Brewing battle over tax hikes to test Democratic unity

An emerging proposal from the White House and Senate Democratic leaders to pay for President Biden’s infrastructure agenda is setting the stage for a major battle in Congress that will test the support of moderates concerned about hiking taxes.

Key centrists such as Sens. Joe Manchin (D-W.Va.), Kyrsten Sinema (D-Ariz.), Jon Tester (D-Mont.), Maggie Hassan (D-N.H.) and Mark Kelly (D-Ariz.) have largely avoided questions about Biden’s tax agenda, which is focused on raising hundreds of billions of dollars from corporations and wealthy Americans. 

To date, much of the debate in Congress has focused on how to pay for a scaled-down $1.2 trillion bipartisan infrastructure package and the contours of a more expensive measure that Senate Majority Leader Charles Schumer (D-N.Y.) plans to pass under a budget reconciliation process allowing Democrats to sidestep a GOP filibuster.

But the brewing battle over tax policy is starting to heat up as lawmakers return to Washington for a crucial work period when Democrats will begin hashing out the budget resolution that sets in motion the legislative vehicle Democrats intend to use to pass some of the party’s biggest priorities, without any GOP support.

Schumer and Democrats on the Senate Budget Committee have discussed a $6 trillion reconciliation package that would include $2.4 trillion in tax increases and legislation to lower the price of prescription drugs that would save the federal government an estimated $600 billion over 10 years.

“They’re all trying to figure out what the bottom line is,” said a person familiar with the internal negotiations. “Schumer had $2.4 trillion [in tax revenues] plus $600 billion from the Medicare drug-price negotiation. He’s trying to figure out: ‘What can I get my caucus to support? What’s the revenue number?’ It’s not clear to me he can get $3 trillion.”

“There’s a lot of pressure on these people, pressure from both sides. Manchin has been very clear he wants it all paid for,” the source added, meaning no deficit spending.

Manchin dealt an early blow against Biden’s tax plans by declaring months ago that he wouldn’t support raising the corporate tax rate to 28 percent, proposing a compromise target of 25 percent instead.

That 3 percentage point difference would cost Biden’s plan more than $300 billion in revenue, as the White House envisions raising $858 billion over a decade by hiking the rate to 28 percent.

Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, said Manchin has changed expectations on where the corporate tax rate will end up.

“Biden hasn’t explicitly said he’s changing the plan to 25 percent, which is what Joe Manchin wants … but the hard reality of narrow majorities in both houses is that if Manchin says 25 percent that’s kind of the [limit]. So that seems like the most likely thing where you can say it’s going to be different from what [Biden] proposed initially.”

Manchin has further complicated the political calculus by insisting that Congress pay for as much of the budget reconciliation package as possible.

“I want to make sure we pay for it,” Manchin said on ABC’s “This Week” in late June. “I do not want to add more debt on.” 

Meanwhile, some Democratic-allied groups are pushing for an even bigger tax package, arguing it’s a once in a generation opportunity to improve the tax code.

A coalition of labor and liberal advocacy groups including the AFL-CIO, the American Federation of Teachers, the Center for American Progress and the National Employment Law Project sent a letter to Capitol Hill last week urging lawmakers to support a $4 trillion tax package.

The letter cited recent reporting by ProPublica that found the nation’s 25 wealthiest individuals paid a tax rate of only 3.4 percent between 2014 and 2018.

“If Congress is serious about fixing this problem, you must require that the wealthy and corporations pay at least $4 trillion more in taxes over the next ten years,” the groups wrote. “Failing to restore fairness to our tax code would not only slow our economy but it would ensure that economic growth continues to be concentrated with the wealthiest Americans.”

Moderate Democrats, however, have raised concerns about various elements of Biden’s $2.39 trillion tax plan.

House Agriculture Committee Chairman David Scott (D-Ga.) has criticized Biden’s plan to get rid of the so-called step-up basis that shields unrealized capital gains from taxation when they are passed on after death. 

“I am very concerned that proposals to pay for these investments could partially come on the backs of our food, fiber, and fuel producers,” Scott wrote in a letter to Biden last month.

“In particular, ‘step-up in basis’ is a critical tool enabling family farming operations to continue from generation to generation,” Scott wrote. “The potential for capital gains to be imposed on heirs at death of the landowner would impose a significant financial burden on these operations.”

The Democratic chairman warned that a proposal to delay tax liability on family farms would likely “result in further consolidation in farmland ownership.”

Tester has also flagged the proposal to tax unrealized capital gains at death as a significant concern.

“I’m a small farmer in eastern Montana and it would have significant effects on me,” he told The Wall Street Journal last month.

Biden’s proposal to reform the taxation of capital income will raise $322 billion over 10 years.

The White House has said it plans to include protections for owners of smaller farms and businesses facing big tax hits but has yet to lay out those policy details.

Gardner, of the Institute on Taxation and Economic Policy, said concerns raised over the impact of eliminating the step-up in basis on family farms “have been enough to doom efforts of this kind in the past.”

Democratic-allied policy experts say Biden has other proposals he could use to replace any that get stripped out because of political opposition. His options include a tax surcharge on the wealthy or lowering the exemption for the estate tax back down to $5.5 million for individuals and $11 million for couples, where it stood before the 2017 GOP tax-cut measure was enacted under former President Trump.

The emerging prescription drug plan is also sparking pushback from some congressional Democrats.

Rep. Scott Peters (D-Calif.), an ally of the pharmaceutical industry, which employs many of his constituents, has voiced concerns about letting Medicare use its leverage to lower the cost of prescription drugs.

Peters joined nine other moderate Democrats in May in writing a letter to Speaker Nancy Pelosi (D-Calif.) warning that Congress should “preserve our invaluable innovation ecosystem,” arguing that cost controls could dampen the development of new drugs.

Republican lawmakers and conservative activists are vowing to pull out all the stops to oppose any infrastructure and tax package that moves under budget reconciliation.

Senate Minority Leader Mitch McConnell (R-Ky.) promised Tuesday to put up a “hell of a fight.” 

Conservative activists are already ramping up pressure.

“If you have 10 House [Democratic] members, you can stop anything. No Republican in the House or Senate will vote for tax increases,” said Grover Norquist, the president of Americans for Tax Reform, a conservative advocacy group. “This is how the Democrats lost the House and Senate in 1994 and the House and six Senate seats in 2010,” referring to tax increases by past Democratic majorities.

Policy experts across the ideological spectrum predict the battle over paying for Biden’s infrastructure priorities in the reconciliation bill will be one of the toughest of the 117th Congress.

“Obviously it’s always easier to give out stuff,” said Seth Hanlon, a senior fellow at the Center for American Progress. 

He said Democrats are “still discussing” how much of Biden’s infrastructure program can be deficit-financed without having to raise taxes.

Hanlon is one of the outside policy experts arguing for a bigger tax package.

“It’s unlikely that they’ll only pay for half, I think they’ll definitely want to pay for more than half,” he said, adding, “$2.4 trillion of tax revenue is not going to be enough given that there’s considerable reluctance to deficit spend.”

Some lawmakers such as Sen. Chris Murphy (D-Conn.) have argued the cost of one-time infrastructure investments don’t need to be offset because they will pay for themselves over the long-term by providing substantial economic benefit to the nation.

Hanlon said the tax debate will get more attention when Senate and House Democrats advance their budget resolution in late July or early August.

“There’s going to be many questions to be decided afterward. The budget resolution does necessarily shape the overall framework, but there are going to be many policy questions that are still to be resolved,” he said.