $475 million in annual IRA resources already allocated for this purpose.
Corporate Transparency and Financial System Monitoring. The Budget would significantly expand on FY2023 enacted levels to provide $473 million to the Treasury Department’s Office of Terrorism and Financial Intelligence and Financial Crimes Enforcement Network. This funding would be used to crack down on money laundering, as well as support Treasury Department offices charged with closing financial reporting loopholes that allow illicit actors to evade scrutiny and undermine corporate accountability.
Cybersecurity Expansion. The Budget would provide $215 million for Treasury Department and IRS enterprise cybersecurity initiatives, an increase of $100 million or about 85% compared to FY2023 enacted levels. This funding would be used to protect and defend sensitive agency systems and information, including those designated as high-value assets.
Staffing for Policy and Equity Offices. The Budget would provide $332 million for Department of the Treasury’s departmental offices, a 21% increase over 2023 enacted levels. This funding would be used to increase staffing for policy offices, such as the Office of Tax Policy, as well as enhance support for equity programs like the Treasury Department’s Climate Hub.

Beyond FY2024, the Budget would extend certain mandatory funding allocations made to the IRS for fiscal years 2032 and 2033. Currently, the additional appropriations provided to the agency under the IRA are set to expire after 2031. The Budget would give the IRS an additional $14.3 billion in FY 2032 and $14.8 billion in FY 2033 to continue IRA-funded enforcement and operations initiatives. The Treasury Department estimates this increase in mandatory IRS funding would provide a net decrease in the deficit of $134 billion through increased enforcement. Notably, this proposal would not extend the current mandatory funding for taxpayer services or business systems modernization projects.

The Green Book also includes several new and modified proposals that would expand the IRS’ enforcement authority, including:

Enhanced Requirements on Tax Filers. This proposal would allow the Treasury Secretary to require electronic filing for several return types, including individual filers with assets or gross income of more than $400,000 and corporations with assets or income of more than $10 million. For reportable payments subject to backup withholding, the Budget would permit the IRS to require payees to furnish their Taxpayer Identification Numbers to payors.
New Authority to Levy Certain Tax Penalties. The Budget includes new proposals that would remove deadlines imposed on the IRS for issuing certain notices to taxpayers, allowing the agency more authority to levy financial penalties. In addition, the proposal would eliminate current requirements that IRS auditors must receive written supervisory approval to impose certain penalties.
Increased Statute of Limitations for Certain Tax Assessments. This revived proposal would extend by three years the current statute of limitations for enforcement against a taxpayer omitting more than $100 million of gross income on their return or reporting benefits from certain listed transactions. A new Budget proposal would provide IRS officials two additional years to audit taxpayers claiming certain COVID-19-related paid leave credits or Employee Retention Tax Credits.
Expanded Oversight of Paid Preparers. The Budget significantly expands on previous proposals to increase oversight of paid tax preparers. The budget revives an FY2023 proposal that would provide the Treasury Secretary with explicit authority to regulate paid preparers of federal tax returns and establish mandatory minimum competency standards. In addition, the Green Book includes new proposals to expand the IRS’ authority to determine the suitability of paid tax return preparers applying for Preparer Tax Identification Numbers (PTINs), as well as provide agency officials greater authority to revoke PTINs issued to currently certified paid preparers who are determined to be unsuitable.

NEXT STEPS

The Budget kicks off congressional negotiations over FY2024 spending legislation. The first step in that process began last Friday when Treasury Secretary Yellen appeared before the House Ways and Means Committee to answer lawmakers’ questions concerning the Budget. At the hearing, GOP lawmakers expressed concern over proposed tax increases and their possible repercussions on families, small businesses and domestic energy producers. This Thursday, Treasury Secretary Yellen will testify before the Senate Finance Committee on the Budget. In the coming weeks, several other committees are also scheduled to hold hearings to discuss the president’s Budget. Thereafter, attention will shift to the annual appropriations cycle and the looming debt limit.