Will Biden Fill in Needed Details Wednesday Re: Tax Increase Proposals?

Posted on 04/25/2021 11:45 AM

Traders to focus Wednesday on what Fed chair says about inflation, Fed policy ahead

 


Washington Focus


 

The House is not in session but in “committee work week” while the Senate is working and has several bills in the hopper. On Washington’s agenda ahead in the last week of April: A Fed FOMC meeting and more details of new tax and spending proposals from the White House. Also on tap: The Supreme Court will debate the authority of the Environmental Protection Agency to exempt refiners from biofuel usage mandates.

 

President Joe Biden on Wednesday evening in an address to a joint session of Congress will hopefully fill in some of the details of his “American Families Plan” featuring new spending (likely around $1.5 trillion) to help families. He also is expected to propose new taxes, including a major increase in capital gains taxes for the wealthy. The announced plans for corporate taxes — raising the corporate tax rate from 21% to 28% and implementing a minimum corporate tax — would cover the $2.25 trillion infrastructure plan dealing with transport, broadband, water and electricity. All this comes on top of the $1.9 trillion spending package, billed as coronavirus relief, passed in March.

 

     The family part of the spending: Making childcare cheaper through $225 billion in funding, offer free prekindergarten and community college for $200 billion-plus, and creating a $225 billion 12-week national paid family and medical leave program. Biden wants to extend the child tax credit through 2025. Some Democrats want to render the benefit permanent. The child tax credit was already enhanced to $3,600 per young child and $3,000 per older child this fiscal year through the "American Rescue Plan."

 

     A focus on Biden's proposed capital gains tax increase. Under current law, gains from the sale of stocks, mutual funds, and other capital assets that are held for at least one year are taxed at either a 0%, 15%, or 20% rate. The highest rate (20%) is for wealthier taxpayers — i.e., single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600. President Biden has previously stated that he wants anyone making more than $1 million per year to pay a 39.6% tax on long-term capital gains. That's nearly twice as much as the current rate. The forthcoming proposals on capital gains, White House press secretary Jen Psaki noted, would only affect the top 0.3% of taxpayers. Essentially, the idea is for millionaires to pay the same tax on long-term capital gains that they would pay on ordinary income, such as wages. Right now, the top tax rate on ordinary income is 37%, but Biden has also said on numerous occasions that he wants to boost that rate to 39.6%, which is the same top rate that applied before former President Trump's 2017 tax reform act.

 

      Surtax on net investment income. Recall there is a 3.8% surtax on net investment income (e.g., taxable interest, dividends, gains, passive rents, annuities, and royalties). This extra tax hits single taxpayers with a modified adjusted gross income over $200,000 and joint filers with a modified AGI over $250,000. Biden hasn't suggested doing away with or otherwise modifying this extra tax, which means millionaires could see the overall tax rate on capital gains soar to 43.4%.

 

     Will Congress clear a capital gains tax hike? Getting a capital gains tax increase through Congress and onto the president's desk faces lots of hurdles. Republicans will oppose it, and there will most likely be some Democrats that aren't thrilled with the idea, either (some far left Democrats say the tax increase propels are not high enough). Moderate Democratic Sen. Joe Manchin (W.Va.) has said he prefers a negotiated bipartisan solution but argues that corporate tax increase should not go beyond 25%. Raising taxes on individuals will be more difficult than increasing taxes on corporations, too. “This is another economic blunder by the Biden Administration,” said Rep. Kevin Brady (R-Texas), the top Republican on the House Ways and Means Committee, which deals with taxation. “It punishes investment in local businesses and their expansion, as well as in technology and the economy," he added. "The result will be slower growth and investment in the U.S., sabotaging not only our economic recovery but also future growth.” Bottom line: It’s murky whether a capital gains rate change can ultimately make it into the final bill.

 

     The president's American Families Plan will likely include other "tax the rich" provisions, so there will be ample negotiations in Congress to find the right mix of tax hikes on the wealthy to pay for the expected benefits and tax breaks for middle- and lower-income Americans.

 

     Proponents of altering the estate tax say is it paid only by a sliver of the super-rich (the first $11.7 million is exempt from a penny of taxes). Biden and other Democrats are considering raising the tax too, with some proposing a change to the “step-up in basis” rule that would allow less inherited wealth to escape taxation. But that too would only apply to inheritances of over $1 million. The U.S. is expected to lose almost $42 billion in tax revenue this year from the exclusion of capital gains from tax at death, according to the Joint Committee on Taxation. (JC) It will likely cost $218 billion over 2020-24, JCT said. Estate tax reform proposed legislation (STEP Act) wouldn’t double-tax such estates, since income taxes paid under the bill would be deductible for estate tax purposes. The bill also includes rules to prevent the use of trusts to avoid the tax.

 

     Here come the studies. A study by the accounting firm EY (link) says that eliminating stepped-up basis would trim U.S. GDP by about $10 billion a year and reduce employment by about 80,000 jobs. Link to a separate study by the American Farm Bureau Federation and the American Soybean Association.

 

     On top of the $1 million capital gains exemption, an additional exclusion of up to $500,000 for personal residences offered by current law would still apply. Assets held in retirement accounts would continue to be exempt from capital gains tax. Gifts and bequests to charity would also be exempt. The legislation allows taxpayers to pay the tax in installments over a 15-year period for capital gains that apply to any illiquid asset like a farm or business.

 

     SALT in the wound. Another hurdle: a group of House Democrats insist they will vote down any proposal that doesn’t roll back limits on the state and local tax deduction, known as SALT. The GOP 2017 tax law limited the deduction to $10,000, a move that largely affected the wealthy in blue states such as California, New York, New Jersey and Illinois. Other Democrats do not want to modify the SALT language. Reason: Scrapping the deduction cap would take an axe to federal revenue — eliminating the deduction would raise the price of legislation by $130 billion, half of which would accrue to millionaires. Some observers expect Democratic leaders to broker a compromise on the topic.

 

The RFS and SREs return. On Tuesday, lawyers for the refining industry and a coalition of biofuels groups will make virtual arguments before the Supreme Court over whether EPA has the authority to extend small refinery exemptions that had lapsed. Refiners are appealing a 10th U.S. Circuit Court of Appeals ruling issued in January 2020, that struck down three SREs. The Tenth Circuit Court of Appeals on Jan. 24, 2020, issued a ruling that struck down three SREs that the court said were improperly issued by the EPA and held that the agency cannot “extend” exemptions to any small refineries whose earlier, temporary exemptions had lapsed. The ruling stemmed from a May 2018 challenge brought against the EPA by Renewable Fuels Association, the National Corn Growers Association, the American Coalition for Ethanol and the National Farmers Union. SREs are issued to refiners with production capacity of less than 75,000 barrels per day who claim RFS compliance would cause them undue economic harm. The court’s decision was challenged by affiliates of Wynnewood Refining and HollyFrontier.

 

Good news The National Zoo (May 21) and several Smithsonian museums are set to reopen timed-entry passes will be required for all the venues. At the National Zoo, visitors will no doubt be clamoring for a glimpse of new panda cub Xiao Qi Ji. That is why Smithsonian officials will require separate timed-entry passes specifically for the panda habitat that will be available once visitors enter the zoo. And, a certain person has a ticket to an upcoming Washington Nationals game.

 


Recap of major topics from last week (check Policy Updates from April 19-23 for more details):

  • Infrastructure reform: House Transportation and Infrastructure Chairman Peter DeFazio (D-Ore.) wants to mark up his infrastructure bill by late May. The White House continues to signal it wants to compromise with Republicans on the topic, but congressional Democrats quickly dismissed the GOP’s nearly $600 billion counteroffer.
  • Senate Ag panel clears climate bill. The Committee approved the Growing Climate Solutions Act (S 1251) by voice vote Thursday after Chairwoman Debbie Stabenow (D-Mich.) negotiated changes with Ranking Member, Senator John Boozman (R-Ark.). Companion legislation has been introduced in the House by Reps. Abigail Spanberger (D-Va.) and Don Bacon (R-Neb.).
  • Biden pushes climate reform in leaders conference. Biden committed the U.S. to cutting greenhouse gas emissions by 50% to 52% over the next decade relative to 2005 levels. Details will come later. Many think the effort will flatter once implementation details are known as Biden is committing the U.S. to three times the cut in emissions the country has taken over the past several years — levels which lead the world. Meanwhile, China, India and Africa are increasing their emissions. The Biden administration is also preparing to use section 115 of the Clean Air Act to limit emissions across the U.S. economy following passage of any incentive-based infrastructure and climate legislation to meet the proposed 50-52% reduction in the timeframe proposed.
  • Green New Deal revived. Sen. Ed Markey (D-Mass.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) unveiled a piece of the Green New Deal — the Civilian Climate Corps for Jobs and Justice Act.  It would establish a Civilian Climate Corps that would, among other things, be assigned with helping producers transition to “more regenerative farming and ranching systems.”  Workers would earn $15 per hour, receive free health care, childcare, transportation, and housing.
  • Biden’s 30x30 proposal faces major opposition amid lots of questions. USDA Sec. Tom Vilsack said the proposal is not a “land grab” despite some farmers and state groups (notably in Nebraska) saying the opposite. The plan would put 30% of the nation’s land and waters into conservation by 2030. Farmers and Republican lawmakers are concerned it might encroach on private land ownership.  Senate Republican Whip John Thune (R-S.D.) said “The federal government can’t maintain the land it has and shouldn’t be purchasing more."
  • Higher CRP rates, other incentives. USDA wants to enroll another 4 million acres in CRP by raising rental payments. This and other likely moves are seen as end-arounds to prohibitive government set-aside programs. Vilsack says adding CRP acres is in line with President Joe Biden’s 30x30 goal but disputes that it’s a “land grab” because participation would be “voluntary.” The higher rental rates USDA wants will likely raise concerns in Congress since lawmakers put rate caps in place at the urging of farmers who said CRP was too competitive for land.
  • USDA deputy secretary nominee Bronaugh appears before Senate Ag panel. Dr. Jewel Bronaugh said she will “ensure that we keep our farmers, ranchers and landowners first in discussions and plans to address climate change.”
  • Bloomberg report of coming Biden tax increase proposals: While President Biden campaigned on tax increases that he will talk to Congress about Wednesday evening, a Bloomberg report on the topic led to lower equity prices on Thursday. Farmers are mostly concerned about proposed capital gains tax increases and perhaps an end to stepped-up basis.
  • EPA’s Regan vows not to return to Obama-Era WOTUS definition “verbatim.” Regan told Congress he does not intend to go back to the Obama administration’s definition of Waters of the U.S. (WOTUS).  But he said the agency does not agree with everything in the Trump administration’s replacement rule. This topic is still in the murky category.
  • Biofuel proponents keep asking: They want EPA to replace what one trade organization calls “outdated and confusing” labels for E15 gasoline. EPA allowed for three months of public comment on its proposed rulemaking released in January. Meanwhile, a bipartisan group of 12 senators is urging EPA not to reduce biofuel usage mandates for 2021 and 2022.  One of the senators, Sen. Chuck Grassley (R-Iowa), said EPA should set volumes of at least 15 billion gallons like the law requires. Meanwhile, Rep. Cindy Axne (D-Iowa) urged congressional leaders to consider biofuels investments and incentives as part of President Biden's $2.25 trillion proposal to upgrade the nation's infrastructure.
  • Trade policy: The White House named Sarah Bianchi and Jayme White as two deputy U.S. trade representatives, but a chief ag negotiator has not yet been named. Sen. Grassley said he will start turning up the pressure for negotiations to begin on new trade agreements. and Grassley said he would impress upon them the need for strong agricultural provisions in any new trade deals.  A chief agricultural negotiator is still yet to be named.
  • Republicans want Vilsack to bring back the Food Box program. Some 21 House Republicans wrote Vilsack to reconsider his decision to end the Farmers to Families Food Box Program initiated by the Trump administration. 
  • USDA seeks comments on supply chain resilience.  USDA wants to address local and regional food systems and to create “new market opportunities (including for value-added agriculture and value-added products), facilitating fair and competitive markets (including traceability and supply chain transparency), [and] advancing efforts to transform the food system.”
  • House Democrats adopted a measure making D.C. the 51st state. The Senate is not expected to act on the proposal.
  • China’s corn imports seen hitting new record high. China's corn imports will likely hit a record-breaking 28 million metric tons for the 2020-2021 marketing year as the country restocks its domestic reserves and deals with rising demand for livestock feed, according to the U.S. ag attaché in Beijing. That forecast is higher than the 24 million tons from USDA’s World Board.
     

 


Hearings and Events This Week


 

On Wednesday, U.S. Trade Representative Katharine Tai will appear before the Senate Commerce-Science-Justice Appropriations Subcommittee and Labor Secretary Marty Walsh will testify before the House Labor-HHS Appropriations Subcommittee.

 

Monday, April 26

  • North American Agricultural Journalists annual meeting. USDA Sec. Tom Vilsack speaks online at 10 a.m. ET.
  • Infrastructure reform. Cato Institute webinar on President Biden’s infrastructure plan and alternatives.

Tuesday, April 27

  • Independent Community Bankers of America Capital Summit. Expected is the community banks' role during the pandemic, ILC charters, cannabis banking and tax policy during the summit. Senate Banking Committee Chairman Sherrod Brown (D-Ohio) and Sen. Joe Manchin (D-W.Va.) are scheduled to speak.
  • Supreme Court hears oral arguments in HollyFrontier Cheyenne Refining LLC. vs. Renewable Fuels Association.
  • Climate change and taxes. Senate Finance Committee hearing, “Climate Challenges: The Tax Code’s Role in Creating American Jobs, Achieving Energy Independence, and Providing Consumers with Affordable, Clean Energy.” Senate Finance Committee Chair Ron Wyden (D-Ore.) has introduced a bill that would eliminate tax breaks for the fossil fuel sector and incentivize investment in clean energy.
  • Climate Bank Act. Senate Environment and Public Works Committee's Clean Air, Climate, and Nuclear Safety Subcommittee hearing on S. 283, the National Climate Bank Act.

Wednesday, April 28

  • Labor issues. House Labor-HHS Appropriations Subcommittee hearing with Labor Secretary Martin Walsh.
  • FY 2022 budget: EPA. Senate Committee on Environment and Public Works hearing on the Fiscal Year 2022 proposed budget for the Environmental Protection Agency (EPA).
  • Hunger. House Rules Committee hearing, "Ending Hunger in America: Challenges, Opportunities, and Building the Political Will to Succeed.”
  • FY 2022 budget: USTR. Senate Commerce-Science-Justice Appropriations Subcommittee hearing with U.S. Trade Representative Katharine Tai on the budget for the U.S. Trade Representative’s office.

Thursday, April 29

  • Farm income. Senate Agriculture Appropriations Subcommittee hearing, “Diversifying On-Farm Income: Opportunities to Strengthen Rural America.”
  • Infrastructure. Ways and Means Trade Subcommittee hearing on Advancing U.S. Economic Competitiveness, Equity, and Sustainability Through Infrastructure Investments.
  • FY 2022 budget: EPA. Subcommittee on Environment and Climate Change of the Committee on Energy and Commerce hearing on the EPA FY 2022 budget.
  • Nomination hearing: Eric Lander. Senate Commerce Committee hearing on the nomination of Eric Lander to be director of the White House Office of Science and Technology Policy,
  • Electrical grid. Federal Energy Regulatory Commission technical conference to discuss "electrification and the grid of the future.”
  • Nomination hearing: Interior. Senate Committee on Energy and Natural Resources nomination hearing of Tommy P. Beaudreau to be deputy secretary of the Interior.
  • Congress' power of the purse. House Budget Committee hearing on "Protecting our Democracy: Reasserting Congress' Power of the Purse."
     

Economic Reports for the Week


 

The Federal Reserve is not expected to take any action at its two-day FOMC meeting (ending Wednesday), but economists will be listening to see if there are any changes from the Fed’s transitory inflation position, especially with surging commodity prices, transportation costs and supply chain disruptions (see below for more Fed topics traders are focusing on). Key economic reports include first quarter GDP and the Fed's favorite inflation measure — the personal consumption expenditures inflation reading.

 

Monday, April 26

  • Census Bureau releases the March durable-goods report. Economists forecast new orders for manufactured durable goods to rise 2.2% month over month to $260 billion.

Tuesday, April 27

  • Conference Board releases its Consumer Confidence Index for April. Consensus estimate is for a 111.1 reading, slightly more than the March figure, which was a one-year high.

Wednesday, April 28

  • MBA Mortgage Applications
  • Federal Open Market Committee (FOMC) announces its monetary-policy decision. The central bank has pledged to leave the federal-funds rate near zero through 2023, despite a sharp rise in bond yields in the past three months and a projected 6.5% growth rate for gross domestic product this year. Fed Chair Jerome Powell has a presser after the FOMC statement. Key topics traders will see if he comments on include:

    — Climate change and the Fed. In the past, Powell has said the Fed is in the early stages of understanding how to measure climate risk in banks, including on the Fed's stress tests. The central bank has joined the international Network for Greening the Financial System.
    — Supplementary Leverage Ratio (SLR). The Fed let temporary pandemic relief for banks expire at the end of March. The change in the SLR was meant to relax the amount of capital that banks need to hold against Treasurys and other assets, freeing up that capital for banks to invest and help keep markets liquid. The Fed said it would seek comment on adjusting the SLR, and thus Powell could provide more details on that.
    — The Fed is likely to scale back bond purchases before it makes any changes to interest rates, so traders are keen on any timeline. Currently, the Fed is buying $120 billion of Treasury bonds and securities backed by home mortgages via its attempt to keep long-term interest rates very low. Beginning next year, most expect the Fed will gradually dial back those purchases, with many thinking in $15 billion increments. Some expect the Fed will signal this sometimes between September and the end of this year. Key will be sustained data on a lower jobless rate.

Thursday, April 29

  • Jobless Claims
  • Bureau of Economic Analysis (BEA) reports its advance estimate for first-quarter GDP. Consensus estimate is for a seasonally adjusted annual growth rate of 5.6%, well ahead of fourth-quarter 2020’s 4.3%.
  • National Association of Realtors reports its Pending Home Sales Index for March. Expectations are for a 6.5% month-over-month decline, after a 10.6% drop in February.
  • Fed Balance Sheet
  • Money Supply

Friday, April 30

  • BEA reports personal income and expenditure for March. Income is expected to rise 20.5% month over month, while spending is seen increasing 4%. This compares with declines of 7.1% and 1%, respectively, in February. The huge projected spike in income reflects the relief checks from the American Rescue Plan enacted in March.
  • The Institute for Supply Management releases its Chicago Purchasing Manager Index for April. Economists forecast a 63 reading, lower than March’s 66.3 figure.

 


Key USDA & international Ag & Energy Reports and Events 


 

A full-fledged commodity bull market is underway with concerns about U.S. crop plantings and even more anxiety about Brazil’s second (Safrinha) corn crop.

 

Monday, April 26
 

     Ag reports and events:

  • Export Inspections
  • Crop Progress
  • Peanut Stocks and Processing
  • Monthly MARS bulletin on crop conditions in Europe
  • EU weekly grain, oilseed import and export data
  • Malaysia April 1-25 palm oil export data from AmSpec, SGS
  • Holiday: New Zealand

     Energy reports and events:

  • OPEC+ Joint Technical Committee meeting
  • Angolan final loading program (June)
  • Russian Urals loading program (May)

Tuesday, April 27
 

     Ag reports and events:

  • Livestock and Meat Domestic Data
  • Dairy Products, Annual
  • StatsCanada releases data on seeded area for soybeans, barley, canola, wheat and durum

     Energy reports and events:

  • API weekly U.S. oil inventory report
  • Earnings: BP

Wednesday, April 28
 

     Ag reports and events:

  • Broiler Hatchery
  • Brazil’s Unica publishes data on cane crush and sugar output (tentative)

     Energy reports and events:

  • EIA weekly U.S. oil inventory report
  • U.S. weekly ethanol inventories
  • OPEC+ Joint Ministerial Monitoring Committee, OPEC+ Ministers meeting
  • Genscape ARA crude inventories

Thursday, April 29
 

     Ag reports and events:

  • Weekly Export Sales
  • Egg Products
  • Meat Animals, PDI
  • Milk, PDI
  • Poultry, Production and Value
  • Port of Rouen data on French grain exports
  • International Grains Council monthly report
  • Holiday: Japan, Malaysia

     Energy reports and events:

  • EIA natural gas storage change
  • Singapore onshore oil product stockpiles weekly update
  • Insights Global report on European refined product inventories in ARA region
  • Russian refinery outage data (weekly)
  • Earnings: Royal Dutch Shell; Equinor; Repsol; Eni SpA; Total SA; OMV AG

Friday, April 30
 

     Ag reports and events:

  • CFTC Commitments of Traders report
  • Peanut Prices
  • Agricultural Prices
  • Malaysia’s April 1-30 palm oil export data
  • FranceAgriMer weekly update on crop conditions
  • Holiday: Vietnam

     Energy reports and events:

  • Baker Hughes weekly U.S. oil/gas rig counts
  • EPA 914 Production Report
  • EIA Petroleum Supply Monthly
  • ICE weekly Commitments of Traders report for Brent, gasoil
  • Earnings: Exxon Mobil

 


 

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