House Democrats Back Off Targeting Billionaire Tax Schemes and Swap in New Nicotine Levy

The new legislation sacrifices billions of potential estate tax revenue — and makes it up with vapes and e-cigarettes.

The House Rules Committee begins work on President Joe Biden's sweeping domestic agenda, the Build Back Better Act, at the Capitol in Washington, Wednesday, Nov. 3, 2021.
The House Rules Committee begins work on President Joe Biden’s sweeping domestic agenda, the Build Back Better Act, at the Capitol in Washington, D.C., on Nov. 3, 2021. Photo: J. Scott Applewhite/AP

A new version of the Build Back Better Act that the House Rules Committee released Wednesday was amended to protect tax avoidance schemes used by the ultrawealthy in their estate planning. The updated legislation made up the revenue lost by going light on those billionaires by expanding tobacco taxes to additional nicotine products, replacing a tax that was highly progressive with one that is highly regressive.

The previous version of the bill had targeted a number of complex schemes the superrich use that involve moving money in and out of trusts in order to pass more wealth down to the next generation without getting hit by the estate tax or gift taxes. The provision sent rich people scrambling. A note from the law firm Goodwin warned clients that the restrictions may wind up as law, emphasizing that the provisions would take effect on or before January 1, 2022, so their clients should act quickly. The note advised in bold text:

If you are considering making gifts in excess of $6.02 million, less the portion of your exemption amounts you have already used, you should consult your tax advisor and consider making those gifts as soon as possible.

The suggestion that the ultrawealthy quicken the pace of their generosity to their beneficiaries was revised on Wednesday, as the rich breathed easier, a sense of cautious optimism dawning. “Please keep in mind that ongoing negotiations could further modify the current legislation,” Goodwin wrote in an update once the provision was stripped, adding:

… some or all of the prior proposals could be added back in or new proposals could be raised. If you’ve been engaging in planning to address the previous proposals, please consult with your tax advisors or estate planning lawyer to discuss how the newest proposals may affect your plans.

The previous plan was also met with pushback from at least one trade group, the Structured Finance Association, according to another note from law firm Cadwalader, Wickersham & Taft. The firm warned that new restrictions on grantor trusts — one of the schemes the superrich use to avoid taxes on wealth transfers — “could be detrimental” to the securitization industry that leverages the current tax treatment of these trusts.

Per a letter last month from the American College of Trust and Estate Counsel, a lawyers’ association, closing this loophole was set to generate about $8 billion in revenue for the federal government over 10 years. The amount is modest relative to the size of the Build Back Better Act, but it was targeted at a small handful of the country’s wealthy families.

To make up for the loss, the new bill places an excise tax on “any nicotine (other than nicotine used in currently listed tobacco products or certain products approved by the [Food and Drug Administration]) that has been extracted, concentrated, or synthesized.” The new tax will add either the dollar amount for small cigarettes or $50.33 per 1,810 milligrams of nicotine — whichever is greater. In October 2019, the Joint Committee on Taxation estimated a similar plan to tax nicotine in vaping would raise just under $10 billion over 10 years.

This will jack up the prices of popular products like e-cigarettes, many of which are considered to be less harmful than traditional cigarettes. It will also mean that thousands of people making less than $400,000 will end up paying increased taxes, contradicting President Joe Biden’s promise that the middle class and low-income people will not face hikes under his administration.

Despite the oft-touted public health benefits of raising taxes on nicotine and tobacco, smokers trying to quit using cigarettes often rely on the products that will be impacted by the new measure, and they will now be left with an added expense. Further, a price increase for nicotine consumers is likely to disproportionately place the revenue burden on poorer populations, sparing the top 1 percent who can afford to hire elite wealth management professionals and accountants to help them avoid paying taxes year after year.

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