by Pierre G. Villere
Those of us who are older and have had multi-decade careers have seen this play out before in Washington, D.C.: The opposing party wins the White House, and a majority in both houses of Congress. While the 50-50 split in the Senate is not technically a majority, the vice president holds the power to break a tie; this is offset by Democratic middle-of-the-roaders like Senator Joe Manchin (D-WV), who will see his power as a moderate escalate, at least until the mid-term elections that could reshuffle the deck yet again. In many cases, moderate Democrats hold the power to impose compromise on otherwise progressive legislation that Republicans want to hold back.
The Biden Administration has clearly had a couple of victories so far, especially the quickly-passed $1.9 trillion stimulus bill that moved through Congress with great speed, and is now having a positive effect on the economic recovery from the Covid pandemic. Right behind it is the new infrastructure legislation; I won’t be surprised if some form of a bill has been passed into law by press time. But unlike the stimulus bill, funded by adding to the federal debt, the Biden Administration currently plans to pay for this ambitious infrastructure bill by increasing taxes—and targeting America’s corporations and wealthiest individuals.
Our industry enthusiastically supports infrastructure spending, and the proposed $2 trillion package will no doubt be a boon to our industry. But we have to pay for it somehow, ideally not with yet more borrowed money that has pushed the federal debt-to-GDP ratio up from 107 percent at the end of 2019 to 129 percent at the end of 2020. This stands in contrast to the ratio at the end of 1981, which was a mere 31 percent. So a program of tax increases is seen as the answer to this ballooning debt that needs to be moderated.
In the Trump Administration, the Tax Cuts and Jobs Act brought corporate tax rates down from 35 percent to 20 percent, and a big piece of the new Biden tax plan calls for increasing the rate to 28 percent. There is some historical precedence: In 1981, Ronald Reagan dropped the capital gains tax rate to 20 percent, only to raise it again in his 1986 sweeping tax reform which set tax rates on capital gains at the same level as ordinary income, like salaries and wages, with both topping out at 28 percent. Senator Joe Manchin, however, seems to be learning towards an increase to 25 percent, and I am betting he prevails.
The bigger issue is the proposed increases on taxes for America’s wealthiest individuals. Biden has said since his campaign that he wants to raise taxes on those making over $400,000 a year, and also wants to tax long-term capital gains at the same rate as wages for households making more than $1 million a year. This would raise the capital gains rate to 39.6 percent from the current 20 percent; unfortunately, the proposal does not provide an exemption for the sellers of a family business where a disproportionate amount of their net worth is invested, so independent concrete producers looking to exit their business would be treated particularly harshly, with their tax bill effectively doubling.
A majority of sentiment sides against this relatively small group as a percentage of the total taxpayer population: a 2020 Reuters/Ipsos poll said 64 percent strongly or somewhat agreed that “the very rich should contribute an extra share of their total wealth each year to support public programs.” That sentiment by nearly two-thirds of voters is a large percentage to push against. The consensus among the Democratic support for the new legislation suggests the best way for the White House to go bold and keep peace is to focus on progressive taxes, namely on the rich and corporations, and not regressive policies like a gas tax, which seems a more equitable way to pay for highways, streets and roads.
Some observers of the looming fight over rates and policy have suggested in the popular business press that this is shaping up to be the Super Bowl of tax reform, and many expect a protracted battle before a final bill is hammered out. The good news is those tax increases will directly benefit producers, as a massive infrastructure bill will be funded as a result.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.