On March 28, the Biden administration released its second set of desired revenue raising proposals in General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals, (the 2023 Green Book.) These proposals represent the first comprehensive tax proposals from the administration since Build Back Better failed to advance in Congress late last year. For tax advisors, Green Book proposals are always interesting—both for what’s included and what isn’t. While these proposals may not advance, especially given the current Congress—it’s useful to see what topics are being considered and to be able to address client concerns regarding the proposals. In two upcoming pieces, we’ll tackle some of the proposed changes to popular high-net-worth planning techniques and some under the radar, but potentially highly impactful changes to trust and estate administration. In this piece, however, we’ll address the elephant in the room: the so-called Billionaire tax.
Certainly, the headliner of the 2023 Green Book is the billionaire tax. This is a tax based on wealth, but isn’t a wealth tax as traditionally understood (that is, a tax computed as a percentage of a taxpayer’s total wealth). In contrast, the Biden proposal, while only applying to individuals meeting a threshold wealth, would impose a minimum tax rate on income, gains and unrealized gain rather than total wealth.
Under the Biden proposal, a taxpayer with more than $200 million in net assets would have an annual income tax liability of at least 20% of all taxable income and unrealized gains. The tax liability for the initial year could be paid over nine annual installments, while future year liabilities could be paid over five years. The amount of minimum tax paid as a result of the unrealized gain could be used as a credit on a future disposition of that asset. There are provisions phasing in the tax for those over $100 million but under $200 million.
Like Senator Warren’s proposed wealth tax, one practical question practitioners have is how net asset value will be determined and reported. The Biden proposal requires those with wealth over the threshold to file annual returns reporting by asset class the total basis and estimated value as of Dec. 31. For actively traded assets, the value will be the Dec. 31 value. Assets that aren’t regularly traded would be valued “using the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing or financial statements, or other methods approved by the Secretary … Valuations of nontradable assets would not be required annually and would instead increase by a conservative floating annual return (the five-year Treasury rate plus two percentage points) in between valuations. The IRS may offer avenues for taxpayers to appeal valuations, such as through appraisal.”
This proposal is likely to get attention with its catchy name and being the major new addition this year from the perspective of HNW individuals. However, heading into an election year in a Congress that couldn’t advance Build Back Better, it’s unclear this tax will find much traction given its similarities to Sen. Ron Wyden’s (R-Ore.) proposal last year, which Speaker Nancy Pelosi allegedly referred to as a publicity stunt. Sen. Joe Manchin (DW Va.) already has said the Biden proposal was a “tough one” as you can’t tax people “on things you don’t have.”
Other notable rate increases for HNW individuals brought back from the 2022 Green Book include increasing the top marginal rate for ordinary income to 39.6% for single taxpayers earning more than $400,000 and married taxpayers filing jointly with income above $450,000 and increasing the rate on long-term capital gains and qualified dividends to 37% for taxpayers with incomes in excess of $1 million (40.8% including the net investment income tax).