Tax Trick or Treat?
With Halloween just a few days away, Democrats are still trying to decide what treats they will include in their slimmed-down Build Back Better legislation. The bill, which started with an initial price tag of $3.5 trillion, has been negotiated down to about $1.75 trillion to win the support of moderate Democrats. (Republicans, of course, call the whole deal a bag of tricks despite the lower cost.)
On the spending side, Senate Majority Leader Chuck Schumer (D-N.Y.) has said party leaders are hung up on just a few things: prescription drug pricing and climate change provisions, along with an expansion of Medicare. On the tax side, however, there is even more disarray. Last week, President Joe Biden went on national TV and promised the legislation would not raise corporate or personal income tax rates. Why? The president acknowledged his party just did not have the votes to pass those plans in the Senate, where Democrats can’t afford to lose even a single senator’s vote and pass the bill.
That statement left Democrats scrambling a bit.
What has the party come up with in place of those revenue raisers? Here are a few ideas that are still on the tax table.
What Is Sen. Wyden’s Wealth Tax?
Senate Finance Committee Chair Ron Wyden (D-Ore.) today unveiled his idea for a “wealth tax.” Specifically, the plan would tax the unrealized gains of the nation’s 700 or so billionaires annually, kind of. (Right now these gains are taxed only when an asset is sold.) According to The Hill, here is how it would work:
For tradeable investments like stocks, each year, affected taxpayers would pay taxes on gains or claim deductions for losses. They would be able to carry forward or carry back losses for a certain term to reduce their tax liability.
For non-tradable assets like real estate or art, Sen. Wyden’s plan would avoid asking the Internal Revenue Service (IRS) to assess the value of these assets each year. Instead, taxes would be due when the asset is sold and taxpayers would have to pay a “deferral recapture amount” at sale too. The “deferral recapture amount” would be intended to equal what taxpayers would have paid if they had been paying taxes each year on those assets.
Still confused? Here is how the financial newsletter Morning Brew describes the plan: it would be like taking a stack of chips from your craps winnings before you cashed them in.”
Sen. Wyden’s proposal would apply to taxpayers who either have assets of more than $1 billion or, for three years in a row, report income of more than $100 million. That means the levy would impact only about 0.000005 percent of the United States’ approximately 143.3 million taxpayers. The pool of unrealized gains is substantial, however. Morning Brew estimates the wealthiest 169 Americans “are sitting on roughly $516 billion in unrealized gains.”
As alluded to above, Democrats are going in this direction because Sen. Kyrsten Sinema (D-AZ) is opposed to raising tax rates on corporations and high-income individuals. Which begs the question: Does Sen. Wyden’s plan solve Democrats’ vote-wrangling problem?
Perhaps not. As The Hill reported this morning, “It’s unclear whether the proposal can get widespread support among congressional Democrats.” Indeed, “A number of House Democrats have been hesitant to back it.” The list of skeptical House Democrats includes some big names: Speaker Nancy Pelosi (D-Calif.) and House Ways and Means Committee Chair Richard Neal (D-Mass.). These two certainly will need to be on board before this plan can move forward.
House Democrats are not the only ones who are skeptical. A short while ago, Sen. Joe Manchin (D-WV), another crucial moderate Democrat in the Senate, poured cold water on the idea, saying, “I don’t like it. I don’t like the connotation that we’re targeting different people, as people that…contributed a to society and create a lot of jobs.” Morning Brew quoted New York University finance professor Aswath Damodaran who said Sen. Wyden’s plan is “perhaps the worst thought-through and most ineffective attempt ever at rewriting tax code.” Robert Willens, one of the country’s leading tax and financial-accounting experts, told Politico it is unclear how the IRS would put a price on assets. While stocks “are easy to value,” art and real estate are not. Willens also said, “A legal challenge over whether the tax is covered by the income taxes permitted under the 16th amendment is a certainty.”
So it may be back to the drawing board for the White House and Democratic leaders in Congress on the individual tax side of the equation.
Democrats Do Agree on a Global Minimum Corporate Tax
Democrats also have proposed a global minimum corporate tax. (Treasury Secretary Janet Yellen is a huge proponent of this idea.) Yesterday, Sen. Wyden, along with Sen. Elizabeth Warren (D-Mass.) and Sen. Angus King (I-Maine), released legislative text that calls for a 15 percent minimum tax on corporate profits. It is estimated the tax would apply to about 200 companies with more than $1 billion in profits. The senators said, “[T]his proposal would generate hundreds of billions in revenue over ten years.”
The senators singled out Amazon in their explanation of the bill. Amazon, they said, paid only a 4.3 percent effective tax rate on its $45 billion in profits over the last three years. That rate, these senators pointed out, is “well below the 21 percent corporate tax rate.” The senators also noted that, “between 2008 and 2015, 40 percent of our biggest companies paid zero or less in federal taxes in at least one year.”
Most Democrats, including Sens. Sinema and Manchin, are on board. In fact, Sen. Sinema took to Twitter and said, “This proposal represents a commonsense step toward ensuring that highly profitable corporations — which sometimes can avoid the current corporate tax rate — pay a reasonable minimum corporate tax on their profits, just as everyday Arizonans and Arizona small businesses do.”
According to The Hill, in general, the proposal has received a good reception from Democratic lawmakers. That said, the provision is estimated to increase the government’s revenue by only about $400 billion over the next ten years, leaving a significant gap the Democrats will have to cover to fully pay for the Build Back Better Act.
Closing the Tax Gap for All Taxpayers
According to the IRS, the federal government loses out on about $500 to $600 billion in revenue each year because American taxpayers are not quite truthful on their tax returns.
Democrats have a plan to address capture some of that revenue. Back in the spring, President Biden proposed to have all financial institutions (including financial technology companies) report all transactions valued at $600 or more to the IRS. Business groups, particularly those representing smaller businesses and financial institutions, have loudly opposed this legislation.
Democrats reportedly have listened and are discussing a plan to increase the reporting threshold from $600 to $10,000.
That agreement still might not be good enough for Sen. Manchin. Indeed, according to The Hill, Sen. Manchin raised his concerns directly with the president. Specifically, Sen. Manchin said he told President Biden, “Do you understand how messed up that is, to think that Uncle Sam is going to be watching? … I said, ‘Mr. President … This cannot happen.’”
If it does happen, Sen. Manchin is unlikely to be the only Democrat to oppose it. According to a poll from the right-leaning firm Rasmussen, about 70 percent of Americans oppose the financial reporting proposal. You can be certain that Republicans will make an election issue out of this provision if it makes it into the final bill.
Will They Have SALT with That?
Democrats have at least one other tax issue to deal with: the state and local tax (SALT) deduction. A group of House Democrats led by Rep. Thomas Suozzi (D-N.Y.) has said they will not vote for the Build Back Better Act unless it raises or eliminates the cap on the SALT deduction. (As a reminder, the 2017 tax reform bill signed by President Donald Trump limited these deductions to $10,000 a year. That provision hit taxpayers in high-tax states like New York and California the hardest.)
With House Speaker Nancy Pelosi (D-Calif.) having only a three-vote margin in her chamber, she can’t afford to lose these SALT-y Democrats and pass the bill.
As of this morning, there’s no SALT provisions in the bill, but we have heard there are discussions about including a two-year “pause” on the existing cap. This idea would, of course, be a sort of legislative sleight-of-hand: a two-year pause wouldn’t cost all that much in the final bill, but it would give Democrats in those states air cover to vote for the final package.
But then they would have to deal with the election fallout.
Republicans also are likely to make a campaign issue out of SALT if this provision if it makes it in the final bill. Senate Minority Leader Mitch McConnell (R-Ky.) previewed those arguments yesterday, in fact. On the Senate floor, Sen. McConnell said, “Even as our colleagues draft the biggest tax hikes in half a century, they cannot resist the concept of special tax cuts for high earners in blue states.”
What Happens Next?
Speaker Pelosi and President Biden were hoping to have a vote on the Build Back Better Act in the House this week. That seems incredibly unlikely.
Will we at least see a framework that moderate Democrats like Sens. Sinema and Manchin and the House SALT caucus can support?
Today and tomorrow will be telling — but a new framework also could raise additional issues for Democrats. In particular, we will be watching how House progressives react. They have been clear that they see Democratic control of the House, Senate, and White House as a historic opportunity to make corporations and the wealthy pay their fair share.
They might not be willing to give up on that dream so easily, resulting in a very dark Halloween for the White House.