The policy changes financial advisors want to see after Election Day

Financial advisors and other wealth management professionals say the federal government should reduce its spending to balance the budget, but they're open to some higher taxes, too.

Those are some of the mixed results of a survey conducted by the research unit of Arizent, the parent company of Financial Planning, of 213 advisors and other industry professionals about next month's election. At least 56% of the respondents believe the government must cut spending to reduce debt and deficits — compared to about a third of the group who argued that it should slash expenditures and raise taxes at the same time. 

In the survey last month, the advisors and wealth professionals also shared their views on the most impactful expiring provisions of the Tax Cuts and Jobs Act of 2017 and how best to ensure the solvency of Social Security beyond the next decade. 

The outcome of the presidential election between Republican former President Donald Trump and Vice President Kamala Harris, a Democrat, as well as key races in the House and Senate, will likely determine the fate of the Labor Department's new retirement advice rule, the question of whether Congress will act to shore up Social Security and, of course, many areas of federal tax policy affected by the law.    

"Next year, we are headed into what some have called the Super Bowl of tax," Tracy Gordon, co-director and the acting Robert C. Pozen director of the Urban-Brookings Tax Policy Center, said at an event last month. "The reason that they're saying that is that many provisions of the TCJA are scheduled to expire under current law. So what is the TCJA? It is the most sweeping tax legislation in decades, making major changes to both the individual and the corporate side of income taxation."

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The results

FP homed in on the specific issues in play by asking advisors which sunsetting parts of the law will affect their clients the most: the higher standard deduction, the hiked-up exemptions from estate taxes or the limited itemization of state and local duties. Respondents could also pick "other" as their answer, and 6% did so. Out of the rest of the possible answers, 45% chose the standard deduction, 33% picked the estate tax and 16% opted for the so-called SALT deduction.

In terms of how to solve Social Security insolvency before an automatic benefit cut kicks in by the year 2035, the answer of "raise taxes on higher earning workers" received the most support at 34%. The next most popular answer was "reduce benefits by increasing the full retirement age" at 25%, followed by "overhaul the system through privatization with 401(k)-type accounts" (17%), other (14%), and raise taxes on all workers paying into the system (10%).

Interestingly, the two answers involving raising taxes drew a combined 44%, while one calling for reduced benefits and another mentioning privatization added up to 42%.

Arizent

For the overall federal budget, the answers came in more definitively in one direction. When asked to pick the most important action the next White House and Congress should take to balance the budget, more than half of the respondents said the federal government should slash its outlays. Another 32% said the government should decrease its spending and raise taxes simultaneously. Just 6% answered that taxes alone should rise, and another 6% answered "other."

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Is any of this likely to happen?

The murky findings even within a group of several hundred advisors and industry professionals reflect a political outlook mired in uncertainty ahead of Election Day that will likely spill into the following year under a new president and Congress.

For all of the campaign discussions about taxes, fixing the budget and addressing Social Security's long-term fiscal viability, the policy issues can grow more complicated when lawmakers start to write the bills, according to expert attorneys speaking in a virtual panel held last month by law firm K&L Gates' Public Policy and Law practice.

"One of the big unknowns here is the extent to which increased concern about deficits on each side is going to play into this debate, because, as we all know, there's lots more on the deficit-increasing side of the table that people are comfortable with than on the deficit-reducing side of the table," said Mike Evans, a partner in the K&L Washington office's public policy and law practice. "When you're trying to resolve this and address the deficit, you both have to do some of the hard things on taxes and spending, and also, I'll call it creative bookkeeping. And other people would call that accounting gimmicks."

Some critics have referred to the Tax Cuts and Jobs Act that way, since the writers of the legislation phased out most of the provisions after 2025 in order to comply with the rules of the Senate reconciliation procedure and lower the estimated cost. 

"To my mind, a lot of the deficit concerns are sound and fury signifying not a whole lot," said Bruce Heiman, a partner in the K&L public policy practice. "I think serious action to reduce the deficit, serious action to reduce the overall debt, is going to be triggered by a crisis of some kind in some markets, rather than just the Tax Act."

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When it comes to cutting the deficit, many methods that sound popular in surveys or on the campaign trail become "politically not feasible" if lawmakers try to enact them, noted Ryan Carney, a government affairs advisor and member of the public policy and law practice.

"I don't think any serious person thinks that we're going to be able to pass a balanced budget in the next year or two, or even in this budget window," said Carney, referring to the "window" of up to a decade that is often used in calculating the cost of new laws. "So that is one of the reasons why the provisions that, if the Republicans take power, they're focused on, are the ones that they can say are the most growth-producing, like bonus-expensing, for example."

Ahead of the election, it can be "easy right now to be talking about the policy side of things because we don't really have to come up with pay-fors yet," according to Mary Burke Baker, a government affairs advisor who is the leader of the tax policy practice in the firm's Washington, D.C. office. The circumstances may look much different when many provisions of the Tax Cuts and Jobs Act are about to expire at the end of 2025.

"It is extremely difficult to come up with offsets that you can get consensus on, even within a party, let alone between the two parties," Baker said. "I wouldn't be at all surprised to see some sort of machinations with the baseline when push comes to shove and they're trying to figure out how many policies that they can fit into this bill."