Five tax issues to watch as Democrats craft $3.5T bill

Democrats are scrambling to craft their multitrillion-dollar social spending package while seeking to avoid any points of contention that could threaten party unity.

Many key aspects of the package pertain to taxes. Democrats want to extend expansions of tax credits benefiting low- and middle-income households that were enacted under President Biden’s coronavirus relief law earlier this year. They also want to pay for their proposed spending and tax cuts — which focus on areas such as health care, child care and climate — through tax increases on corporations and high-income individuals.

The House Ways and Means Committee, which has jurisdiction over taxes, is expected to start considering its portion of the bill next week. The panel has yet to release any legislative text.

Democratic lawmakers will need to ensure that all of their provisions can garner support from both moderates and progressives since Democrats will need almost every party vote in the House and all 50 in the Senate.

That’s easier said than done, especially since some members have started to raise concerns about several of Biden’s proposed tax increases. Lawmakers will also have to figure out how they want to design provisions that would cut taxes.

Here are five tax issues to watch as Democrats draft the legislation.

Child tax credit

Democrats broadly support extending the one-year expansion of the child tax credit enacted earlier this year. However, lawmakers face questions about the duration of an expansion.

As a result of Biden’s $1.9 trillion coronavirus relief law, the maximum credit amount was increased from $2,000 to $3,600 for children under 6 and $3,000 for older children. The credit was also made fully available to the lowest-income households, and the IRS started issuing advance payments of the credit on a monthly basis. These changes are in place only for 2021.

Many Democratic lawmakers want to make the expansion of the credit permanent. But the longer the extension of the expansion, the greater the cost.

The White House proposed making the credit permanently fully available to the lowest-income households while extending the increased credit amount only through 2025. The Treasury Department has estimated that would cost nearly $450 billion over a decade.

“I’d prefer permanency, but I know that there are competing views from the White House and others,” Ways and Means Committee Chairman Richard Neal (D-Mass.) told reporters in late August.

Corporate tax rate

Biden has proposed raising the corporate tax rate from 21 percent to 28 percent after the GOP tax law in 2017 cut it from 35 percent to 21 percent.

Some moderates have indicated that they want a smaller rate increase than what Biden has proposed. Notably, Sen. Joe Manchin (D-W.Va.), a key moderate, has said he would prefer a corporate tax rate of 25 percent. 

The smaller the corporate rate increase, the less revenue would be generated that could be used to offset the cost of Democrats’ spending priorities. The Treasury Department estimated that raising the corporate rate to 28 percent would bring in about $858 billion over 10 years.

SALT deduction

Democrats are expected to include some type of change to the $10,000 cap on the state and local tax (SALT) deduction that Republicans enacted as part of their 2017 tax law. But it remains to be seen exactly how lawmakers plan to roll back the cap.

Many lawmakers from high-tax states, such as New York, New Jersey and California, strongly oppose the cap, and some have threatened to vote against the final bill if it doesn’t repeal the $10,000 limit.

But fully repealing the cap is expensive, and analysts across the ideological spectrum have estimated that doing so would primarily benefit high-income households. When the House voted on a bill to temporarily repeal the cap in 2019, a handful of Democratic lawmakers, including some moderates and progressives, voted against it.

Democrats have several options if they want to make changes to the cap but not fully eliminate it. For example, they could decide to raise the limit, or they could undo the cap only for people under a certain income level.

Capital gains changes

Democrats have some major issues to wrestle with when it comes to capital gains taxes, which are taxes that people pay on investment gains.

One issue is where to set the top capital gains tax rate. The current top rate is 20 percent, but Biden has proposed significantly increasing it so that capital gains and ordinary income are taxed at the same rates for individuals and households with income above $1 million. Biden has proposed a top rate for ordinary income of 39.6 percent.

Some Democratic lawmakers would prefer a smaller increase in the capital gains rate. For example, Manchin has said he’d prefer an increase to 28 percent.

A second issue relates to the tax treatment of capital gains at death. Capital gains are not taxed at death, and when heirs sell investments they inherited, they have to pay tax only on the difference between the sales price and the value of the investments when they received them.

Biden has proposed taxing capital gains at death, with an exemption of $1 million per person. Under the president’s proposal, taxes would not be due on gains on the value of family-owned businesses and farms until the businesses are sold or cease to be family owned and operated.

Even though Biden’s proposal includes provisions aimed at protecting family farms, some Democrats from agriculture-heavy areas have raised concerns about the proposal.

A document obtained by The Hill outlining Senate Finance Committee Democrats’ revenue-raising options calls for providing more generous exemptions than Biden has proposed. The document floats an exemption of $5 million per person from taxing capital gains at death. It also suggests a potential $25 million exemption per couple for family farms, which would be in addition to the general exemption.

A separate item on Senate Democrats’ list calls for billionaires to pay taxes on their investment gains annually, as opposed to when the investments are sold. Biden has not offered a similar proposal.

International tax changes

Biden and many congressional Democrats have taken issue with the international provisions in the GOP’s 2017 tax law and want to increase taxes on U.S. companies’ foreign earnings. But Democrats have yet to reach consensus on all of the details.

The White House has proposed increasing a minimum tax on U.S. companies’ foreign earnings to 21 percent. At the same time, the administration is negotiating an agreement with other countries, through the Organization for Economic Cooperation and Development, for a global minimum tax rate of at least 15 percent.

A group of House Democrats, including several Ways and Means Committee members, raised concerns last month about raising the rate on the U.S. tax to a level that is higher than the rate established by a multilateral agreement.

Treasury Secretary Janet Yellen defended the White House’s proposal on Friday.

“The U.S. can impose a 21% tax on U.S. corporate foreign earnings — still far less than what’s paid by businesses on Main Street that make their profits at home and still have our corporations be more competitive than they were before,” she tweeted.