Tax Update

The White House released President Joe Biden’s Fiscal Year 2024 Budget proposal last week.

While there are a number of concerning tax increases that would impact the wholesale distribution industry, the budget is dead on arrival in the Republican controlled House of Representatives and the one-vote Senate Democrat majority. Instead, like all Presidential budgets, it is largely an aspirational messaging document that provides information on the White House’s policy priorities, provides clues on what Biden and other Democrats will campaign on in 2024, and serves as a basis for legislative proposals that will be pushed the next time Democrats control the White House and both chambers of Congress. 

In total, the budget called for $4.7 trillion in higher taxes over the ten-year budget window and almost $2 trillion in new spending. As a result, the budget reduces the deficit by almost $3 trillion relative to the existing federal baseline.

Tax increases included in the budget relevant to wholesaler-distributors include:

• Increasing the 3.8 percent Net Investment Income Tax (NIIT) to 5 percent and applying it to all S-Corporation and partnership income above $400,000.
• Increasing the top individual tax rate from 37 percent to 39.6 percent including on main street businesses organized as S-corporations and partnerships.
• Raising the corporate tax rate from 21 to 28 percent.
• Additional limitations on the ability of passthrough businesses to deduct business losses.
• Doubling the top capital gains tax rate from 20 percent to 39.6 percent.
• Raising taxes on family-owned businesses by narrowing existing grantor trust rules.
• Imposing a new, 25 percent minimum tax on large S-Corp and passthrough businesses with assets greater than $100 million.

Although none of these tax increases stand a chance of passing this Congress, it is still important to educate lawmakers on the damage these proposals could do to wholesaler-distributors. As such, NAW released a press release criticizing the proposed tax increases in the Budget on Thursday. You can find the NAW statement here. NAW also signed onto a letter led by the S-Corporation Association and signed by 85 trade associations in opposition to these tax increases which can be found here. NAW will continue to educate and update lawmakers on these harmful proposals.

On a related note, several House Democrats released legislation to repeal roughly a dozen tax credits and deductions utilized by the oil and gas industry. One of the proposals would repeal the last-in, first out (LIFO) deduction for large oil and gas companies.  

While this legislation would not directly impact wholesaler-distributors that utilize LIFO and is purely a Democrat messaging bill with little chance of passing Congress, NAW takes seriously any threat to the LIFO inventory accounting method, even if the threat is not aimed at wholesaler-distributors. NAW will be reaching out to lawmakers through the LIFO Coalition to explain the importance of the provision and to highlight the significant opposition efforts to repeal the deduction in full or in part.

Amazon Update 

Senator Amy Klobuchar (D-MN) held a hearing last week on the need to rein in Big Tech including Amazon. The hearing was titled “Reining in Dominant Digital Platforms: Restoring Competition to Our Digital Markets” and was held in the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights. Witness testimony and a video of the hearing can be found here.

The hearing focused on Senator Klobuchar’s American Innovation and Choice Online Act (AICOA), legislation supported by NAW that would prevent Amazon’s unfair treatment of third-party sellers. The hearing also focused on Open Market App Act, legislation that also reins in Big Tech but is unrelated to NAW’s Amazon issue.

This was the first action taken by the new Congress to push AICOA and It is expected that Sen. Klobuchar will soon formally reintroduce the bill and bring it for consideration before the Senate Judiciary Committee.

One new challenge in passing the legislation is the increasing unpopularity of the FTC and Chair Lina Khan among Republicans and business groups. These critics argue the FTC is out of control and is pushing sweeping regulations on businesses and the U.S. economy including their proposal to ban noncompete clauses. Given this viewpoint, many Republicans are hesitant to cosponsor legislation that would give the Biden FTC more authority. A Bloomberg article that can be found here provides more information.

On the hearing itself, it was encouraging that no Senator or witness defended Big Tech. Even critics acknowledged the need to act to rein in Big Tech although viewpoints on what should be done varied greatly.

Sen. Klobuchar noted that Big Tech spent at least $200 million running ads against her bill and $90 million on lobbying. Despite this, there is bipartisan support for the legislation. She bemoaned the fact that the rest of the world, including the EU, is ahead of the US in reining in Big Tech. She also referenced how Amazon bullies third party sellers.

Ranking Member Mike Lee (R-UT) acknowledged the size and power of Big Tech and stated that he agreed that Congress should act to rein them in but worried that solutions being proposed could harm the economy. He talked about the need for crafted, targeted solutions rather than empowering unelected, unaccountable bureaucrats and said he does not want to give more power to the Biden FTC.

Six other Senators spoke at the hearing – Chuck Grassley (R-IA), Sheldon Whitehouse (D-RI), Dick Durbin (D-IL), Richard Blumenthal (D-CT), Mazie Hirono (D-HI), and Alex Padilla (D-CA).

Sen. Padilla was the only one that was critical of the legislation and specifically mentioned his concern that the restrictions on Big Tech preferencing could have unintended consequences that harm consumers and businesses.

The other five Senators all supported AICOA and discussed the need to act now, the challenges with adequately regulating Big Tech, the fact the EU has already taken action to rein in Big Tech, and how the bill is targeted to addressing specific issues like self-preferencing and data collection.

Five witnesses appeared before the Committee including three that supported the legislation and two that had concerns with the bill.

The supporters of the legislation discussed the need to update antitrust law to properly regulate Big Tech, with some calling for the creation of a new federal agency to specifically regulate Tech. They believed AICOA is a targeted, narrowly crafted approach, with some arguing that Congress should go even further.

The witnesses speaking in opposition to AICOA argued the bill was poorly crafted and that it contained vague, confusing, or overly broad definitions. They also argued the bill would have unintended consequences that could harm consumers and businesses. While they both criticized the bill, they did not defend Big Tech and acknowledged the need for reforms and legislation.

Federal Trade Commission Non-compete Clause update 

As we previously noted, the FTC released a notice of proposed rulemaking (NPRM) to ban non-compete clauses. Last week, the FTC announced it would extend the comment period for 30 days from March 20 to April 19. This extension is welcome news given that over 100 trade associations including NAW had requested the FTC to extend the comment period shortly after the rule was first published.

As a reminder, the proposal would impose a blanket ban on all non-compete clauses. The proposed rule could also extend to other restrictive covenants like non-disclosures and non-solicitations if they are deemed to be broad in scope. Certain businesses like banks and nonprofits that are outside of the FTC’s jurisdiction would be exempt and there would be a narrow sale of business exemption allowing non-competes for an individual who owns at least 25 percent of the business.  More information on the NPRM can be found here and here. 

Congressional Update 

The House is out of session this week and will return next week for a two-week session before taking another two-week recess. The Senate is in session and will be in for the next three weeks. They continue to focus on confirming executive and judicial nominations and holding Committee hearings.

Last week, House Republicans announced that H.R. 1, would be the Lower Energy Costs Act, legislation to lower energy costs, increase energy independence, and enact permitting reform. H.R. 1 is designated each Congress to the Majority party’s top legislative priority. Specific legislative text has not yet been released; however, the bill will be voted on in the last week of March and will contain proposals from three House Committees – the Energy & Commerce, Natural Resources, and Transportation & Infrastructure.

Labor Update

As we mentioned in our last Update, controversy continues to surround the nomination of current Deputy Secretary of Labor Julie Su to succeed outgoing Secretary Marty Walsh in the top post.  After reviewing Ms. Su’s record going back to her time as Secretary of the California Labor & Workforce Development Agency, NAW has announced opposition to the nomination, and sent a letter today to members of the Senate Health, Education, Labor and Pensions (HELP) Committee urging the senators to vote against the nominee. 

 

In the labor space, NAW has concerns about the President’s proposed budget. Although budgets submitted by the sitting President never become law, and in fact almost never are even considered by Congress, a President’s budget is usually seen as aspirational, and often provides insight into the chief executive’s legislative and policy priorities.  While the most notable proposals in President Biden’s budget are the more-than-four-trillion dollars in tax increases, his proposed increased in budgets for the Department of Labor and the National Labor Relations Board send a clear signal that NAW will have to maintain our focus on those agencies in the months to come: 

Biden Budget Request:  On March 9, the Biden administration released its FY24 budget request. It includes a $1.5 billion increase for DOL, an approximately 11% increase from FY23, and a 25% increase in funding for the NLRB. The budget request also includes calls for up to 12 weeks of paid family and medical leave and urges Congress to require employers offer a minimum of 7 paid sick days to employees.