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Tax Policy Outlook Uncertain as Key Senate Races Head to Runoff

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Melissa A. Oaks, J.D., LL.M.                                                                                                        Current Awareness Lead

Reuters has projected that Joseph R. Biden, Jr. will be the next U.S. president, after defeating incumbent President Donald J. Trump in the Nov. 3, 2020 election. In the House of Representatives, Democrats retained the majority while Republicans picked up a number of swing-district seats. The fate of further COVID-19 relief and the trajectory of tax policy in 2021 is largely dependent on which party will control the U.S. Senate.

As of publication, Republicans and Democrats are each projected to hold 48 Senate seats, with the remaining four seats still undetermined. The outcome in the Senate election in North Carolina is too close to call (GOP Sen. Thom Tillis appears poised to retain his seat) and, in Alaska, the race is too early to call with just over half of the votes tabulated.

In Georgia, both of the state’s two Senate seats were on the ballot due to a special election for the remaining two years of former Sen. Isakson’s term. Since no candidate in either race received greater than 50% of the votes cast, the top two candidates in each race will advance to a runoff election on January 5, 2021. If Republicans win the races in North Carolina and Alaska, Democrats will need to pick up both Georgia seats to gain control of the chamber (with Vice President-elect Kamala Harris serving as tie-breaker).

With all eyes on the Georgia runoff elections, chances of passing significant COVID-19 relief before year-end are dwindling. House Speaker Nancy Pelosi (D-CA) said on Nov. 6 that the House is looking to “move swiftly” for a new relief package and called on the Trump administration to “come back to the table.” Senate Majority Leader Mitch McConnell (R-KY) indicated Friday that the GOP-held Senate would only consider a smaller package, which Speaker Pelosi quickly rejected. To avoid a government shutdown, Congress needs to act on a government funding measure by Dec. 11, 2020. Limited COVID-19 relief is expected to be part of that negotiation.

Despite the gulf between the parties on the overall size of a new relief package, there are areas of agreement that can shed light on what might be feasible in the event of divided government in 2021. The House passed the HEROES Act (HR 6800) in May, which contains numerous tax-related provisions. A slimmer version of the bill was passed in October; the Senate has yet to vote on either measure.

In late July, Senate Republicans introduced (but did not pass) the HEALS Act, which also contains tax provisions. Both packages provide for additional economic impact payments to individuals, supplemental unemployment compensation, and an extension or expansion of the Paycheck Protection Program (PPP) and Employee Retention Credit. A “skinny” relief bill proposed by Senate Republicans in September would have addressed PPP but not provide another round of economic impact payments.

There is also bipartisan support for state income tax nexus and withholding relief related to employees telecommuting across state lines during the pandemic. (Many states have provided temporary nexus relief – for a state-by-state chart, see State guidance on whether COVID-19 telecommuters create nexus.)

Beyond COVID relief, a divided government would be unlikely to drastically change tax policy in the near term. Even in the event Democrats gain control of the Senate, they will hold only a slim majority within a caucus with wide-ranging views on taxation.

Further, while the Biden campaign platform included many tax proposals, these are likely to be enacted (if at all) as targeted revenue-raising measures to support the President-elect’s broader agenda (e.g., child care, health care, infrastructure), rather than as a single tax reform package like the Tax Cuts and Jobs Act in 2017. To enact a bill without GOP support in the Senate, a Democratic majority would need to end the filibuster or use the limited reconciliation process (TCJA was enacted through reconciliation). In the absence of Congressional cooperation, the Biden administration would still be able to advance, at least partially, its agenda through executive orders, regulations, and agency guidance.

 

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