Democrats have floated a wide menu of tax hikes to pay for their infrastructure and social spending package. Here is what has been proposed and what has a chance of becoming law.
It has been months since President Joe Biden’s administration first announced plans for sweeping legislation intended to improve healthcare, retirement, transportation, the country’s technological infrastructure, and combat climate change, among many other Democratic priorities.
The final price is still in flux after initially clocking in at $3.5 trillion and now stands at about $2 trillion, according to Biden. How much the spending package could end up costing may come down to which taxes Democrats are able to agree on, and that largely hinges on two centrists in the party: Sens. Joe Manchin of West Virginia and Kyrsten Sinema of Arizona.
Because the Senate is evenly split with Vice President Kamala Harris serving as the tiebreaking vote, the party can’t afford to lose support from either Manchin or Sinema, meaning they have outsize control over what taxes will end up being included in the final package.
Corporate tax rate
The 2017 GOP tax cuts lowered the corporate tax rate from 35% to 21%. The Biden administration initially hoped to hike the rate to 28%, but that proposal was met with fierce opposition from business groups that feared such a rate would harm U.S. global competitiveness and lead to higher prices in an economy already racked with too-high inflation.
Manchin also said that he would only be comfortable with a 25% rate.
Last month, Democrats on the House Ways and Means Committee voted to raise the rate to 26.5%, a compromise.
But Democratic hopes for a corporate tax rate hike were effectively dashed when Sinema signaled that she is not willing to raise the rate. Biden additionally revealed during a recent town hall event that Sinema “will not raise a single penny in taxes on the corporate side and/or on wealthy people, period.”
The administration has also said it wants to increase the top marginal tax rate on individuals making over $400,000 per year to 39.6%, up from the current 37% rate. This would also apply to married couples filing jointly who earn over $450,000 annually. Increasing the rate by that degree could reportedly raise about $170 billion over the next decade.
Manchin has indicated that he would vote for raising the rate to 39.6%. But Sinema has also ruled out rate increases on individual income, forcing Democrats to abandon the plan.
One proposal to finance the spending package was to eliminate the “step-up in basis” at death for capital gains above $1 million per person or $2.5 million per couple. The step-up in basis prevents heirs from being taxed on the increase on assets that occurred during the decedent's life. Sometimes called the “trust fund loophole” by Democrats, the step-up in basis effectively leaves some capital gains untaxed when they are passed down across generations, although the estate tax may apply.
Many Democrats argued that step-up in basis affords the wealthy a loophole to avoid paying taxes, but Republicans say that the policy doesn’t just target the ultra-wealthy but also farmers and small businesses .
Democrats from rural states expressed concern over the funding mechanism, and 13 Democratic lawmakers sent a letter to House Speaker Nancy Pelosi and leadership earlier this year pointing out how it could affect their constituents, many of whom own family farms. Additionally, Sen. Jon Tester of Montana, a Democrat, said the issue was a “non-starter.”
Party leadership declined to gut stepped-up basis when tax legislation was introduced to the House Ways and Means Committee last month.
IRS bank reporting proposal
Another proposal being discussed would require banks to report all account inflows and outflows of over $10,000 to the IRS as a way of cracking down on tax fraud. The administration’s first plan was to do so with all transactions over $600 , although that was met with fierce resistance by the GOP and banking industry as being too invasive and logistically cumbersome.
Still, Republicans are up in arms over the notion of the IRS “surveillance” proposal. Top Republican lawmakers recently held a news conference where they bashed the measure as intrusive and giving the government too much insight into people's checkbooks.
Manchin appeared to deliver the death blow to the proposal during an appearance before the Economic Club of Washington, D.C., on Tuesday. Manchin said he told Biden the idea was “screwed up” and that the president agreed.
“So, I think that one is going to be gone,” he quipped.
Democrats want to provide the IRS an extra $80 billion over a decade and give it more authority, which the administration claims would raise $700 billion over the next decade. Republicans see that figure as unlikely and fear giving the IRS more power after a tax leak resulted in the information of the wealthiest people being handed over to a media outlet .
Capital gains rate
The Biden administration had also proposed big changes to the capital gains rate for top earners. The White House was seeking to nearly double the capital gains rate for the highest earners from 20% to a new rate of 39.6%. People making more than $1 million would have also faced a federal rate of up to 43.4% when an existing Obamacare surtax on investment income is considered.
Democrats on the Ways and Means Committee then cut back on the proposal and agreed to raise the top capital gains rate to 28.8%. That number was also slightly above the 28% capital gains level that Manchin had been pitching to his colleagues.
This is another funding mechanism that will likely be opposed by Sinema, who has drawn a line in the sand on increasing top marginal rates on corporations, capital gains, or individuals.
While the proposed increases to the capital gains tax rate for the highest earners appear to be on life support, there has been growing interest among Capitol Hill Democrats to tax the unrealized capital gains of billionaires . The tax would target just several hundred people rather than a wide swath of those making over $400,000, as the administration had envisioned.
Senate Finance Chairman Ron Wyden is spearheading the effort. It is expected to focus on those with $1 billion in wealth or people making at least $100 million in income for three years in a row.
A Finance Committee spokesperson previously confirmed to the Washington Examiner that the new tax would only apply to tradable assets like stocks.
House Speaker Nancy Pelosi said this weekend that the tax would likely raise between $200 billion and $250 trillion over a decade.
Manchin said on Tuesday that he is waiting to see the details of the plan before he announces whether he supports it.
Minimum tax/changes to international taxation
While Sinema is opposed to increasing the headline corporate tax rate, she is reportedly open to a 15% minimum tax on the foreign earnings of corporations. The measure is intended to cut down on certain tax breaks that corporations have been able to legally take advantage of to reduce their effective tax rates.
International tax changes included in the current House version of the legislation would raise about $136 billion in a decade, the Tax Foundation calculated. Other changes could raise as much as $550 billion over a 10-year period.
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