By Richard Rubin
September 14, 2021
House Democrats spelled out their proposed tax increases on Monday, pushing higher rates on corporations, investors and high-income business owners as they try to piece together enough votes for legislation to expand the social safety net and combat climate change.
The plan would increase the top corporate tax rate to 26.5% from 21%, impose a 3-percentage-point surtax on people making over $5 million and raise capital-gains taxes—but without the changes to taxation at death sought by the Biden administration. The tax increase details were the last major missing piece in the Democratic agenda, and their release will accelerate lawmakers’ negotiations over which new spending to give priority to and which tax increases they find acceptable.
Democrats have few votes to spare in the House and none in the Senate, and moderate Democrats, such as Sen. Joe Manchin (W.Va.), have called for a narrower proposal with smaller tax hikes than the ones outlined Monday. Republicans are expected to mount unanimous opposition to the proposal, which would reverse many of the GOP tax cuts from 2017.
Democrats plan a committee vote this week on the proposals, which would generate more than $2 trillion that would go toward expanding Medicare, increasing renewable-energy tax breaks and creating a national paid-leave program, among other items.
Democrats also are looking elsewhere to cover the rest of the $3.5 trillion spending and tax-cut agenda they aim to pass this fall. They hope the government can save $700 billion from prescription drug pricing policy changes, and they plan to assert that their agenda would spur $600 billion in budgetary savings from faster economic growth.
Business groups warned Monday that the tax increases would damage the economy.
“Rolling back job-creating tax reforms will slam the brakes on hiring and wage increases,” said Neil Bradley, chief policy officer at the U.S. Chamber of Commerce, who called the bill an existential threat to U.S. prosperity.
In several areas, the committee proposed tax increases that weren’t as far-reaching as those the Biden administration has sought.
It didn’t include the administration’s proposed curbs on oil-and-gas companies’ tax breaks or a provision opposed by banks that would have required annual reporting on account flows to the Internal Revenue Service.
The House plan doesn’t change the income-tax rules that allow unrealized capital gains to go untaxed at death. Rural Democrats had opposed that administration capital-gains plan, and its chances of becoming law are looking slimmer.
The committee made up the money elsewhere with changes to the estate tax, the 3-percentage-point surtax on people making more than $5 million and several tax increases that would affect closely held companies whose owners pay those business taxes on their individual tax returns. The result is that passive investors who borrow against their assets and don’t sell would see relatively little change, while active business owners could see sharp increases in their marginal tax rates.
The changes, when combined with the expanded child tax credit available to households with no income, make the income-tax system much more of a tool for redistribution, said Lawrence Zelenak, a law professor at Duke University.
“It’s using the income tax to take money from only half the population and using it to distribute money to half the population,” he said.
The capital-gains tax increase would be effective as of Monday, with special transition rules for deals with binding contracts that haven’t been completed yet, according to a summary released by the committee.
The proposal will test Democrats’ willingness to raise taxes, and its pieces are designed to hit those above the $400,000 annual income dividing line that President Biden set during last year’s campaign. Democrats agree on the broad direction, but the details may change as the proposal works its way through Congress. Some moderate Democrats favor smaller tax increases, while some senators have proposed tax changes on stock buybacks and partnerships that aren’t included in Monday’s version.
Some lawmakers, including Senate Finance Chairman Ron Wyden of Oregon, insist that tax politics have changed and that Democrats can win votes by strongly advocating that corporations and wealthy Americans pay more.
“It’s important to address the fact that billionaire heirs may never pay tax on billions in stock gains,” Mr. Wyden said Monday, suggesting that he may not accept the House’s capital-gains proposal.
But others, including Ways and Means Chairman Richard Neal (D., Mass.), have been more cautious.
“We seek to help families better afford essentials with the continuation of the expanded child tax credit and investments that will lower the cost of prescriptions and health insurance premiums. And we can do all this while responsibly funding our plans,” Mr. Neal said Monday.
For individuals, the top marginal tax rate would rise to 39.6% from 37% starting in 2022. That tax rate would kick in at taxable income of $400,000 for individuals and $450,000 for married couples, below where the Biden administration had proposed.
The 3-percentage-point surtax would apply to individuals and married couples with adjusted gross income above $5 million.
The proposal released by the committee on Monday is silent on the state and local tax deduction, which was capped at $10,000 in 2017. Raising or repealing that cap is a priority for Democrats from high-tax states such as New York and New Jersey, some of whom have threatened to vote against any tax legislation that doesn’t include the change. Some progressives oppose changing the cap, noting that much of the benefit goes to some of the same high-income households that Democrats are trying to tax more.
Democrats are still trying to figure out what they will do, Mr. Neal and Reps. Bill Pascrell (D., N.J.) and Tom Suozzi (D., N.Y.) said Monday in a joint statement about the state and local tax deduction, known as SALT.
“We are committed to enacting a law that will include meaningful SALT relief that is so essential to our middle-class communities, and we are working daily toward that goal,” they said.
The top tax rate on dividends and long-term capital-gains would rise to 25% from 20% and would apply when income reaches $400,000 for individuals and $450,000 for married couples.
Pass-through businesses, which don’t pay the corporate tax but instead pay taxes on their owners’ individual returns, would be affected in several ways. They would face caps on a special deduction created in 2017, with individuals limited to a $400,000 deduction and married couples limited to $500,000.
Those businesses would also no longer be able to avoid paying a 3.8% tax on their active business income. Currently, taxes of that amount apply to wages, self-employment income and passive income but not other types of income.
Large companies would face a series of tax increases. The top tax rate would rise to 26.5% from 21%. That is below the 28% that the Biden administration proposed but above the 25% that some Senate Democrats are seeking. Smaller companies would get tax brackets with lower rates.
Republicans cut the corporate tax rate from 35% to the current 21% in 2017.
Companies would also face new limits on interest deductions and higher taxes on their foreign income. Notably, the minimum tax on U.S. companies’ foreign income would go up from 10.5% to 16.6%, below the 21% the administration had sought. And companies would be able to use more of their foreign tax credits, softening the blow of that higher minimum tax.
Companies would be able to exclude an amount equal to 5% of their foreign tangible assets from that minimum tax, down from the current 10% but below the administration’s proposal to eliminate that benefit. The minimum tax would be calculated for each foreign country, as the administration has proposed.
The committee also included a series of miscellaneous tax changes. It would reverse the doubling of the estate tax exemption that Congress created in 2017. Instead of that increase expiring at the end of 2025, it would end after 2021. The plan would also limit several estate-planning techniques, including some uses of grantor trusts and asset transfers with discounted values.
High-income people with tax-preferred retirement accounts totaling $10 million or more would no longer be able to contribute to those accounts and would face sharply higher mandatory distributions once the account balances reached that level.
In a provision that would be retroactive to December 2016, the legislation would limit deductions for certain land-rights donations called conservation easements. The government has been attacking those donations in court, arguing that promoters are using inflated values to generate and sell tax deductions.
The plan would also accelerate higher taxes on corporate executive compensation and impose higher taxes on tobacco products.
The Internal Revenue Service would get nearly $80 billion over a decade to beef up enforcement. That matches the administration plan, which would roughly double the size of the tax agency.
Beyond tax cuts spelled out over the weekend, Monday’s measure includes some newly introduced tax breaks. It would delay a tax increase slated to start next year that would have hurt companies with significant research expenses. Local newspapers would get a new payroll tax credit for employing journalists. Labor-union members would get a new deduction for up to $250 in dues, even if they don’t itemize their deductions.