MIKE TOWNSEND: Last week, President Joe Biden delivered his first address to a joint session of Congress. It wasn’t quite a State of the Union address—technically, those don’t start until a president has been in office for a full year.
And it looked different in lots of ways. One way was historic: For the first time in history, a U.S. president spoke with two women in the seats directly behind him—the first female Speaker of the House and the first female vice president.
Other ways were more a sign of the times. Instead of a standing-room only crowd of around 1,600, there were about 200 people in attendance, scattered throughout the House chamber, masked and socially distant. Usually, one member of the president’s cabinet stays away from these types of speeches, to ensure the continuity of the government if there is an emergency. This time, just one member of the president’s cabinet attended the speech in person, due to COVID-19 protocols.
But it was nevertheless a major speech, full of grand promises, applause interruptions, a list of the accomplishments of the new administration’s first 100 days, and sweeping policy proposals, including more than $4 trillion in spending plans.
For investors, what probably stood out in the speech, however, was the list of tax increases that the president is proposing to pay for all those new spending plans: increased taxes on corporations and increased taxes on wealthy individuals.
But is it any of it realistic with razor-thin majorities in both chambers of Congress?
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation’s capital and help investors figure out what’s really worth paying attention to.
On today’s episode, we’re going to dive into those White House tax proposals. We’ll discuss what’s been proposed and what’s likely to make it through the narrowly-divided Congress—and the significant gulf between those two things. I’m pleased to be joined today by Hayden Adams, one of Schwab’s tax experts. That conversation is coming up in just a few minutes.
But first, let’s take a look at some of the issues making headlines right now.
In his speech last week, the president unveiled his American Families Plan, a $1.8 trillion plan focused on social programs, including universal pre-kindergarten, a national paid leave program, and free community college. The proposal complements his American Jobs Plan, the $2.25 trillion infrastructure and climate change plan that Biden proposed at the end of March. Together, the White House is calling for more than $4 trillion in spending that would significantly reshape the American economy.
Can it happen? Well, it’s important to remember that the proposals are just that: proposals. There’s an old adage in Washington that “the president proposes and Congress disposes.” The president can propose whatever he wants, but it is Congress that controls the purse strings, Congress that will have to write the legislation, Congress that will ultimately have to find the sweet spot where a bill can win enough support to pass both the House and the Senate.
And that process really hasn’t even started yet. Over the next two to three months, Democrats on Capitol Hill will be trying to turn these ideas into actual legislation. At least a dozen committees in the House and Senate will have some say in the drafting of the legislation. Virtually every lawmaker on Capitol Hill will be angling to make sure his or her favorite proposal is included.
The bigger question in the near term is whether the White House and Congressional Democrats will try to find areas of common ground with Republicans on Capitol Hill. Doing so would likely require breaking the proposal into smaller pieces. Few, if any, Republicans are going to support tax increases. But there may be some places for the two parties to work together.
Last month, an overwhelming bipartisan majority in the Senate approved a $35 billion water infrastructure bill. It’s a fraction of the amount the president asked for in his infrastructure bill for water projects—but it’s a sign that there is at least some common ground.
Meanwhile, Senator Shelly Moore Capito, a Republican from West Virginia, has reportedly had conversations with the White House about a $568 billion infrastructure package that includes money for roads and bridges, money for public transit, money for airports, and money for expanding broadband internet access. It is, of course, much smaller and much more narrow in scope than the president has proposed.
One possible path forward is that a bipartisan majority could approve a slimmed-down infrastructure package, and then Democrats, using the special budget reconciliation process that prohibits a filibuster and allows them to pass a bill with just a simple majority in the Senate, could pass a larger package that contains other priorities and tax increases, without Republican support. Democrats, including President Biden, have sent signals in recent days that they are at least open to considering that path.
Right now it’s unclear that any of that can happen. Keep in mind that we are at Step 1, with about 300 steps to go. It’s likely to be June at the earliest before we see a draft of a bill, or bills. And what emerges from Congress is going to look very different from the initial White House proposals. We’ll have plenty of time to discuss and digest all of this over the coming months.
There’s another issue bubbling on Capitol Hill that investors should keep an eye on, and that’s retirement savings. Earlier this week, House Ways & Means Committee Chairman Richard Neal, a Democrat from Massachusetts, introduced a retirement savings bill. It’s similar to a bill that attracted broad bipartisan support last fall, but the year ended before any action could be taken on it by Congress.
The bill includes a number of provisions of interest to retirees and those saving for retirement. Most notably, the bill would slowly raise the age at which individuals must begin taking required minimum distributions from their retirement accounts from 72 to 75. It would increase tax incentives for lower-income individuals to save for their retirement years, make it easier for employers to automatically enroll new employees in the company retirement plan, and take a number of other steps to try to boost retirement savings.
While there is no timetable yet for consideration of the bill by the full House, we continue to think this bill has a good shot at passing this year. It’s one of the relatively few issues that is attracting bipartisan support.
Another thing I’m watching this week: On Thursday, May 6, new SEC chair Gary Gensler will make his debut on Capitol Hill, testifying before the House Financial Services Committee. He’ll be a witness at the panel’s third hearing examining the retail trading frenzy earlier this year that saw so-called “meme stocks” like GameStop Corporation go on a wild ride, fueled by retail investors chatting on Reddit message boards and other social media channels. Thursday’s hearing will also feature testimony from officials at the Financial Industry Regulatory Authority, or FINRA, and the Depository Trust and Clearing Corporation. The DTCC is one of the key players inside the market plumbing, providing clearing and settlement services to financial institutions.
Expect to hear a lot of questions about things like payment for order flow and whether the industry should work toward speeding up the settlement process for stock trades. But don’t expect to hear a lot of specifics from the regulators. The SEC, FINRA, and the DTCC are all at the front end of reviewing what happened during the trading craziness in January and February and have barely started thinking about whether new regulations are needed.
Finally, an update on something I’ve talked about on the podcast before: With new Chairman Gensler settling into his SEC role over the last couple of weeks, there has been considerable speculation about whether and when the SEC would take some action on cryptocurrency. Prior to becoming SEC chair, Gensler was an academic whose focus was on digital currencies and blockchain technology—a background that gave cryptocurrency enthusiasts hope that the agency might take a more active role in the space.
The first way that might come to pass is for the SEC to take action on any of the proposals submitted by 11 different asset managers to launch the country’s first Bitcoin exchange-traded fund. But we found out last week that we will have to wait a little longer for that decision. Facing an end-of-April deadline for at least one of the proposals in the queue, the SEC announced that it was delaying any decision on a Bitcoin ETF until mid-June.
While the decision was met with disappointment by cryptocurrency advocates, it’s not especially surprising or controversial. Gensler had been on the job for less than two weeks, so it makes sense that the agency would give itself a little more time on this important decision. Stay tuned—I’ll be following this issue as it continues to move forward.
MIKE: On my Deeper Dive today, I want to go back to the new proposals from the White House—the American Jobs Plan and the American Families Plan. There is so much to dissect in both proposals, but what investors have been focusing on is how those plans will be paid for. The president proposed a corporate tax increase to pay for the infrastructure plan. Last week, he called for a number of tax increases on wealthier individuals as part of the American Families Plan, including changes to the top income tax rate, changes to the estate tax, and changes to the taxation of capital gains. Investors have a lot of questions: What do these tax proposals mean for me? How likely are they to become law? When are they likely to take effect?
One of the main points I’ve been emphasizing in my talks with investors over the last couple of weeks is that everything in this proposal is just a starting point for negotiations. The president has put forward a proposal—but there’s no requirement that Congress consider exactly what he has proposed, or even that Congress consider the proposal at all.
To help us break down what’s in the proposal, who would be impacted, and whether any of these changes can pass a narrowly divided Congress, I’m pleased to be joined by Hayden Adams, director of tax and financial planning at the Schwab Center for Financial Research. Prior to joining Schwab in 2015, Hayden spent eight years with the IRS—so he knows how the tax process works.
Thanks so much for joining me today, Hayden.
HAYDEN ADAMS: Well, thanks for having me, Mike.
MIKE: Well, Hayden, you are also both a CPA and a Certified Financial Planner, so I know you’ve been getting a lot of questions since this proposal came out. So I want to walk through with you what the president has proposed and the implications for investors. The headlines over the last week or so have been all about the individual tax increases in the proposal.
But before we get to those, let’s begin with an aspect of the plan that has received a little less attention so far. The president is calling for an $80 billion infusion into the IRS to beef up staff and systems, increase the number of audits of wealthier taxpayers, and just generally improve services at the agency. The White House is saying that this money would result in a big increase in taxes paid, taxes that go uncollected today. You worked at the IRS for a number of years. Would that kind of boost in the resources make a difference toward closing the tax gap, the difference between what taxpayers owe and what they actually pay?
HAYDEN: Oh, it definitely will. From the government’s perspective, investments in the IRS’s budget, increasing their overall staffing, increasing the overall resources they have, pay a big dividend. And, in fact, historically, for every dollar you spend on the IRS, it returns about $7 in additional funds to the government coffers.
Now, a lot of that money, what they will probably spend it on is enforcement, i.e., audits. And to do that, though, they will have to increase staffing. And that’s not something that happens quickly. It will take time for them to ramp up the training and the staffing of the individuals that they bring onboard using these funds. And, in fact, the IRS has been seeing their budget cut year after year. The whole time I was at the IRS, it seemed like every single year their budget was continually reduced.
So this $80 billion will make a significant impact in the overall bottom line for the agency and help them with their enforcement actions. And, most likely, what we’re going to see is those enforcement actions are going to be focused on the top 1 to 5% of taxpayers. So this is wealthy individual households, business owners, and we’ll probably see some more enforcement on corporations, also.
MIKE: Well, this seems like it would be an easy fix, but the IRS has been left hugely underfunded for more than a decade as you noted, under presidents of both parties. So it will be interesting to see whether Congress can get behind what seems like a relatively painless way to increase tax revenue.
Now, when it comes to direct tax increases on individuals, let’s start with the president’s call to return the top income tax rate to 39.6%. That’s where it was prior to the 2017 tax law that lowered the top rate to 37%.
HAYDEN: Yeah, this is definitely been getting a lot of attention in the media. This is actually not a new proposal. Biden campaigned on this proposal. Back during his campaign, he said anyone who makes over $400,000 a year would see an increase in their taxes from that 37% to 39.6%. Recently, we’ve heard some rumors that that number is a little bit higher than 400,000. We haven’t seen any written proposals about this, but what we’ve heard is that that 39.6% tax rate may not impact anybody other than individuals over 452,000 of income, or married couples with over 509,000 of total taxable income.
Now, the big takeaway when it comes to this potential tax increase is that basically anybody who makes less than $400,000 a year has probably got nothing to worry about. They’re most likely not going to see an increase in their taxes. And, in fact, a lot of the people who are in the middle income to lower income households will probably see their taxes go down a bit further than it had in the past simply because there’s been an increase in tax credits, and there could be potential additional deductions that they could take in the future.
So, Mike, from your perspective, what is the likelihood that Congress could actually pass this? Is there any consensus within Congress?
MIKE: Yeah, Hayden, I think this is—of all the president’s proposals on taxes—probably the one that has the least controversy attached to it, at least among Capitol Hill Democrats. I think there’s fairly wide support among Democrats for this proposal. And for that reason, I think it’s probably got the best shot of any of these proposals at actually becoming law.
Well, let’s turn to the part of the White House proposal that probably resonates most directly with investors, and that is changes to the taxation of capital gains and dividends. First, could you give us a little historical context on capital gains and how they’ve been taxed?
HAYDEN: Well, historically capital gains have kind of been all over the board. In the past, capital gains have been as low as 15% and as high as 35%. So it changes, definitely, over the years as to what to the overall long-term capital gains tax is. And that’s something that people kind of need to understand is that there’s a lot of different tax rates and brackets out there. There’s the ordinary tax brackets—that’s the what you pay on your wages or your business income, rental property income. There’s the long-term capital gains tax brackets, which are generally lower, and those range from 0% to 15 to 20% right now. And then there’s the short-term capital gains tax rates. So if you hold an asset for less than a year, you end up paying the ordinary income tax rates on those assets.
Now another area that does cause quite a bit of confusion, especially within the media where they talk about like, “Oh you’re going to pay a super high tax rate, you know, on certain capital gains,“ is that, yes, you may pay a marginally higher tax rate, but the reality is that we have a graduated tax system. And what I mean by that is, with your ordinary income, for example, it starts out the first certain percentage of your income is taxed at 10%, then the next portion is at 20%. It works the same way with long-term capital gains. So the long-term capital gain brackets, you actually pay, for a married couple, 0% on the first $80,800 of your income.
Then, from that amount on, up to $501,600 of income, you end up paying 15%, and from there on it goes to 20%. And, of course, to complicate things even more, you have to stack your capital gains on top of your ordinary income.
So I think the easiest way to understand how the capital gains tax brackets work is with a quick example. So let’s say we have a married couple, and that couple has $70,000 worth of ordinary income—from wages, or a small business, or maybe even a rental property. In addition to that, they have $1.2 million of long-term capital gains. And I know that seems a little far-fetched that you have a person with only $70,000 of income but also $1.2 million of long-term capital gains, but I’m picking these numbers for a very specific reason, so I can show you exactly how those long-term capital gains tax brackets interact with the ordinary income tax brackets. So what happens is, is that married couples, that first $70,000 of income is taxed at their ordinary income tax rates. Then you stack on top of that $1.2 million in long-term capital gains. And to determine where those long-term capital gains will be taxed, you start with 70,000 and you look across to the long-term capital gains tax brackets. And what you find is, is up to $80,800 receives no tax at all; it’s a 0% tax bracket when it comes to long-term capital gains. So that’s $10,800 that isn’t even taxed. From that point on, it’s 15% tax rate on the long-term capital gains up to $501,600. After that, it’s a 20% tax rate on everything beyond that $501,600.
MIKE: So what is the president proposing and who will it affect?
HAYDEN: So, basically, the president’s proposal is that anybody who has over a million dollars of income will be taxed at the 39.6% tax rate. Basically, it’s creating a fourth long-term capital gains tax bracket. So we would have the zero, the 15%, the 20%, and a 39.6% for anybody who has over a million dollars’ worth of income. This is not going to impact a lot of individuals. A lot of people are worried about this, but the reality is it’s only going to impact about 0.3% of all taxpayers in any given tax year.
And, again, let’s use that same example I used before to better understand how this is going to work. So let’s say we’ve got that same married couple, $70,000 of wages and that same $1.2 million of long-term capital gains. Same thing happens. A portion is going to be taxed at the 0% tax rate of that long-term capital gain, then a portion will be taxed at 15%, and then the next portion at 20%. But once they hit $1 million of total income, anything over that $1 million then pops into the 39.6% tax bracket and begins being taxed at that 39.6%.
MIKE: Well, Hayden, right now, what I’m hearing is that it’s pretty unlikely that Congress will tax capital gains as ordinary income. In fact, isn’t it true that there’s a point at which the rate actually begins to lose money for the government because it could change investor behavior?
HAYDEN: Yeah, that’s definitely the case. People react whenever you change the Tax Code. And if you change the Tax Code too significantly, people react and change their behaviors in a significant manner, at least in the short run. So, initially, usually what happens when there’s any major tax law change is when people see that about to pass, you know, a certain time period before that and up to like three to six months after that change occurs, people begin changing their behaviors. But, eventually, they kind of revert back to the norm, they kind of revert back to the mean.
But, you know, with this proposal of increasing tax rates on the wealthy for over a million dollars of income, a lot of advisors are already getting calls from investors saying, “Hey, I want to maybe like start recognizing these gains right now, because right now I know my tax rate. My highest rate I pay is that 20% plus the 3.8% net investment income tax. I want to start recognizing those gains today.” And that is an actual strategy.
Another strategy is that investors could just hold their assets longer. So they might just say, “Hey, I don’t want to recognize gains anymore because if Congress passes a 39.6% tax rate on capital gains, I’m just going to wait out the storm.” And like we mentioned earlier, the tax rates for capital gains have been all over the place over the decades. And so you could literally just wait until tax rates go back down into the future.
Plus, another strategy investors could possibly look at is harvesting gains and losses and using them to offset each other, so that they can basically think of it as bucketing your gains. And what you could do is just try to like have your gains only go up to a million dollars of long-term capital gains, and then use your losses to offset anything over that so that you don’t have to recognize anything over that million dollars.
That’s kind of the unique thing when it comes to long-term capital gains is that you have a lot more control than you might realize. You control when you’re going to recognize the gain and what assets you’re going to sell. You don’t have that control when it comes to your ordinary income.
So a lot of people are kind of thinking ahead and strategizing as to, “What can we do if this does pass?” I think it’s a little early for that right now. But overall, I think the government could help mitigate some of this reaction that we’re seeing in the markets simply by not increasing it to 39.6%, but shooting for a little bit lower number, maybe 25- to 30% instead.
MIKE: Yeah, I think it’s likely that Congress will try to find a middle ground between the current top rate of 20% and the president’s proposal of a top rate of 39.6%. And, certainly, at least at the moment in the early stages, 25 to 30% already seems like that’s the range that’s gaining momentum here in Washington.
Well, Hayden, let’s shift gears and talk about the estate tax. How does the estate tax work today?
HAYDEN: So the estate tax is actually pretty complicated, and it’s not something that the majority of people understand, and it makes a lot of sense that they wouldn’t because it’s not a tax that impacts anybody on a daily basis. It’s something you may only see once or twice in your lifetime simply because it only takes effect when somebody passes away and passes on assets to another individual.
So as an overview, this tax system it really truly is almost its own system. It has its own standard deduction, though it’s not called the standard deduction—it’s called the gift and estate tax exemption. And that’s $11 million. And what that means is that you can pass on up to that $11 million—it’s actually $11 million and change—and you can pass that on to other individuals, and there’s no estate tax whatsoever. But once you pass that estate tax exemption amount, what happens is a 40% tax rate kicks in.
There’s also another aspect of the estate tax that is pretty unique, and it’s a great opportunity for passing on assets, is that you get a step-up in basis on any assets that you pass on to your heirs. And so what I mean by that is, let’s say you’ve got an individual who passes away and gives you $10 million in corporate stocks. When you receive those assets from the estate, you get a step-up in basis to the fair market value of those assets at the date of that individual’s death. So your basis in those assets becomes 10 million, no matter what the basis of the individual who initially held those assets was. They could have only paid a million dollars for those assets, and they appreciated to 10 million. But because you got to step-up in basis at the date of death, your basis becomes $10 million.
And then, eventually, let’s say, your assets appreciate, and they appreciate to $20 million, and then you’re like, “‘Oh, I’m going to sell these.” Well, when you sell those assets, you don’t have to recognize all $20 million as a gain. You’re only, again, recognizing the gain on the net assets. So your basis was 10 million. They appreciated to 20 million. Now you recognize a $10 million gain, the difference between your basis and the value at the date you sold them.
MIKE: So, Hayden, what the president is calling for is interesting, because he is not calling for any changes to the exemption amount or the tax rate on estates. The exemption amount would stay at $11 million. Instead, he’s focused on ending the step-up in basis. So how would that work?
HAYDEN: That’s slightly controversial, simply because it does create a situation where you could get double taxation. So, as I mentioned, there’s that estate tax exemption of $11 million-ish, and if you go over that exemption amount, you get taxed at 40% for any assets you pass on. And if that basis step-up is removed, what that means is the estate’s taxed at 40%, and then when you sell any assets that you did not receive a step-up in basis on, you’d get taxed again.
Now, the actual proposal that he’s got out there, it says that any assets that you receive from an individual, the first million dollars would still receive a step-up in basis. That would be 2 million for married couples is what we’re hearing. But anything after that doesn’t receive the step-up in basis any longer. So what that means is you’re carrying over the basis of the individual from whom gave you those assets.
And what I want to kind of do is get your thoughts on this, Mike. Like do you think this is likely to pass? Is there any consensus in Congress about this?
MIKE: Yeah, you know, the estate tax has long been a tricky one on Capitol Hill. And it seems like increasing the rate or lowering the exemption amount, those are fairly simple changes, the kinds of changes that Congress makes to tax law all the time. But ending the step-up in basis, definitely a lot more controversial because it’s really a fundamental changing of the entire concept of how taxes at death have worked for decades. And that strikes me as a more difficult political lift in Washington. The estate tax is also one of the few tax issues that doesn’t break down easily on party lines. It really matters more what kind of constituents you represent in your district or your state. Do you have a lot of family farms, or a lot of ranchers, or a lot of big landowners? Does your state have a lot of multi-generation family-owned businesses? Those are some of the issues that members of Congress are looking at when they’re thinking about their position on the estate tax.
That said, this issue of the step-up in basis is something President Biden and other leading Democrats have felt strongly about for a very long time. They really see the estate tax rules as a mechanism that essentially allows wealthy families to avoid paying their fair share in taxes. So I think this is going to be a very interesting battle to watch over the next several months.
Hayden, one of the other questions I’ve been getting a lot at my events recently is about the corporate tax increase. Of course, as part of his infrastructure proposal, the president is looking to increase the corporate rate from 21% to 28%. Some Democrats on Capitol Hill have already signaled that that may be too much, and maybe 25% would be a more realistic target. How much does the corporate tax rate matter to investors? I mean, what we saw after the tax cut in 2017 was an increase in stock buybacks and dividends, which, obviously, do matter to investors. So would a tax increase mean companies cut dividends?
HAYDEN: There is a potential that some companies could cut dividends. What a lot of people don’t realize is that one of the biggest expenses for many corporations is their federal tax bill. A lot of companies, they don’t have R&D, research, expenses and all these kinds of deductions. And so they end up having a pretty hefty tax bill. And for some of them, it can be like the second largest expense on their books. Now, that’s not the case for all companies. Some companies, you know, it might be the fifth largest expense. And if the company is not even making profits—for example, some tech companies that are growth-oriented—they may not even have net income, so taxes may not be a significant expense for them. So it doesn’t distribute evenly for every company out there.
So, you know, for those investors investing in dividend-earning companies, there could be an impact to increasing taxes on corporations to the amount of dividends that those investors receive, whereas other investors who are more growth-oriented or investing in startups, they may not see as big of an impact, simply because those companies don’t pay a lot of taxes since they may not have a significant net income or any net income at all.
Again, only time will tell how this will actually eventually impact companies. But one area that’s not talked about quite as often is how our tax rates compare to the other countries throughout the world. One of the main reasons that the tax rate was lowered to that flat 21% tax rate was simply because America was not very competitive in the past when it came to our corporate tax rate. There were many countries out there that had lower tax rates, and a lot of companies were taking their businesses and moving them elsewhere, specifically to countries like Ireland. And by doing so, they were able to benefit from those lower tax rates. So increasing our corporate tax rate back to what it was before could have negative impacts to companies migrating elsewhere. And that’s why I think that discussion about like maybe the 28% tax rate is a little too high and something more like 25% might be more palatable.
MIKE: Well, Hayden, you’ve given us a great overview of what’s being proposed. I think it bears repeating we are really at the very beginning of what is going to be a long process on Capitol Hill. And it’s virtually certain that these proposals will change significantly as they work their way through the Congress. In fact, there’s no guarantee right now that any of them will pass Congress at all. Given all that uncertainty, should investors be doing anything right now, or is this more of a “wait and see how things play out” kind of situation?
HAYDEN: I think it’s more about wait and see for investors. I don’t think at this point in time that we should have too many reactions to what we’re hearing because these are just proposals. They’re not even in Congress yet. We haven’t even heard the debates in Congress about what they do or don’t want to have in the final bill. And in the end, I think we’re going to have an opportunity to see what the final bills look like long before they pass. And at that time, then we can have maybe a deeper discussion as to what investors should be doing and what actions they should be taking.
A lot of investors are already contacting advisors about some of these proposals and are very concerned. But I think the big takeaway is that investors shouldn’t base any decisions that they’re making right now on proposals—and specifically, tax-related proposals. Because in the end, the general recommendation is keep focused on making your decisions based on does your portfolio meet your risk tolerances? Does your portfolio have proper diversification? Those kinds of things are what should drive your decision-making process, not so much taxes.
MIKE: Well, Hayden, I expect we’ll have you back on the podcast later this year as we get more details on how these proposals evolve. But thanks so much for being here today to get this conversation started.
HAYDEN: Thanks. It was great being here, and I look forward to coming back.
MIKE: That’s Hayden Adams, director of tax and financial planning at the Schwab Center for Financial Research.
In my Why It Matters segment, last week saw the one of the rarest events in politics—the once-every-10-years announcement of the new Congressional apportionment. After each census, states gain and lose Congressional seats, as well as electoral votes in presidential elections, based on changes in population. Last Monday, the U.S. Census Bureau made the announcement that Texas will gain two Congressional seats, while five states—Colorado, Florida, Montana, North Carolina, and Oregon—will each gain one seat.
At the same time, seven states will lose one seat in Congress and one electoral vote in presidential elections: California, which lost a seat for the first time in its history; Illinois; Michigan; New York; Ohio; Pennsylvania; and West Virginia.
There are some incredible stories behind these results. For example, if New York had 89 more people—just 89—then that state would have kept the seat it lost, and Minnesota would have lost a seat.
New York and Florida are great examples of how much population trends have changed this country—in the 1940s, New York had 45 seats in the House of Representatives, and in 2022, they will have 26. By contrast, Florida had just eight seats in the House in the 1950s; in 2022, it will have 28, more than every state other than California and Texas.
But experts have estimated that the reshuffling alone could mean Republicans gain anywhere from three to six seats in the House in 2022—and that’s before any state has actually drawn its district lines, where gerrymandering and other political horse-trading could come into play. The bottom line is that these changes are likely to slightly favor Republicans in 2022—and, given the narrow margin today, every seat will matter a great deal in the midterm elections.
This story is just beginning—few things are more politically complicated in every state than drawing Congressional district lines. I’ll be keeping track of this process as it unfolds in the months ahead.
That’s all for this week’s episode of WashingtonWise Investor. I’ll be back in two weeks, so please take a moment now to follow the show in your listening app so you don’t miss an episode. And if you like what you’ve heard, leave us a rating or a review—that really helps new listeners discover the show.
For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.