While there are no new details on the substance of any potential tax law changes, there is activity on Capitol Hill that could pave the way for a spending bill later this year that is supported by increased tax revenue. The recently passed budget resolution in the House and the early comments from members of Congress of potential tax law changes suggest that significant negotiations will be required to get to a unified approach for Democrats. Updated Tax Policy Highlights The House voted and passed a budget resolution this week. That budget blueprint creates a pathway for Congress to propose a spending package up to $3.5 trillion over 10 years under a reconciliation bill. Tax increases could form the basis for about 50% of the revenue support required. This would be the largest tax increase since 1993. Tax writing committees in both the House and the Senate are working under a September 15th deadline to outline the details for the proposed reconciliation bill though many believe that they will not be able to meet this deadline. Progress has been stalled due to lack of consensus on the bottom line size of the package, indecision on which tax measures to enact, and individual ideas from committee members. For individuals, increases in top income tax rates, long-term capital gains rates, the loss of stepped-up basis at death, and related taxes on gift transfers are being heavily debated. Increases in corporate taxes seem to have broad support but details are still unknown. The effective dates detailed in the roadmap offered by Treasury for many tax increases are generally 2022 and beyond with one exception: Treasury suggested an early 2021 (and retroactive) effective date for an increase to the tax rate on realized long-term capital gains. While the probability of a tax increase in this area is high, we believe that it would be more likely that the effective date would occur after a bill has been introduced or even passed (which could still be 2021). Advice to Consider The probability of tax increases for high earners and wealthy families continues to be high, so it will be important to consider: Building liquidity reserves for known needs and rebalancing portfolios or other actions that bring clients in line with their risk parameters. Those who are ready to sell large capital assets should consider completing such sales before year-end. Anyone who wishes to utilize their augmented gift/estate tax exemption should consider moving forward promptly so that transfers can occur in 2021 to avoid the consequences of potential income and estate tax law. Background Early this summer, the Biden Administration released budget details that forecasted tax law changes that could impact many of our clients. (See the post: “Treasury “Green Book” and Budget release gives detail on Biden’s tax policy plans”). These plans gave detail and insight into the specifics of tax law changes that would likely be supported by the White House and to their ideas about effective dates for change. Since then, legislative priorities have been focused on a bipartisan infrastructure bill, a budget resolution, and a reconciliation bill to support the framework of a social spending plan (see the post: “The American Families Plan”). This week, the House has cut short its August recess to pass a budget resolution giving lawmakers the budgetary pathway to the reconciliation bill. As a reminder, reconciliation bills require only 50 votes in the Senate for passage (the Vice President will provide the tie-breaking vote if needed) and need to “score” as revenue-neutral over a 10-year budget window. This will require unified Democratic support in the Senate. If passed, the plan intends to be funded by increases to taxes on high earners and wealthy families (50% of the proposed revenues raised). There are tax-writing panels in the House (Ways and Means) and Senate (Finance Committee) that have set a September 15th deadline for writing the details of the tax package that is expected to support the American Families Plan. Many believe that they will miss that deadline. While there is general guidance to the size of the total spending package at $3.5 trillion, there are members of Congress that represent critical votes who believe that the total spend should be lower. This uncertainty makes it difficult to produce the details needed to support a plan. In addition, there are committee members that would like to put their own thumbprint on the Bill and have additional tax provisions to incorporate including a proposal to overhaul the international tax system. When the House and Senate are back in session in mid-September, committees are likely to offer a series of options to iron out which tax increases will be included in the initial proposal. An area that has so far eluded lawmakers is how to expand the state and local tax deduction (SALT deduction) which is a priority for members of Congress representing taxpayers residing in high state tax states. Many believe that because of the narrow majority in the Senate and the powerful voting position of a few centrist Democrat Senators, a final Bill will likely look closer to the version produced by the Senate. Some believe that Democrats are weighing the option of expediting the process by allowing fewer opportunities for individual members to add additional priorities, but this increases the risk that the ultimate bill could fail. We see the tax debate heating up for year-end which means that the probability for tax increases is high. The details provided by Treasury in late May suggest that most effective dates would be after December 31, 2021. The tax rate on realized long-term capital gains is the exception and could change in 2021. As we get closer to the end of the year, a retroactive application of a tax increase appears less likely though an effective date in 2021 is still possible. Our advice to clients is to act now if liquidity is needed for lifestyle spending, large expenses, or portfolio balancing. Additionally, for clients considering gifts, they should act in 2021 to avoid being subject to income tax and/or estate tax law changes being considered. The views expressed are those of Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.