Page 9 - ISQ July 2021

JULY 2021

“ We see the most likely final bill having a core focus on traditional

infrastructure, tied to several priorities – most likely an extension of the
Child Tax Credit and some new education funding. This brings the final
spending total to the $2 trillion to $3 trillion range, depending on the final
funding levels for individual provisions. ”

rate of 39.6% for incomes above $1 million with SALT caps in place, priorities. With Democrats seeing this as a once in a generation
raising the chances that the capital gains rate change, if included, opportunity to advance domestic investments, we are likely
also trends lower. The balance is between three items on capital heading toward a $2-3 trillion final bill with some revenue-raising
gains – the rate, step-up in basis, and implementation date. If provisions as cost offsets. The least politically-sensitive revenue
compromise is found on the rate and step-up exclusion, the measures would target increased IRS enforcement (projected to
effective date could come earlier, as currently proposed by the capture around $800 billion in missed federal revenue) and a higher
Biden administration (retroactive to its announcement in April corporate tax rate/tightened international corporate tax rules. As
2021). We expect continued emphasis on popular support for these such, while we expect a robust debate on specific policy details into
corporate and individual tax changes by the Biden administration, the fall, the politics of the infrastructure debate have likely already
but the current political dynamics highlight the difficulty of finding paved the road to be taken to a final bill later this year.
agreement among Democrats with very limited room to manoeuvre
given the slim margins in both chambers of Congress.
KEY TAKEAWAYS:
We will specifically be watching dynamics among Democratic House • An infrastructure package in the $2 trillion to $3 tril-
lawmakers as the capital gains tax would be an even bigger hit to lion range, with about $1 trillion in deficit spending, is
high-tax states with their own state-level capital gains charges, such likely by the end of this year or early next year.
as New York and California. Lawmakers from these states, especially
in swing districts, are likely to see political blowback from their • The most likely provisions to pass are funding for
constituents. However, many are also concerned about primary water, electricity, broadband, roads, bridges, trans-
challengers from the left. As such, support for a capital gains rate portation, and education infrastructure given strong
hike with some moderating adjustments to the current proposal bipartisan support, but the scope of the funding for
would likely be the preferred policy path forward for these members. these priorities remains a moving target.
As it currently stands, Speaker Pelosi can only lose two votes to • The domestic manufacturing aspect of the proposal
advance legislation, giving these lawmakers significant leverage to is directly aimed at securing the ability for the U.S. to
influence the tax debate. remain economically competitive with China. Expect
this to be a significant selling point by the adminis-
REGARDLESS OF THE PATH FORWARD, THE OUTCOME tration as it looks to secure bipartisan support for
WILL LIKELY BE THE SAME Biden’s infrastructure agenda.
We expect volatile headlines over the course of the summer and • The second phase of the infrastructure agenda — the
into the fall on the specifics of an infrastructure deal, which could American Families Plan (AFP) — focuses more on
cause volatility in markets; however, our forest from the trees view social programs with around $1.8 trillion in spending
is that the outcome is likely to be the same no matter the process and tax credits. Broadly, the plan envisions $500 bil-
going forward. There is a growing acceptance of around $1 trillion lion toward education and around $450 billion for
in deficit spending tied to Biden’s infrastructure priorities, and the childcare programs and paid leave.
legislative tools are there for Democrats to pass either a primary bill • While we expect a robust debate on specific policy
or a secondary bill with only Democratic support. As these pieces details into the fall, the politics of the infrastructure
come into place, the debt limit will have to be raised later this fall, debate have likely already paved the road to be taken
which will almost certainly have to be done via a reconciliation to a final bill later this year.
simple majority vote that could include additional infrastructure

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