Your State Of The Union Address Tax Cheatsheet

President Joe Biden will deliver the 2023 State of the Union Address tonight, on Tuesday, Feb. 7, 2023, at 9:00 p.m. EST. The President is expected to stress what he deems to be the successes of his administration during challenging times.

History and Authority

The State of the Union Address—sometimes referred to as SOTU—is delivered by the President of the United States each year before a joint session of Congress. The practice is authorized in Article II, Section 3, clause 1 of the Constitution which states that the President “shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient.” It began in 1790 and was referred to as the Annual Message until 1946—it’s been called the State of the Union since 1947.

George Washington delivered the first handful of addresses in person, as did his successor, John Adams. However, Thomas Jefferson broke tradition by preparing separate, written messages beginning in 1801. That method continued until 1913, when Woodrow Wilson delivered his annual message in person. Since then, most SOTU speeches have been in-person, with the first televised evening SOTU provided by Lyndon B. Johnson on January 4, 1965. Despite its rich history, there have only been 98 in-person addresses from 1790 to 2022.

2023 State of the Union

Most sitting presidents use the SOTU to tout new legislation and agenda items. The 2023 speech is not expected to deviate from that pattern and will likely focus on something that many Americans are concerned about: the economy.

One of the big pieces of the economy is—no surprise—taxes.

The President is expected to highlight proposals that raise revenue while maintaining his promise not to raise taxes on families making less than $400,000 annually. That means, by process of elimination, that wealthy Americans and corporations would likely shoulder any tax hikes or increases.

According to the White House, in a typical year, billionaires pay an average tax rate of just 8%. For context, there are seven individual tax rates for federal purposes ranging from 10% to 37%—you can check those out here.

Billionaire Minimum Tax

President Biden is expected to call on Congress to pass what’s being called a “billionaire minimum tax.” If that sounds familiar, it’s because the proposal was included in the administration’s revenue proposals submitted by the Treasury in March of 2022.

The title is a bit of a misnomer—the tax would actually apply to those taxpayers with a net worth of at least $100 million. The proposal would impose a minimum tax of 20% on the total income of those taxpayers, including unrealized capital gains. The tax due would be payable in installments.

The most controversial part of the plan involves those unrealized capital gains. Under current law, taxpayers don’t pay tax on appreciated capital assets until they are sold or otherwise disposed of. Some policymakers argue that incentivizes taxpayers to hold onto assets to avoid paying the tax instead of using the capital for other investments.

As you can imagine, the reporting and calculations on such a tax would be pretty complex. According to the Treasury proposal, affected taxpayers would be required to submit an annual report stating separately by asset class, the total basis and total estimated value as of Dec. 31 of the taxable year of their assets in each specified asset class, and the total amount of their liabilities.

Tradable assets like publicly traded stock would be valued using end-of-year market prices. Non-tradable assets 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 Treasury—those would not be required to be submitted annually.

The process has been labeled as unworkable by opponents, but supporters point out that the reporting process mirrors the “mark-to-market” reporting procedures for assets like Passive Foreign Investment Companies, or PFICs. For those of you experiencing PFIC-related accounting trauma flashbacks, my apologies. But for those wondering what PFICs are, think of them like foreign mutual funds.

The bottom line is that this “mark-to-market” like tax structure is not an entirely novel idea. It already exists. It is, however, neither common nor overly popular in corporate or tax professional circles.

The President is expected to suggest that the tax would raise $361 billion over a decade.

Corporate Stock Buybacks

Stock buybacks are under the microscope again and are also expected to be part of the President’s address.

A corporate stock buyback is precisely what it sounds like: companies use cash to buy previously issued shares of their own stock. Since a company cannot also be its own shareholder, the shares are often canceled, reducing the total number of shareholders. Typically, this means that the remaining shares of the company are more valuable, which can benefit existing investors and employees.

Corporate stock buybacks can be tax-favored, and policymakers argue that tax revenues are subsequently reduced when dividend-producing shares are taken off of the market. The Inflation Reduction Act of 2022 (IRA) imposed a 1% surcharge on corporate stock buybacks, intended to make it less appealing. The tax takes effect this year, but there’s no sign that buybacks are slowing down.

While popular, corporate stock buybacks are also controversial. Biden has signaled his unhappiness with the practice, and he’s hardly alone. In 2020, Donald Trump criticized companies that engaged in buybacks after a 2018 tax break and promised to prevent companies from doing the same with Covid funds.

To stem the stream of buybacks, the President will call for increasing the surtax on corporate stock buybacks to 4%. He is expected to say that the measure would raise $75 billion over the next ten years.

Reaction

New taxes will be a challenge in the current Congress, and there’s bound to be pushback. The National Taxpayers Union has referred to these two proposals as “so ill-conceived and damaging that they should rightly be consigned to the dustbin with other failed tax proposals.”

Existing Legislation

In addition to pitching new taxes, the President will likely tout existing tax legislation in his speech, including a 15% minimum tax on profits that large corporations report to shareholders. Large corporations are defined as those with $1 billion or more in average annual earnings, calculated over three years. The point of the tax is to add consistency to the reporting to shareholders and tax authorities.

Under prior law, some companies were alleged to report less profit to tax authorities than to shareholders, resulting in low to no tax payable. For example, in 2021, the Institute on Taxation and Economic Policy reported that at least 55 of the largest corporations in America paid no federal corporate income taxes while reporting nearly $40.5 billion in US pretax income in the previous year.

Like the corporate stock buyback law, the minimum tax was signed into law as part of the IRA.

IRS Funding

IRS funding is a controversial issue as a new Congress gets started. The IRA also included nearly $80 billion in funding for the IRS over ten years. The Treasury Department previously estimated that money would allow the agency to hire roughly 87,000 new employees, including those for customer service and IT, by 2031. The President is expected to stress that while most taxpayers pay their taxes, some high earners don’t report earnings from offshore and other entities and deserve additional scrutiny. Biden is expected to reiterate Treasury’s previous position that the funds will not be used to increase audits for families or small businesses making under $400,000 per year.

Child Tax Credit

Finally, the President may call for a less controversial proposal—but hardly a shoo-in—to expand the Child Tax Credit. The administration will likely highlight findings that show that child poverty fell to a historic low in 2021 when Congress enhanced the credit during the pandemic. The law reverted to the “normal” child tax credit in 2022 despite calls to revisit the 2021 credit, a measure that appeals to voters on both sides of the aisle.

How to Watch

The SOTU will be broadcast live on most major broadcast and cable news networks on Tuesday, Feb. 7, 2023, at 9:00 p.m. EST. You can also stream it live on the White House website.