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White House FY2025 Budget Request: Key Tax Takeaways

Brownstein Client Alert, March 19, 2024

Budget Overview

On Monday, March 11, President Joe Biden released his budget request to Congress (“Budget”) and various accompanying documents. Separately, the Treasury Department released its General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals, commonly known as the “Green Book,” which provides more detailed descriptions of the tax proposals in the Budget along with associated revenue estimates.

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

The $7.3 trillion Budget is the largest in U.S. history, including $1.6 trillion in base discretionary spending—approximately $895 billion for defense and $734 billion in non-defense discretionary spending. If enacted in its entirety, the Budget would raise $5 trillion in additional tax revenue over the next 10 years compared to baseline budgetary estimates. For FY2025, the Budget would result in an estimated federal deficit of approximately $1.8 trillion—an increase of about 30% compared to FY2023 levels. Below are key figures in the president’s Budget.

Type	FY2023 Actual	FY2025 Proposed
Total Receipts	$4.812 trillion	$5.485 trillion
Total Spending	$6.206 trillion	$7.266 trillion
Deficit	$1.394 trillion	$1.781 trillion
Federal Debt	$25.716 trillion	$29.984 trillion

Treasury Secretary Janet Yellen will appear before the Senate Finance Committee on Thursday, March 21, to address lawmakers’ questions. Yellen is expected to also participate in a similar hearing with the House Ways and Means Committee following the spring recess.

This is the fourth and final budget proposal that Biden will submit to Congress before the end of his first term, highlighting the tax-policy priorities that will continue to be central to his reelection campaign. Republicans are expected to oppose a majority of the tax and spending proposed in the Biden Budget request, and the extent of congressional Democrats’ support for all of the tax proposals is uncertain.

Below are the Brownstein tax policy team’s five key takeaways on the Budget.

Key Takeaways

1. Proposed $5 Trillion Tax Increase Produces Net Projected Deficit Reduction of $3 Trillion. In response to increasing concerns regarding the federal deficit, the Budget proposes spending and revenue levels that would reduce the federal deficit by roughly $3 trillion over the next 10 fiscal years. Key to that objective are proposals to increase tax revenues by an estimated $5 trillion, the vast majority of which would affect large corporations, especially those with multinational operations, and individuals earning more than $400,000 per year. Proposals expected to be the largest revenue-raisers include:

Business Tax Increases: The Budget would raise U.S. corporate taxes by roughly $2.9 trillion primarily through an increase in the corporate tax rate to 28%, an increase in corporate alternative minimum tax to 21%, an increase in the stock buyback excise tax to 4%, and denying business deductions for employee compensation above $1 million, among other proposals. Proposals affecting U.S. multinational businesses include revenue-raising revisions to the global intangible low-taxed income (GILTI) regime and adoption of an undertaxed profits rule (UTPR) in line with the proposal negotiated through the Organisation for Economic Cooperation and Development (OECD).
Individual Tax Increases: The Budget proposes a new 25% billionaires minimum income tax projected to raise about $500 billion over the next 10 years. While the Budget is silent on the expiration of the Tax Cuts and Jobs Act (TCJA) individual tax rates (as noted below), it proposes to accelerate the expiration of the current 37% top rate to 39.6% beginning in 2025, raising an additional $300 billion. Since the current budgetary baseline assumes the individual tax rates will revert to pre-TCJA rates after 2025, this proposal would raise taxes by a further $200 billion if compared to an extension of current individual tax rates. With other proposals, including expansion of the Net Investment Income Tax (NIIT) rate, the Budget would raise roughly $2.1 trillion in revenue by increasing taxes on individuals.

An important feature of the Budget’s deficit-reduction totals is the baseline reference. The president’s Budget is developed against the Office of Management and Budget’s (OMB) baseline estimates of federal revenues and spending over the next 10 years. Because the OMB baseline incorporates the administration’s economic and other assumptions, it often reflects a more optimistic economic assessment, and can be colored by political objectives, as compared to the annual baseline determined by the Congressional Budget Office (CBO). For example, the Budget assumes real GDP will grow at 2.2% annually in the last five years of the budget window; the CBO assumes real GDP will grow 1.9% annual over the same period. Accordingly, when CBO evaluates the president’s Budget later this year, its estimates with respect to the Budget’s deficit reduction potential over the 10-year period may be materially different.

2. Absent Recommendations to Address TCJA Expirations, the Biden Budget Leaves Democrats’ Opening Position Unclear in the Lead-Up to 2025 Tax Reform. The Budget is silent on proposals to address the impending expirations of several tax provisions enacted as part of TCJA. Instead, Biden offers to work with Congress to extend tax relief for individuals making under $400,000 per year and enact “additional reforms” beyond those included in the Budget to offset the costs of such extensions. Moreover, the Budget criticizes the expiration of certain TCJA provisions at the end of 2025 as a deliberate decision to “conceal both the true increase in the deficit … and the true size of their tax breaks for multi-millionaires and large corporations.”

The Budget confirms the administration’s opposition to “extending [TCJA] tax cuts for the top two percent of Americans” scheduled to sunset after next year. Many of the expiring TCJA provisions, however, also provide significant relief for low- and middle-income taxpayers, including the expanded child tax credit (CTC), increased standard deduction, and lower individual income tax rates and brackets. Biden’s proposal would not extend any of this tax relief beyond 2025, resulting in tax increases for individuals at every income level. With respect to the CTC, for example, the Budget highlights a proposal to expand the credit from $2,000 to $3,000 per child ($3,600 for children under six). However, the Green Book clarifies that the proposed expansion would apply only for 2025, at a cost of about $200 billion, and expire thereafter in conjunction with the TCJA CTC expansion. In contrast, making the CTC expansion permanent (a proposal Biden has endorsed previously) would negate the majority of the Budget’s estimated 10-year deficit reduction.

On the business side, the Budget does not propose to extend any of the expiring or expired TCJA provisions that enjoy significant bipartisan support, such as the section 199A qualified business income deduction and section 174 research and development (R&D) expensing. These expiring tax provisions are used by small- and medium-sized businesses across industries, so it is unlikely that Democratic lawmakers will support allowing them to phase out completely.

When later questioned about the absence of proposals to address TCJA, OMB Director Shalanda Young suggested that such proposals would be premature given that “we also know, in this country, we’re going to have a robust tax debate … at the end of 2025.” While largely avoiding TCJA’s expiring tax cuts, the Budget would achieve much of its estimated deficit reduction by modifying permanent business tax relief enacted as part of TCJA. The proposed increase in the corporate tax rate to 28% and repeal of the deduction for foreign-derived intangible income (FDII), for example, would reduce the 10-year deficit by about $1.35 trillion and $158 billion, respectively.

3. Political Priorities Take Center Stage as Biden Ramps Up Campaign Effort. Similar to previous years, the FY2025 Budget carries forward several proposals that lay out a familiar campaign tax agenda ahead of the November elections. Similar to his 2020 campaign agenda, Biden continues to propose raising taxes on corporations and wealthy individuals to finance new, sweeping social entitlement programs and tax incentives benefitting individuals making less than $400,000 annually. Most of the proposals failed to garner sufficient support from lawmakers during Biden’s first two years in office when Democrats narrowly controlled Congress. However, depending on the results of the upcoming elections, the proposals are likely to take center stage in a potential second Biden term. More than serving as a realistic tax agenda for a potential second Biden term, these partisan proposals appeal to key Democratic electorates and will continue to be central to the political messaging of the president’s ongoing reelection campaign. Political priorities in the Budget include:

Ending Fossil Fuel Incentives. To appeal to environmentalist voters, the Budget proposes repealing tax provisions afforded to the fossil-fuel industry, including intangible drilling cost and percentage depletion deductions, as well as certain foreign tax credit allowances for dual-capacity taxpayers. These proposals were previously opposed by both Republicans and moderate Democrats in the House and Senate.
Enhancing Benefits for Families. To provide relief to families with children, the Budget would permanently make the CTC fully refundable and advanceable. However, it only contemplates an increase in the value of the credit to $3,600 or $3,000, depending on the age of the child, for one year. After that, the CTC would revert back to pre-TCJA levels. The Budget would also expand the business tax credit for employer-provided child care and make the adoption tax credit refundable.
Reducing Housing Costs. To combat high housing prices, the Budget would expand the Low-Income Housing Tax Credit (LIHTC) and create a new Neighborhood Homes Credit (NHC) for the construction or rehabilitation of owner-occupied housing in distressed areas. New proposals would create first-time home-buyer and home-seller tax credits, each equal to up to $10,000.
Expanding Incentives for Students. To appeal to young voters, the Budget would make permanent the exclusion from gross income for certain discharged student debt. An additional proposal would extend tax-preferred treatment to certain loan repayment programs and scholarship plans that are fully taxable under current law.
Eliminating Tax Strategies Used by Wealthy Individuals. To crack down on perceived “tax loopholes,” the Budget would limit the tax benefits for private-placement life insurance and certainty annuity contracts. The Budget also would restrict high-income taxpayers’ use of retirement savings tools, including Roth accounts, and tighten rules governing estate-planning vehicles like grantor trusts.

The Budget aims to satisfy Biden’s promise to extend long-term Medicare solvency by directing revenue from the NIIT to fund the Medicare Hospital Insurance Trust Fund, which is currently set to be depleted before 2031. The proposal would increase 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. This will result in certain taxpayers, including some pass-through business owners, being subject to a top marginal tax rate of 44.6%. Similar proposals were previously rejected by both Democratic and Republican lawmakers out of concern that NIIT expansions would significantly raise taxes on small businesses. The Budget also highlights the Biden administration’s commitment to strengthening Social Security by “asking the highest-income Americans to pay their fair share,” but it does not provide any explicit legislative proposals that would extend the program’s solvency.

4. Biden Doubles Down on Long-Term IRS Expansion, Requesting Over $100 Billion in Additional Mandatory Funding and Expanded Enforcement Authority. Although the Budget would maintain baseline IRS discretionary funding at the current enacted level of $12.3 billion for FY2025, it calls for $104.3 billion in additional mandatory funding for the agency over the next decade. This supplemental funding would be on top of the estimated $52 billion in remaining IRS funding enacted as part of the Inflation Reduction Act (IRA), which remains available through FY2031. The Budget would make some of this new funding available as early as FY2026 for the agency’s taxpayer services and business systems modernization accounts, with the majority of the request reserved for expanding tax-enforcement activities between FY2029 and FY2034.

Proposed Additional IRS Mandatory Funding ($ Billion)

	2026	2027	2028	2029	2031	2031	2032	2033	2034	2026-2034
Taxpayer Services	1.7	1.9	1.9	1.9	2.0	2.0	2.1	2.1	2.1	17.7
Enforcement	0	0	0	1.3	9.6	11.7	11.9	12.1	12.4	58.9
Operations Support	0	0	0	0.2	2.9	4.8	5.2	5.3	5.3	23.8
Business Systems Modernization	1.0	0.9	0.3	0.3	0.3	0.3	0.3	0.3	0.3	3.9
Total Cost	2.7	2.8	2.2	3.7	14.7	18.8	19.5	19.8	20.1	104.3

The Budget contends that the $1.4 billion and $20.2 billion recissions of IRA funding made by the Fiscal Responsibility Act and FY2024 appropriations process will significantly reduce IRS operations in the coming years, with IRA funding for taxpayer services and business systems modernization depleted by 2026 without additional appropriations. The Budget offers further justification by arguing that the proposed $58.9 billion in new tax-enforcement funding for FY2029 through FY2034 is expected to increase tax revenue by over $341 billion as a result of additional audits targeting high-income taxpayers, large corporations, and complex partnerships.

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

Enhanced Requirements on Tax Filers. This proposal would allow the Treasury Secretary to require electronic filing of several return types, including those filed by individuals with assets or gross income of more than $400,000 and corporations with assets or income of more than $10 million.
New Authority to Levy Tax Penalties. The Budget would remove certain statutory deadlines for issuing noncompliance notices to taxpayers and eliminate the requirement that auditors must receive written supervisory approval to impose certain penalties while also extending the statute of limitations for underreporting tax liability or engaging in certain listed transactions.
Expanded Oversight and Examination. The Budget would provide the Treasury Secretary with explicit authority to establish minimum competency standards for paid tax-return preparers. The Budget also would allow the IRS to issue summons to large partnerships, such as complex investment entities and hedge funds.

5. Yellen Refuses to Alter Course on the Global Tax Agreement and Other International Tax Reforms. The FY2025 Budget reintroduces several recommendations included in previous budget proposals intended to further align the United States with Pillar Two of the OECD global minimum-tax regime. The inclusion of these recommendations follows a tax report from the OECD Secretary-General last month highlighting that the Pillar Two minimum tax is expected to come into effect in over 35 countries this year. While guidance from the OECD suggests that the GILTI rules will temporarily be treated as a qualifying system,Treasury Secretary Yellen has frequently advocated for further modifications to align the U.S. tax code to Pillar Two more comprehensively.

Legislative efforts to adopt a Pillar Two-compliant tax regime were scuttled in the 117th Congress by Sen. Joe Manchin (D-WV), and House Republicans outright rejected the proposal when they took control of the chamber in the current Congress. Moreover, Republicans on the House Ways and Means Committee introduced legislation last year that would impose retaliatory taxes on taxpayers in countries implementing either pillar of the OECD framework. Nonetheless, the Budget signals that the Biden administration is undeterred in its objective to adopt the international agreement, recommending the following 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 a UTPR.The proposal would repeal the Base Erosion Anti-Abuse Tax (BEAT) and replace it with a UTPR applicable to financial reporting groups with global revenue equal to the dollar equivalent of €750 million (about $815 million) or more, consistent with Pillar Two. 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 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. In particular, the Budget would repeal the current 37.5% deduction for FDII, with revenue generated from the repeal used to provide additional incentives for domestic research and experimentation expenditures. As noted above, the Budget does not specifically address the current requirement that research expenses be amortized over five years rather than expensed currently.

Next Steps

In past years, the president’s budget kicks off the annual appropriations process, but congressional negotiations concerning FY2025 funding cannot begin in earnest until the FY2024 process is completed. Some agencies received full-year funding for FY2024 as part of a funding package enacted on March 8, but funding for the remaining agencies, including the Treasury Department and IRS, is still set to expire on March 22 absent congressional action. Nonetheless, Republicans on the House Budget Committee advanced their own partisan high-level budget resolution for FY2025 intended to serve as a contrast to the Biden Budget. The resolution proposes to reduce the deficit by $14 trillion over the next decade through cuts to discretionary spending and repeal of provisions like the IRA energy credits. With Democrats controlling the Senate, an FY2025 budget resolution that can be reconciled with the House resolution is unlikely.

With respect to Biden’s tax priorities, the current Republican-controlled House ensures that none of these proposals will be enacted in the 118th Congress. Last week, House Ways and Means Committee Chairman Jason Smith (R-MO) suggested that, if enacted, the Budget would result in “fewer jobs, higher prices, and handing our competitive advantage to China.” Nonetheless, the outlook for Biden’s tax priorities in 2025 depends entirely on the results of the upcoming elections. If Democrats gain a majority in the House, while maintaining control of the Senate and presidency, Biden’s priorities are likely to find their way into future tax legislation, potentially through budget-reconciliation legislation like the IRA. Alternatively, these tax proposals may still be considered in a split Congress in exchange for extensions of certain TCJA provisions favored by Republicans.