The Coming Infrastructure Package Could Have Significant Tax Implications
If you Google “infrastructure week,” the top two articles returned refer to the annual celebration as a “joke” and a “punchline.” Every year, lawmakers and lobbyists tout the need to invest in the country’s roads, bridges, and schools and—every year—a bill never makes it to the finish line.
President Joe Biden has made it clear his next priority, after signing a $1.9 trillion COVID-19 relief bill into law last week, is a massive infrastructure package.
Will he need the luck of his Irish heritage to get it done? Very likely, along with the will on Capitol Hill to raise taxes.
One reason an infrastructure package has been so elusive in Congress is that lawmakers simply cannot settle on how to pay for the investments, no matter how badly they might be needed back home. President Biden and his administration understand that fact, and have made it clear this week that they have a plan. A massive tax plan.
Will Congress go along? And what could happen in the 2022 midterm elections if it does?
Let’s take a look.
During the 2020 presidential election, the Biden campaign put forward a program that called for about $3 trillion in tax increases. While the White House has not put out a formal tax proposal yet, when they do it is likely to include at least some of the elements of the campaign outline. According to several news sources, that means the White House is likely to propose:
Raising the corporate tax rate from 21 percent to 28 percent;
Increasing the top income tax rate from 37 percent to 39.6 percent for individuals who earn more than $400,000 annually;
Expanding the tax on individuals’ estates when they die;
Increasing taxes on pass-through businesses such as limited liability companies; and
Taxing capital gains and dividends at an ordinary income tax rate of 39.6 percent for individuals who earn more than $1 million a year.
Bloomberg estimates that these elements likely would increase taxes by around $500 billion. A big boost, but far short of $4 trillion in infrastructure investments that some Democrats have said they want in the forthcoming bill. In a separate story, Bloomberg said the tax increases likely would not take effect until 2022 and some advisers reportedly have urged the president to delay the impact even longer—until pandemic-related unemployment comes down.
While the White House is putting the finishing touches on its proposal, U.S. Treasury Secretary Janet Yellen is working with the Organization for Economic Cooperation and Development (OECD) on a plan to update global tax rules. The OECD’s draft initiative would include a nonbinding global minimum tax on multinational corporations. (Simply, as international tax expert Florence Barnes explained in 2019, a global minimum tax would “ensure all international businesses are subject to the same minimum rate of corporate tax on their profits, therefore disincentivizing them from entering into profit shifting arrangements.”)
One initiative the White House does not support? Raising the gas tax, which currently is set at 18.4 cents per gallon for regular gasoline and 24.4 cents per gallon for diesel. Those levies are in addition to state and local gas pump taxes. Even though this tax directly supports highway spending, raising the levy is unpopular because it would impact every single American who drives a car that runs on gasoline. In other words: it would violate President Biden’s pledge not to increase taxes on anyone who earns less than $400,000 a year.
According to Politico, however, the White House might not be able to avoid other transportation-related taxes. On Tuesday, the Washington-based newspaper reported the Senate Finance Committee is taking a hard look at how to fund Democrats’ expansive infrastructure plan and is considering taxing mileage on trucks specifically. The American Trucking Association, of course, is opposed to the idea and even called truck-only fees “discriminatory.”
Capitol Hill Democrats also are pushing for other priorities. As Axios reported this week, Senate Majority Leader Chuck Schumer (D-N.Y.) wants the White House to include some tax cuts in his proposal as well. Specifically, he wants President Biden to repeal the $10,000 limit on deducting state and local taxes that was included in President Donald Trump’s 2017 tax reform bill. If included in the package, this provision, which would decrease government revenue by about $357 billion over five years, would mean President Biden and Democrats on Capitol Hill would need to find even more “revenue raisers” to pay for their infrastructure legislation.
And that’s to say nothing of the politics. As Axios said, “Repealing the cap is deeply unpopular with progressives, who argue doing so would favor the rich.” Republicans also have opposed the idea since it would benefit mostly larger, high-tax states like New York and California.
In general, as The Hill shouted in a headline Tuesday, Republicans will put up a “huge fight” over these proposals.
Leading the opposition from outside of Congress, The Hill said, will be Americans for Tax Reform and its leader Grover Norquist. Norquist already has focused on how the proposed new tax levies will impact the average American family. He told The Hill, “You can’t talk to suburban moms and dads by raising their taxes and raising taxes on the companies they invest in.”
Bloomberg Intelligence tax analyst Andrew Silverman seemed to agree. He said, “Raising the corporate tax rate has, in many ways, a broad economic impact. It doesn’t distinguish between large and small corporations. Taxes on corporations might reduce the amount that they can contribute to mutual funds, pension fund holders and employee stock plans, as well as how much they pay employees.”
As a result of the partisan divide, Democrats are again likely to use budget reconciliation rules to try to get an infrastructure package through Congress. (As we explained in a previous update, these rules allow spending-related legislation to pass with a simple majority vote in the Senate, therefore avoiding the filibuster.)
In an appearance with U.S. Transportation Secretary Pete Buttigieg this week, Sen. Ben. Cardin (D-Md.) was caught on microphone privately acknowledging that Congress would need to address infrastructure/tax legislation through the reconciliation process given the partisan divide over how to pay for the package.
Using the reconciliation process is politically risky, especially when it comes to a potentially unpopular tax increase—and, as Bloomberg noted, if enacted into law, President Biden’s proposed tax increases would be the largest new levies in nearly three decades.
Consider what happened the last time Congress narrowly passed a major tax increase, which President Bill Clinton signed into law in August 1993.
The similarities between then and now are eerie. As Slate recalled in 1996, during his White House campaign, Clinton had promised to raise taxes only on the wealthy. About 80 percent of increases he signed impacted only businesses or taxpayers who paid the top income tax rate. The Clinton bill also cut some Social Security taxes and expanded the Earned Income Tax Credit, which benefits taxpayers at the bottom of the income scale.
But, the legislation did “directly” impact middle-income families by increasing the gas tax by 4.3 cents per gallon. The levy cost the average family $45 per year, but it was deeply unpopular.
By July of 1993, The New York Times was reporting the Democratic majority in Congress was in peril because of the proposed tax increases. The newspaper explained Republicans pounced on Sen. Kent Conrad, a Democrat from North Dakota who voted for an early version of the tax increase. The GOP argued Sen. Conrad had “turned his back on the people of North Dakota and voted with Bill Clinton for the largest tax increase in the history of the world.”
The Times also noted Democrats in Arizona, Nevada, and New Jersey had voted against President Clinton’s because they did not want to be “tarred with unpopular elements like its proposed increase in gasoline taxes.”
That August Vice President Al Gore cast the tie-breaking vote in the Senate to push the package to President Clinton’s desk for signature.
Based on the results of the 1994 midterm elections, Americans were not happy with that vote. Democrats lost 54 seats in the U.S. House of Representatives and eight seats in the U.S. Senate. At the time, Baltimore Sun columnist Theo Lippman, Jr. proclaimed, “Bill Clinton Is the Mid-Term Election Loser of the Century.” (For comparison, Democrats currently have only a three-seat hold on the House majority and control the Senate, which is split 50-50, only because Vice President Kamala Harris casts the tie-breaking vote.)
Gary Jacobson, a professor of political science at the University of California at San Diego who completed a statistical analysis of what congressional votes impacted the outcome of the 1994 election, told U.S. News & World Report, that “the vote for the tax increase” had a huge impact on the outcome of the campaign. (Notably, in his second term President Clinton signed legislation to reduce taxes, including levies on capital gains and the estates of wealthy individuals and families.)
Will the outcome be different this time if Democrats pass a tax increase using a vice-presidential vote in the Senate?
Perhaps, at least based on Gallup’s tracking poll gauging how Americans feel about their own tax rates. Gallup asks voters a single question: do you feel like you pay too much in taxes, too little, or just the right amount?
In March 1993, about 55 percent of Americans thought their taxes were too high. In Gallup’s latest survey, that number is down to 46 percent. A majority of Americans actually think their tax rates are just about right or too low.
A nine-point shift might not look significant on paper, but it might be enough to get Democrats comfortable with a tax increase – especially if a gas tax is left out of the equation.