Senate, House Democrats split over taxes in $3.5T package

A rift is starting to emerge between the chairmen of the two tax-writing committees on Capitol Hill over the size and details of Democratic plans to pay for President Biden’s broad economic agenda.

Senate Finance Committee Chairman Ron Wyden (D-Ore.) and House Ways and Means Committee Chairman Richard Neal (D-Mass.) are taking different approaches to laying out the funding mechanisms designed to fuel a $3.5 trillion Democratic-only bill.

Wyden has put out much more detail about what’s under consideration for the Senate’s tax plan and has announced publicly that he’s ready to raise whatever amount is needed in taxes to pay for the spending package.

The Senate chairman reaffirmed on Thursday after meeting with Democrats on the Finance panel that “we’re committed to raising the revenue needed to pay for critical priorities for American families.”

Neal, by contrast, has been much more circumspect in previewing what the House tax package will look like, reflecting the tougher path he must trod to round up enough votes in a chamber where moderate and progressive Democrats are deeply divided.

“Getting the Senate and House together is a yeoman’s task. I think that task is just as serious as getting Republicans and Democrats together,” said Rep. Bill Pascrell (D-N.J.), a member of the House Ways and Means Committee.

“We’re assuming some things here that we’re in the same boat as Democrats in the Senate,” he added.

“They think that their main problem is dealing with Manchin? They may have a problem with us,” Pascrell said of Senate Democrats, while referring to Sen. Joe Manchin (D-W.Va.). “We got to get to a point where we can resolve it.” 

Neal on Thursday night acknowledged differences with the Senate but insisted the two sides are making progress toward an agreement.

“We might not be quite aligned yet with the Senate but we certainly are coordinating. We’re in the same ballpark. They know where we are and we know where they are,” he said.

The House chairman declined to comment about what are the biggest differences between the two chambers.

There are also significant divisions among House Democrats, with progressive Rep. Alexandria Ocasio Cortez (D-N.Y.) and other members of “the squad” at one end of the caucus and centrist Democrats from high-income districts at the other.

The turmoil bubbled to the surface Thursday when Rep. Stephanie Murphy (D-Fla.), a prominent moderate, threatened to vote against portions of the $3.5 trillion bill in the Ways and Means Committee. 

Murphy vented frustration over the drafting process, which has left many House lawmakers in the dark about what to expect. 

“Despite this committee’s extraordinary efforts, I find myself in an impossible situation,” she lamented, warning that she will vote “no” in committee “unless something changes.”

House Democrats have yet to resolve their differences on the state and local tax (SALT) deduction, capital gains and international taxes.

Democratic lawmakers are facing a potential internal battle over the SALT deduction that Republicans capped at $10,000 in the 2017 Tax Cuts and Jobs Act.

Rep. Tom Suozzi (D-N.Y.), a member of Ways and Means, on Thursday said he’s “advocating for full repeal” of the cap, something that would add nearly $400 billion to the bill’s cost, according to an estimate from The Tax Foundation.

Asked how many Democrats are prepared to vote against the bill without action on the SALT deduction, he replied: “Enough.” 

Another major uncertainty about the House tax bill is whether it will end the step-up in basis for unrealized capital gains at death, a major tax break for wealthy families who fall below the threshold of the estate tax.

The tax code currently does not impose capital gains taxes on stocks and other investments at death, and when heirs sell investments, they only have to pay taxes on the difference between the sales price and the value of the investments when they received them.

The proposal to end the step-up in basis — for capital gains above $1 million — combined with an increase on the top tax rate for capital gains is projected to raise more than $100 billion over the next decade, according to an estimate by the Penn Wharton Budget Model.

Biden has proposed ending stepped-up basis for gains above $1 million per person and taxing those gains at death. The Treasury Department estimated that proposal would raise more than $300 billion over 10 years.

Wyden, who supports ending stepped-up basis, is floating exemptions for family farms and small businesses to deflect anticipated Republican attacks. But that might not be enough to save it in the House.

Pascrell and other Democrats on the Ways and Means Committee say inclusion of a proposal to eliminate stepped-up basis in the House bill is by no means assured.

Pascrell gives it a 50 percent to 60 percent shot of being included.

Rep. John Larson (D-Conn.), another senior Democrat on the Ways and Means panel, said the proposal on stepped-up basis and other controversial reforms are still “to be determined.”

“We’re still working on it,” he said.

Asked whether there was still significant disagreements between Senate and House Democrats on taxes, Larson replied with a chuckle: “You think?” 

Debate over an excise tax on stock buybacks is yet another potential flashpoint.

Wyden and Sen. Sherrod Brown (D-Ohio), a member of the Finance panel, are expected to unveil a new tax proposal on stock buybacks Friday, but the idea is controversial in the House and might not be a component of Neal’s proposal.

A Senate Democratic aide noted that Wyden has been very open about what he’s considering. 

“Wyden and Neal have generally taken different approaches to this, and all of the stuff Wyden is working on is out there,” the aide said.

Democratic lawmakers said it’s clear that Wyden and Neal are coming at the legislation from different angles.

“They came from such different backgrounds, if you take a look at what they look at,” Pascrell said.

The cloak of secrecy surrounding the House debate on taxes has fueled concerns that Neal’s proposal might raise only a fraction of the revenue needed to fully offset the $3.5 trillion measure.

“Democrats in the House need to propose a high revenue number if they hope to fund the roster of critical investments needed by working families. That’s what the public wants, and it also provides the best chance for success in the Senate,” said Frank Clemente, executive director of Americans for Tax Fairness.

“Based on my back-of-the-envelope estimates of what’s been reported that House Democrats are considering, their revenue target is much too conservative,” he warned. “They might not even recoup all the revenue lost from the Trump-GOP tax cuts.” 

Neal indicated Thursday evening that the House Democratic plan will raise substantially less than the $3.5 trillion needed to cover the full cost of the reconciliation package.

“At the moment that’s not what we’re talking about,” he said. “I have a top line, but I’ll share it with you over the weekend.”

Democratic members of the House tax-writing committee say they expect Neal to unveil a draft of the tax portion of the reconciliation bill — or at least notes for committee members to review — this weekend.

That would set up a more vigorous debate within the House Democratic Caucus and position the Ways and Means panel to mark up the tax portion of the reconciliation package next week.

Democratic leaders are already facing complaints from fellow Democrats over what some perceive to be a rush to put legislation on the floor without a full review and debate.

“I believe this deadline was too rushed, driven by politics, rather than policy,” Murphy said of the Sept. 15 deadline to finish markups in committee.

Naomi Jagoda contributed.