House Democrats take step back from Biden on tax hikes

House Democrats on Monday released tax-increase legislation that scales back some of President Biden’s key proposals as they work to craft a massive social spending package that can get the votes to become law.

The bill text released Monday by the House Ways and Means Committee includes a variety of tax increases targeted at wealthy individuals and corporations in an effort to help pay for $3.5 trillion in spending and tax cuts in areas such as child care, climate and health care. 

But in many ways it is not as aggressive in raising taxes as Biden has proposed, prompting criticism from progressive groups.

“They have a once in a lifetime opportunity to address the egregious, unfair treatment that the wealthy get in the tax code, and the committee has refused to do it,” said Erica Payne, president and founder of the Patriotic Millionaires.

There are several areas where House Democrats’ proposal does not go as far in increasing taxes on corporations and the rich as Biden had proposed earlier this year.

The Ways and Means Committee would raise the corporate tax rate for income above $5 million from 21 percent to 26.5 percent, while Biden had called for a 28 percent corporate tax rate. 

The committee called for raising the top capital gains rate from 20 percent to 25 percent, while Biden proposed raising it further to match the top tax rate for wage income. And the committee’s bill does not include a proposal Biden offered to tax capital gains at death.

Additionally, the committee’s proposal limits but does not fully eliminate the carried interest tax break benefiting investment fund managers, while Biden would eliminate the preference. And the committee’s proposal would not increase a minimum tax on U.S. corporations’ foreign earnings by as much as Biden would.

House Democrats released their bill months after Biden offered his proposals, and their measure appears to take into account some of the criticism from moderate Democrats about the president’s plans. Biden’s proposals on the corporate tax rate, capital gains and international tax changes have all drawn concerns from moderates.

There are also places where the committee’s bill matches Biden’s plan or goes beyond its scope. For example, Biden proposed raising the top individual tax rate from 37 percent to 39.6 percent. The Ways and Means Committee does this and also would impose a 3 percent surtax on individuals’ income above $5 million. Both Biden and the Ways and Means Committee also proposed providing the IRS with an additional $80 billion to strengthen tax enforcement and update technology.

Committee Chairman Richard Neal (D-Mass.) said in a statement Monday that his panel is “responsibly funding” their spending plans.

White House principal deputy press secretary Karine Jean-Pierre on Monday called the legislation a “first step.” She said it advances Biden’s goals of cutting taxes for families, repealing former President Trump’s tax cuts for the wealthy and corporations and not raising taxes on families making under $400,000.

Left-leaning groups were less positive.

Steve Wamhoff, director of federal tax policy at the Institute on Taxation and Economic Policy, said the committee’s proposal would be a “huge improvement” over the current tax code. But he also said that a lot of the income of very wealthy people would not be taxed at all, because the committee didn’t adopt Biden’s proposal to tax capital gains at death or take similar action.

“The Ways and Means proposal does not go as far as the president in many regards, and it would leave some huge problems in the tax code,” he said.

Senate Democrats have been working on their own tax proposals and could end up taking a different approach on capital gains than their House counterparts. Senate Finance Committee Chairman Ron Wyden (D-Ore.) said Monday that he is making it a priority to ensure that wealthy heirs pay taxes on investment gains.

“It’s important to address the fact that billionaire heirs may never pay tax on billions in stock gains,” Wyden said in a statement.

Groups are also urging the Ways and Means Committee to go further in increasing the rate of a U.S. minimum tax on corporations’ foreign earnings in order to close the gap between the rates that companies pay on their domestic and foreign profits. The committee has proposed a rate of about 16.5 percent, compared to the administration’s proposed 21 percent rate.

“The Ways and Means draft missed the opportunity to narrow the differential between domestic and foreign profits,” said Ryan Gurule, policy director of the Financial Accountability and Corporate Transparency Coalition, whose membership includes many progressive organizations. “Equalizing these rates increases incentives to invest in the United States.”

While progressives are arguing that House Democrats aren’t going far enough in raising taxes on the wealthy and corporations, the business community and conservatives are attacking the Ways and Means Committee bill from the opposite angle, arguing that the corporate tax increase would hurt the U.S. economy.

“Any increase in America’s globally competitive corporate rate would position our country even further behind global competitors like China — and carry devastating consequences for American workers,” a group of businesses and industry groups called the RATE Coalition said in a statement.

The Joint Committee on Taxation estimated that the Ways and Means Committee’s section focused on tax increases would raise nearly $2.1 trillion over 10 years. That estimate does not take into account the IRS funding provision. The Congressional Budget Office previously estimated that Biden’s similar IRS proposal would raise about $200 billion.

A document outlining the Ways and Means Committee’s plans that was circulated on Sunday said that Democrats would cover the cost of the remainder of the $3.5 trillion in spending through savings from drug-pricing changes and through economic growth generated by their spending package.

It remains to be seen how the tax proposals change as the spending package moves through Congress. Nearly every House Democrat, and every Senate Democrat, will need to vote for the spending bill for it to pass, meaning small groups of lawmakers have the ability to influence the legislation.

One change that Democrats are planning to make to the bill is to add some type of change to the $10,000 cap on the state and local tax (SALT) deduction — a limit that is strongly disliked by many lawmakers in high-tax states such as New York, New Jersey and California. But undoing the SALT cap is expensive, so lawmakers may need to find ways to raise additional revenue to offset the cost of any changes to the deduction limit.

“If the intent is to add SALT relief into this package, they are clearly going to need to raise a lot more revenue because they surely can’t cut the investments,” said Frank Clemente, executive director of the progressive group Americans for Tax Fairness.