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President Biden’s FY 2025 budget again calls for corporate and individual tax increases
March 2024
In brief
What happened?
President Joe Biden on March 11 sent Congress a fiscal year (FY) 2025 budget that proposes to increase taxes by nearly $5 trillion for corporations and for individuals with incomes above $400,000. Many of the president’s tax proposals -- including a proposal to increase the corporate tax rate to 28% and impose a 25% minimum tax on certain high-income individuals – were included in President Biden’s previous budgets. New tax proposals in the FY 2025 budget include measures to increase the recently enacted corporate alternative minimum tax rate from 15% to 21% and to deny business deductions for employee compensation above $1 million.
Why is it relevant?
President Biden’s FY 2025 budget proposals to increase taxes will not be considered by the current Congress in which Republicans control the House, but do provide a marker for his tax policy priorities if he is re-elected.
The scheduled expiration of key 2017 Tax Cuts and Jobs Act (TCJA) provisions at the end of 2025 ensures that the next president and Congress will have to act on a major tax bill to prevent across-the-board individual tax increases. The outlook for action on President Biden’s tax proposals in a potential second term will depend on which party controls the Congress next year, as well as the margin of control in the House and Senate.
Observation: President Biden was unable to gain support for many of his key corporate and individual tax proposals during his first two years in office, when Democrats narrowly controlled both the House and Senate. The Senate in particular became a stumbling block and the outcome could have been significantly different if his party had held even one more seat in the Senate at that time. Republicans in the next Congress might be forced to consider some of President Biden’s tax increase proposals as part of a compromise bill preserving key TCJA tax provisions that benefit families and small businesses.
Action to consider
Business leaders should begin communicating now with policymakers on the potential positive and negative effects of President Biden’s tax proposals and other Administration economic policy proposals on their employees, job creation, and investments in the United States.
In detail
Overview
Key business tax provisions in the FY 2025 budget include a renewed proposal to increase the US corporate income tax rate from 21% to 28%. The budget also includes proposals to increase the corporate alternative minimum tax from 15% to 21% and to increase from 1% to 4% the corporate stock repurchase excise tax; both provisions were enacted as part of the 2022 Inflation Reduction Act. The budget also includes other tax proposals that would affect corporate and pass-through businesses.
The budget again calls for reforms to US international tax rules that include raising the tax rate on the foreign earnings of US multinational corporations from 10.5% to 21% and adopting an undertaxed profits rule (UTPR), as well as a domestic minimum top-up tax (which would apply to US profits when another jurisdiction’s undertaxed profits rule comes into effect). Accompanying this provision is an unspecified proposal to ensure that adoption of a top-up tax would not undermine the benefits of “tax incentives that promote U.S. jobs and investment.” Also making a repeat appearance is unspecified “additional support” for research and experimentation expenditures to be funded by the revenue raised from repealing the deduction for foreign-derived intangible income (FDII).
Key individual tax increase provisions include measures increasing the top individual ordinary income tax rate from 37% to 39.6%, taxing capital gains income for high earners at ordinary rates, and imposing a 25% “minimum income tax on the wealthiest taxpayers.”
President Biden’s FY 2025 budget states that the budget includes “a set of measures to make sure the wealthiest Americans and corporations pay their fair share of taxes while ensuring that no one making $400,000 per year or less will pay a penny more in new taxes.”
The President’s budget does not specify how he would propose to offset the cost of preserving TCJA individual provisions that are set to expire at the end of 2025 for taxpayers with incomes below $400,000. Like last year’s budget, President Biden’s FY 2025 budget states only that he supports “paying for extending tax cuts for people earning less than $400,000 with additional reforms to ensure that wealthy people and big corporations pay their fair share, so that the problematic sunsets created by President Trump and congressional Republicans are addressed in a fiscally responsible manner.” The President’s budget contains no specific proposal to extend the expiring tax cuts for taxpayers making less than $400,000.
Note: Recent Joint Committee on Taxation estimates suggest that the cost of maintaining TCJA individual tax provisions for taxpayers with incomes below $400,000 could range from $2 to $2.5 trillion over 10 years.
Treasury also has released a ‘Green Book’ general explanation of the budget’s tax proposals, which includes the revenue estimates cited below.
Business tax proposals
In total, the President’s budget proposals are projected to increase corporate income taxes by nearly $2.8 trillion, or 56%. Corporate tax increase proposals include:
- Increasing the top US corporate income tax rate to 28% ($1.35 trillion over 10 years).
- Increasing the corporate alternative minimum tax to 21% ($137.4 billion over 10 years).
- Increasing the excise tax on certain corporate stock repurchases from 1% to 4% ($165.9 billion over 10 years).
- Denying business deductions for employee compensation above $1 million ($271.8 billion over 10 years).
Proposed reforms to US international tax rules include:
- Revising global intangible low-taxed income (GILTI) rules, limiting inversions, and making related reforms ($373.9 billion over 10 years).
- Adopting an undertaxed profits rule and repealing the base erosion and anti-abuse tax (BEAT) ($136.3 billion over 10 years).
- Repealing the deduction for FDII ($157.9 billion over 10 years).
- Restricting deductions of excessive interest of members of financial reporting groups ($39.9 billion over 10 years).
- Revising rules that allocate Subpart F income and GILTI ($2.7 billion over 10 years).
- Reforming the taxation of foreign fossil fuel income, including changes to the tax rule for dual capacity taxpayers ($74.9 billion over 10 years).
Additional business tax proposals in the President’s budget would:
- Tax corporate distributions as dividends ($1.9 billion over 10 years).
- Limit tax avoidance through inappropriate leveraging of parties to divisive reorganizations ($43.7 billion over 10 years).
- Prevent basis shifting by related parties through partnerships ($14.8 billion over 10 years).
- Conform definition of “control” with corporate affiliation test ($6.7 billion over 10 years).
- Strengthen limitation on losses for noncorporate taxpayers ($75.7 billion over 10 years).
- Repeal expensing of intangible drilling costs ($9.7 billion over 10 years).
- Repeal the use of percentage depletion with respect to oil and natural gas wells ($15.6 billion over 10 years).
- Increase geological and geophysical amortization period for independent producers ($3.6 billion over 10 years).
- Expand pro rata interest expense disallowance for business-owned life insurance ($7.1 billion over 10 years).
- Repeal deferral of gain from real estate like-kind exchanges ($19.6 billion over 10 years).
- Modernize various rules related to digital assets, including the application of ‘wash sale’ rules to digital assets and addressing related-party transactions ($42.0 billion over 10 years).
- Require 100% recapture of depreciation deductions as ordinary income for certain depreciable real property ($7.2 billion over 10 years).
- Improve information reporting for reportable payments subject to backup withholding ($2.0 billion over 10 years).
- Grant the Secretary authority to simplify the reporting and payment of adjustments related to foreign tax redeterminations (FTRs) (-$328 million over 10 years).
- Extend statute of limitations for listed transactions and impose liability on shareholders to collect unpaid income taxes of applicable corporations ($6.6 billion over 10 years).
- Make permanent the new markets tax credit (-$9.1 billion over 10 years).
- Reform excise taxes on business aviation. ($2.4 billion over 10 years).
Individual tax proposals
President Biden’s proposal to increase the top individual ordinary income tax rate to 39.6% is projected to raise $245.9 billion over 10 years. The proposal to tax capital gain income for high earners at ordinary rates is projected to raise $288.5 billion over the same period.
The proposed 25% “minimum income tax on the wealthiest taxpayers” is projected to raise $502.6 billion over 10 years. The Treasury Green Book explanation of this provision states that the proposed minimum tax on certain high-income taxpayers would apply on total income, including unrealized capital gain income, for all taxpayers with net wealth greater than $100 million. Payments of the minimum tax would be treated as a prepayment available to be credited against subsequent taxes on realized capital gains to avoid taxing the same amount of gain more than once.
The proposal to increase from 3.8% to 5% the net investment tax rate and the additional Medicare tax rate for high-income taxpayers is estimated to raise $403.7 billion over 10 years. The proposal to apply the net investment income tax to pass-through business income of high-income taxpayers is estimated to raise $393.2 billion over 10 years.
Observation: While the Administration does not specify the “additional reforms” that might be considered to offset the cost of preserving TCJA provisions for those with incomes below $400,000, some in Congress have suggested limiting the Section 199A pass-through deduction to only taxpayers earning less than $400,000. Such an approach coupled with the President’s net investment income tax proposal and other proposals affecting high-income individuals could result in the top marginal tax rate for certain pass-through business owners rising from 29.6% to 44.6%.
Additional individual tax proposals in the President’s budget would:
- Tax carried (profits) interests as ordinary income ($6.5 billion over 10 years)
- Modify estate and gift taxation ($97.2 billion over 10 years).
- Limit use of donor advised funds to avoid private foundation payout requirement ($270 million over 10 years).
- Impose ownership diversification requirement for small insurance company election. ($11.4 billion over 10 years).
For additional information
Biden Administration FY 2025 budget (including fact sheets)
Treasury Green Book general explanations of the Administration's FY 2025 revenue proposals (includes estimates of tax proposals)
For more tax policy insights, see PwC’s 2024 Tax Policy Outlook: Defining the Choices Ahead
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