We all know that a change is likely in the tax regimes governing personal income, gift and inheritance taxes, but what if the change is already there? There are a number of potential effective dates for President Biden’s tax bill, some in the future and some already in the past.
The uncertainty of substantial changes associated with potential retroactive effective dates can leave many looking for some form of stable ground and wonder, and rightly so, “but they can’t do it, no. ‘is this not ? “After all, the US Constitution says no”ex post facto The law will be voted. And naturally, a taxpayer should be able to confidently trust the applicable law when entering into a transaction without fear that the same published law will later govern their transaction.
Surprisingly, the answer does not follow our common intuition; and instead, the United States Supreme Court has repeatedly upheld retroactive changes in tax legislation. As early as the 1930s, the Supreme Court ruled that retroactive tax laws are constitutional and subject to a standard that depends on whether “retroactive application is so severe and oppressive that it violates the constitutional limitation.” Welch v. Henry, 305 US 134, 147 (1938). As the Supreme Court later noted:
Provided that the retroactive application of a law is supported by a legitimate legislative objective pursued by rational means, judgments on the wisdom of such a law remain in the exclusive competence of the legislative and executive powers. . . .
Be certain, . . . retroactive legislation must bear a burden not faced by legislation which has only future effects. . . . “The retroactive aspects of the legislation, as well as the prospective aspects, must satisfy the criterion of due process, and the justifications of the latter may not be sufficient for the former”. . . . But this burden is satisfied simply by demonstrating that the retroactive application of the law is itself justified by a rational legislative objective.
United States v. Carlton, 512 US 26, 30-31 (1994) (citing Guarantee of pension benefits. Corp. vs. RA Gray & Co., 467 US 717, 729-30 (1984).
The standard established by the Supreme Court is undeniably broad and extremely respectful of the legislature. In fact, it is difficult to imagine a situation where a retroactive change in tax law (whether an increase or a decrease) would not be supported by a rational legislative objective. So don’t expect any certainty as to the substantive terms or the effective date of the proposed tax legislation. Rather, it is better to bet on change – a change that may already be there.