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Friday, Dec 2, 2022


When voters in Georgia head to the polls for a special election on January 6, more than that state’s future U.S. Senators will be on the ballot. The results of those two races will determine whether Democrats or Republicans control the U.S. Senate, and with it, national tax policy for at least the next two years.

If Joe Biden is sworn into office on January 20 with a Democratic Senate, his tax program of steep hikes in corporate and individual taxes will have an excellent chance of becoming law. Thus far, markets are banking on a divided Congress stopping the proposed tax increases. But Biden won Georgia this year, and with a month left in the Georgia campaigns, anything can happen.

So, it is prudent for businesses and individuals to consider both alternatives seriously.

The Biden Tax Plan

What would the tax changes contemplated in the Biden plan mean?

For starters, businesses would face seemingly unavoidable tax increases of more than 33% on corporate income, with the rate jumping from 21% to 28%. Many businesses would also face a new alternative minimum tax that will wipe out the benefits of, for example, loss carryforwards and capital equipment expensing.

Biden has also proposed an additional 10% surtax on corporations that “offshore manufacturing and service jobs to foreign nations,” which would penalize, for example, call centers located in different time zones in order to provide 24/7 customer service.

For individuals, particularly the self-employed, there could be even steeper tax hikes. The combined federal-state top rate on self-employed individuals’ income in California would rise from today’s 54.1% to 69.1%. Capital gains and dividends, already taxed the same as ordinary income in California, would also be treated the same for federal tax purposes beginning with incomes above $1 million. The combined federal-state top rate on capitals would be 56.7%.

The Biden plan also calls for elimination of up to 80% of otherwise allowable itemized deductions, including charitable donations and home mortgage interest.

When would these tax increases take effect? Conceivably, they could be applied retroactively to include 2020. There is precedent for this, including the Clinton tax increases of 1993. The Supreme Court has upheld retroactive tax changes under the due process clause of the U.S. Constitution.

Opportunity Zones

There are year-end strategies to avoid at least some of the potential tax increases in this scenario. For investors, one of the few bright spots on the tax planning horizon is equity investment in Opportunity Zones, a feature of the 2017 Trump tax cuts that the Biden plan proposes to keep.

Championed by South Carolina Senator Tim Scott, one of three African Americans in the Senate, Opportunity Zones are intended to direct investment into distressed communities across the country. To achieve this, there are strong pro-investor tax incentives.

Instead of paying capital gains on the sale of real property, investment securities, a family business, or any other capital investment, an investor can avoid the tax through an equity investment in a qualified Opportunity Zone fund. The tax can be deferred for years and, if the investment in the Opportunity Zone is held for ten years, all tax on gain from the investment is eliminated.

Because of the substantial tax savings afforded through this federal program, it has been criticized by some on the political left, despite its purpose of helping people in poverty. Progressive Reps. Alexandria Ocasio-Cortez (D-N.Y.) and Rashida Tlaib (D-Mich.) have proposed legislation to halt the program. But mainstream Democrats, and importantly Biden himself, have focused not on ending the program but monitoring it more closely to ensure that economically distressed communities benefit.

Over 8,700 census tracts, home to 31.5 million people, have been designated as Opportunity Zones. In Orange County this includes, among other cities, areas of San Juan Capistrano, Costa Mesa and Santa Ana. These factors explain why the program has enjoyed bipartisan support from its inception, and why this aspect of the Trump tax cuts is likely to remain unscathed even if the Biden tax plan is enacted in full.

Ways to Reduce Taxes

Are higher taxes really coming?

We can’t know now what will happen in Georgia next month.

Even if Republicans control the Senate, it will be by a slender margin. It is not inconceivable that one or two Republicans will vote with Democrats to raise taxes from their already high levels, in an effort to reduce trillion-dollar annual budget deficits—and to begin taming a national debt that, including unfunded Medicare and Social Security liabilities, now exceeds $113 trillion (over $800,000 per individual income tax return filed).

In addition to Opportunity Zones, there are other tax strategies that investors can follow to find shelter from the gathering tax storm. Individuals can choose to sell appreciated stocks before year end. Those with unrealized capital losses can try to postpone them, in hopes of netting the losses against gains in the coming higher-tax years.

One could even think about buying an electric vehicle for the tax credit—but not this year. While the federal credit has lapsed, Biden and his new climate czar, John Kerry, have talked about bringing it back.

Paying taxes, Oliver Wendell Holmes memorably said, is the price of civilization. Avoiding taxes is equally an American tradition. Our democratic government, as Tocqueville wryly observed, “is the only one in which those who vote for a tax can escape the obligation to pay it.”

He could not have known that in this bizarre year of 2020, the deciding voters are all in Georgia.

Editor’s Note: Chris Cox is Counsel at the Costa Mesa office of Morgan, Lewis & Bockius and serves on several boards including RevOZ Capital, a Newport Beach-based manager of Opportunity Zone funds. He was formerly Chair of the Securities and Exchange Commission, Chair of the Homeland Security Committee in Congress, and a White House counsel to President Reagan.

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