Biden’s “Build Back Better Bill” has been brewing since back before the President’s inauguration. Its various iterations have included funding for COVID-19 relief, social services, welfare, infrastructure, and efforts to combat climate change. The means of funding the nearly $2 trillion in proposed spending has been a source of debate among politicians and consternation among those who may be impacted in the form of higher taxes.
On November 21, 2021, the House of Representatives passed the bill by a narrow margin of 220 to 213. As of this writing, a week before Christmas in the United States, the act still needs to pass through the Senate, where it faces stiffer opposition from the evenly divided branch of Congress.
While the timeline and the bill’s final form remain uncertain, we wanted to update you on the key proposals, potential market impact, and steps for individuals to take in light of the changes.
Here are the key tax provisions in the latest version of the Build Back Better bill:
Several items have been previously mentioned or included in prior iterations of the bill but are not in the latest one. These include increases to personal and corporate income tax rates, hikes in capital gains tax rates, and changes to the estate tax exemption and grantor trust rules.
According to the White House, the proposed additional taxes would only affect the highest earnings among Americans (the top 0.02%). However, the tax proposals for publicly-traded companies could potentially impact the much broader group of Americans who own stocks. According to a poll by titled “What Percentage of Americans Owns Stock?” roughly 56% of Americans owned stocks as of August 2021.
The Build Back Better Framework aims to utilize these tax revenues to invest in children and caregiving, combat climate change, expand affordable healthcare, and strengthen the middle class. The latest bill includes around $1.75 trillion in spending. These spending provisions include:
The potential changes could impact investors and companies in various ways. For example, companies that face higher taxation may earn less profit as a result. On the other hand, industries such as alternative energy may benefit from the subsidies. In general, the plan is supportive of infrastructure, manufacturing, and low-to-middle income households. Conversely, funding will come from the highest-earning individuals and corporations.
The ultimate market impact will depend on the final form of the bill that gets passed and how market participants digest and react to these changes over time.
For the most part, individuals concerned about potential changes to their income or capital gains tax rates can stand pat, as most of those changes have been taken off the table.
Individuals who anticipate making $10 million or more next year may consider accelerating income into the current year. Similarly, they might want to defer items that may reduce income from this year to next year.
Regardless of income, taxable investors can utilize strategies such as tax-loss harvesting (selling securities at a loss to reduce income), charitable giving (donating appreciated securities), and tax-managed strategies (optimizing for after-tax returns). These methods have merit regardless of the outcome of the tax bill.
As always, we recommend speaking to your tax advisor if you believe any of the upcoming changes may impact you. We will continue to monitor the developing situation in Washington as it relates to market impact and any potential actions.
This article was written by Matthew Lui, CFA, CAIA, Vice President, Investment Research. As a member of Canterbury’s Research Group, Mr. Lui is responsible for sourcing, evaluating, and monitoring traditional, long-only equity managers. Mr. Lui serves as the chair of Canterbury's Global Equity Manager Research Committee and the vice chair of the Hedge Funds Committee. He also sits on the Capital Markets Committee. Prior to joining Canterbury, Mr. Lui was a trader and research analyst at Knightsbridge Asset Management. He received his Bachelor of Arts in economics from University of California, Berkeley. Mr. Lui is a CFA® charterholder and a Chartered Alternative Investment Analyst.