Monday Morning Quarterback (01/18/2021)

January 18, 2021

Proposed Taxes for Individuals Earning $400,000+

Last week’s Quarterback discussed potential 1031 exchange and other commercial real estate tax changes under the Biden presidency. This week’s Quarterback will further describe tax changes important to self-storage owners, specifically taxes for high-income earners.

Biden proposed increasing the top tax bracket to 39.6% from 37%. This proposal will also cap itemized deductions at 28% for those in the top tax bracket, resulting in a higher effective tax rate. Those making $400,000+ a year would pay a 39.6% tax on earnings used to fund charitable donations but only receive a deduction of 28%. This change would create an 11.6% tax on income-earned but then donated.

Under these changes, Individuals with annual incomes exceeding $1 million could lose preferential rates on long-term capital gains (LTCGs) and qualified dividends. Instead, they would be taxed as ordinary income. Including the 3.8% net investment income surtax, the highest federal rate owed on this income could nearly double to 43.4% for those making over $1 million a year. Repealing preferential rates on LTCGs for high-income individuals would also abolish the benefit that the current rate provides for carried interest payments on capital assets owned for a minimum of three years. Therefore, investors with incomes exceeding $1 million may want to make carried interest payments early in 2021 and consider harvesting LTCGs.

Inflation Remains Low

On Wednesday, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose in December to 1.4% y/y from 1.2% y/y in November. However, much of that growth was due to the recent rise in energy prices. Core CPI, which excludes food and energy, plateaued from November to December, remaining at 1.6% y/y. With the high jobless rate and stifled demand caused by the pandemic, inflation has stayed low. Although the economy is making progress, it is still far from where the Fed would like it. Bloomberg’s December survey of economists showed an expectation of 1.7% inflation in 2021 and 1.8% in 2022.

Chart of US core inflation

Fed on Inflation

“Not the Time to be Talking About Exit” from accommodative monetary policies, stated Jerome Powell, Federal Reserve Chairman, during a webinar with Princeton University. Before ending quantitative easing, the labor market must exhibit “substantial further progress,” and inflation must be on course to reaching 2% on a sustained basis. After running below 2% for over a decade, the Fed may let inflation rise higher than that for several years to achieve its target over the long-term. Before flexible average inflation targeting, the Fed preemptively raised rates when it was concerned that inflation would surpass 2%. However, this is no longer the case and will be the first time that the Fed deliberately allows inflation to run hot for a period of time.

Chart of Internal Claims for Unemployment Benefits

Unemployment Claims

Supporting the Fed’s conviction to continue its easy-money policies, unemployment insurance applications for the week ended January 9 grew 23% from the week before to 950,000, marking the largest weekly gain since last March. According to Mr. Powell, we are a “long way from maximum employment.” In December, the U.S. lost jobs for the first time since April 2020.

Retail Sales

“December Retail Results Were an Absolute Disaster,” according to Stephen Stanley, Amherst Pierpont Securities’ Chief Economist. On Friday, the U.S. Census Bureau reported that retail sales fell by 70 bps m/m in December, while November sales were downwardly revised to -1.4%. The median forecast, according to a Bloomberg survey of economists, called for no change in December. Anemic retail sales were concentrated in department stores, restaurants, and virtual merchants, indicating that consumer spending, which comprises ~70% of GDP, declined in the fourth quarter. For the full year of 2020, the unadjusted retail sales value grew by a dismal 60 bps y/y, the weakest in 11 years.

Chart of US retail sales

President-elect Biden’s Proposed $1.9 Trillion Stimulus Package

The Biden Administration proposed a $1.9 trillion stimulus package last week. If approved, approximately half of the proposed spending will support American households, while the other half will go toward vaccine distribution and help state/local governments. President-elect Joe Biden also urged Congress to support $1,400 in direct payments to American citizens, a higher child tax credit, longer paid leave, and a weekly unemployment insurance supplement of $400 through September. The $1.9 trillion plan would also give $350 billion to local and state governments struggling to balance their budget during the pandemic.

Additionally, the fiscal stimulus package would allot $160 billion in capital towards launching a national vaccination program, mobilizing a public-health employment program, expanding testing, and other steps to meet Biden’s goal of delivering 100 million shots within his first 100 days as president. Finally, the bill extends foreclosure and eviction moratoriums through September-end. Currently, these moratoriums are set to expire in two weeks.

Voting in the “Fast-Track”

With a 50/50 split in the Senate, Democrats can utilize “special fast-track rules,” also known as budget reconciliation, to pass a partisan bill. Democrats would only need 51 Senate votes instead of the usual 60 it takes to pass a law under these guidelines. With a 1:1 ratio of Democrats and GOP senators, Vice President-elect Kamala Harris would cast the tie-breaking vote. However, the fast-track comes with limitations, including rules that confine reconciliation bills to fiscal and tax matters, not broader policy issues. Also, the fast-track can only be employed a limited number of times per year.

COVID Deaths Hit New Weekly High

Last week, new coronavirus cases de-accelerated by 8% week-over-week (w/w), bringing the total U.S. case count to nearly 23.9 million. However, the weekly death toll surged to a new high of roughly 23,300 last week, bringing U.S. COVID casualties to approximately 397,000. During the first 15 days of January, the pandemic claimed over 46,400 American lives. Compared to the same period in December and November, COVID casualties grew by 30% and 200%, respectively.

Chart of New Coronavirus Cases Reported per Day

Chart of New Reported Coronavirus Deaths per Day

 

Vaccine Distribution and Administration

Over 42.2 million vaccinations have been administered globally. In America, 14.3 million shots have been given. U.S. vaccinations began December 14, starting with health-care workers. Roughly 46% of the vaccinations distributed throughout the U.S. have been administered. As of January 17, there were ~16.8 million doses in supply waiting to be utilized.

Chart of Vaccine Distribution by state

Light Economic Calendar

This week, the economic calendar is relatively thin. The most pertinent data will be weekly unemployment claims, which surged during the week ended January 9 and will likely remain elevated.