By Alan K. Ota

Law360 (June 5, 2020, 7:42 PM EDT ) As lawmakers weigh additional legislation to counter the economic fallout from the novel coronavirus pandemic, congressional Republicans are considering proposals to ease capital gains taxes to revive business investment and replace jobs lost due to COVID-19.

President Donald Trump has signaled support for curbing capital gains taxes to reassure investors, spur growth and counter the economic effects of the pandemic. Efforts to cut taxes on investment gains face pushback from Democrats, but key players on both sides say such ideas could be on the table when lawmakers try to cut deals on pandemic-related legislation as the November elections approach and then in a likely post-election session.

Democrats have argued for immediate action on relief measures in the House-approved $3 trillion Health and Economic Recovery Omnibus Emergency Solutions Act, or Heroes Act, such as another round of economic impact payments and broader tax incentives for families with children. The GOP has blocked that bill and argued for new business tax incentives and a shield against COVID-19 liability lawsuits for businesses, setting the stage for a potential deal before the July 31 expiration of expanded jobless aid enacted in March as part of the Coronavirus Aid, Relief and Economic Security Act.

While spurning calls for immediate capital gains tax cuts, House Ways and Means Committee Chairman Richard Neal, D-Mass., left open the door to airing such initiatives in a coming review of taxes for businesses and families.

"Not right now," Neal told Law360. "It could be part of a broader conversation. It would be a broader conversation to talk about those things."

As part of such a discussion, Neal said, he wants to examine the root causes of a dip in capital gains tax revenue in some states.

"One of the things is that looking at the state level, with Massachusetts as the example, the growth taxes like capital gains are way down, as are the sales taxes," Neal said. "I call them growth taxes because they allow you to do the extra things in the state. They provide an indication of when the economy is humming."

While encouraging a study of capital gains taxes and the exploration of other stimulus measures, Neal and other senior Democrats have made clear their party would oppose shoehorning a capital gains tax cut into the next pandemic response measure, arguing it would divert resources from more immediate needs.

"It would shower benefits on the ultrarich taxpayers and not on those who need help the most," said Rep. Lloyd Doggett, D-Texas, a Ways and Means Committee member.

Facing such opposition, Rep. Kevin Brady, R-Texas, told Law360 he would continue to discuss options with administration officials for any push to reduce capital gains taxes. Trump endorsed the idea of cutting or stopping capital gains taxes in a May 8 news briefing after meeting a group of GOP lawmakers.

"I would be in favor of that. Yeah," Trump said.

Brady said he would evaluate whether to add a capital gains tax cut to his draft GOP economic stimulus package. As part of that initiative, he has called for permanent expensing of business investment in equipment and structures and more incentives for research and development.

"We're always interested in more investment in the country," Brady told Law360. "It's really key. We haven't finalized anything."

Rep. David Schweikert, R-Ariz., a Ways and Means member, said he was trying to develop a proposal for a capital gains tax holiday with an as-yet unspecified lower capital gains tax rate for stocks, real estate and other assets purchased during the outbreak of the novel coronavirus, which causes COVID-19, a respiratory disease.

"I am trying to deal with some of the rough edges and sell it," Schweikert told Law360.

Other approaches being discussed include proposals to allow for capital gains taxes to be adjusted downward to reflect inflation, either through legislation or possibly by Treasury regulation, and H.R. 589, a proposal by Rep. Andy Barr, R-Ky., to lift the taxpayer earnings cap on the 15% capital gains tax rate to $500,000 for individuals and to $600,000 for couples.

The 2017 Tax Cuts and Jobs Act  preserved a three-rate framework for long-term capital gains taxes on assets held longer than one year, with new annual adjustments for inflation of the taxpayer-income brackets for those rates. It provided a zero rate for taxpayers currently earning less than $39,375 for individuals and $78,750 for couples, a 15% rate for taxpayers with higher incomes that fall below $434,550 for individuals and $488,850 for couples, and a 20% rate for those at higher incomes.

Barr said his proposal was designed to draw bipartisan support and would not favor wealthy taxpayers.

"It lowers the capital gains rate for most Americans: middle-income taxpayers," Barr told Law360.

In the Senate, Finance Committee Chairman Chuck Grassley, R-Iowa, has played down prospects for a capital gains tax cut.

"No, not at all," he told Law360, when asked whether he was working on such a proposal to be part of a potential Senate GOP alternative to the Heroes Act. The top Senate tax writer has been weighing other proposals promoted by GOP members of his panel such as broadening temporary full expensing for business equipment and putting off the start in 2022 of five-year amortization rather than full and immediate expensing for research and development costs.

Sen. John Cornyn, R-Texas, a Finance Committee member and former majority whip, said a capital gains tax cut would resonate in the Senate Republican Conference but predicted its ultimate fate would hinge on working out a bipartisan deal with House Democrats.

"It would be pretty popular. But the House is probably unlikely to generate something like that unless it is part of a larger package," Cornyn told Law360.

Whether a capital gains tax cut moves in the near term or not, Cornyn predicted a key theme in the 2020 elections would be the clash between Trump's vision for cutting capital gains taxes and a plan by his presumptive Democratic rival, former Vice President Joe Biden, to nearly double the top capital gains rate to 39.6% for those with more than $1 million in income.

"It will be huge," Cornyn said.

--Editing by John Oudens and Tim Ruel.

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