During the intense lead-up to presidential elections, it can be easy to forget that the clock on big changes, if and when they are to come, doesn’t start ticking until January. Newly elected Presidents (incumbents and challengers) start their terms on January 20 while a new Congress convenes January 3.
As tax leaders watch federal election outcomes and monitor potential tax policy changes, it can be even easier to forget that there are important dynamics that will determine whether or not there may be tax reform, which would include changes to federal tax rates.
When it comes to state-level tax policymaking, there are also many races to determine governors and legislative winners that could have significant repercussions on sales tax rates and other tax categories. Those races are too numerous to address here, so instead, I’ll focus solely on the undercurrents that will influence whether we see a change to the current federal corporate income tax rate in 2021.
President Trump has indicated he will not change the current corporate tax rate of 21%. Joe Biden, however, has indicated he will raise the corporate tax rate to 28%. In the most basic terms, this suggests that the corporate tax rate likely stays where it is if President Trump is reelected. While a corporate tax hike is more likely to occur under a Biden presidency in 2021, is not a certainty.
Factors that Influence Corporate Tax Rate
As such, tax leaders should consider the following influences when assessing the likelihood of a corporate tax rate in 2021:
- Congress will be crucial: Regardless of which candidate wins the presidential election, upcoming legislative and policy-making activity will be greatly shaped by 1) whether or not the current Republican-majority Senate swings Democratic; and 2) whether or not the current Democratic majority in the House of Representatives swings Republican. When the same party holds sway in Congress and the presidency, their legislative priorities obviously are more likely to be executed. If not, there will be far more legislative obstacles at the federal level, as has been the case throughout much of the past decade.
- Gridlock is not guaranteed: That said, legislative gridlock is not guaranteed when different parties occupy the Senate and House. More traditional legislative negotiations and compromises could occur depending on economic conditions and other factors. If that happens in the event of a Biden presidency, it could lead to a smaller corporate tax rate increase (e.g., to 25%) in exchange for the passage of a Republican legislative priority.
- 100 is the magic number: During their new terms, presidents traditionally focus on accomplishing as much as possible during their first 100 days. The past two presidents experienced some difficulty achieving their 100-day objectives, and whoever wins office will likely strive to apply lessons from those struggles to achieve greater success.
- Corporate income tax is not an island: A corporate tax rate increase is just one of Biden’s stated priorities, but it would compete with several other formidable urgencies, including a pandemic stimulus (if a sweeping measure is not passed before January), immigration reform and addressing climate change. Given the pressure to produce legislative wins during the first 100 days, whoever is in the White House probably will prioritize legislative priorities based on their ultimate likelihood of success. That means that a potential corporate tax rate increase depends not only on its own chances of success but also how those odds compare to the likelihood of competing priorities.
This is by no means a complete list of factors that will influence what potential tax reform will look like after Tuesday’s election results are finalized. A new occupant of the Oval Office would also appoint new leaders to cabinet posts and government agencies, who will be more focused on regulatory and administrative reforms. That said, the list above should help tax leaders monitor key drivers of potential change in the months ahead.
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