The Washington PostDemocracy Dies in Darkness

Democrats’ lofty tax agenda imperiled by resistance from within

The White House and its allies wanted to rewrite the tax code, raising rates on businesses and the wealthy. But key Democrats balked, and they scaled everything back.

Sen. Kyrsten Sinema (D-Ariz.) is seen in the halls of the Capitol in Washington on Nov. 2. (Mandel Ngan/AFP/Getty Images)

Democrats swept into power earlier this year promising to raise tax rates on corporations and the wealthy to pay for their ambitious social agenda.

Both have been dramatically pared back, with a suite of their initial ideas on taxes in particular imperiled by resistance from within the party.

To meet the demands of Sen. Kyrsten Sinema (D-Ariz.), the White House agreed to drop a proposed 3 percent tax on taxpayers earning over $5 million, instead agreeing to target the higher tax to those earning more than $10 million, two people familiar with the matter said on the condition of anonymity to discuss the internal negotiations. The move exempted roughly 35,000 of the wealthiest Americans, or approximately .02 percent of the richest 1 percent, from the new levy, according to the most recent Internal Revenue Service data.

The Biden administration also agreed to pull a proposed tax in late October targeting 700 billionaires after it faced criticism from a number of top Democrats, including House Speaker Nancy Pelosi (Calif.), who complained in one phone call with senior party officials on Oct. 26 that the plan amounted to a publicity stunt, two people familiar with the matter said. Sen. Joe Manchin (D-W.Va.) also raised substantive objections to the plan.

And while the White House is pushing a new 15 percent minimum tax on corporations, the measure faces fresh objections this week from renewable-energy groups who are warning it could undermine the party’s climate goals. Rep. Earl Blumenauer (D-Ore.) said in a statement that he and several Senate Democrats are seeking changes to ensure the minimum tax does not dilute the potential impact of the legislation’s clean energy tax credits to spark new renewable capital projects.

Biden’s minimum tax proposal could hit these ultra-profitable corporations

The behind-the-scenes jockeying over Democrats’ tax proposals reflects the enormous challenge facing the administration as it tries to make campaign promises into concrete policy as a way to fund President Biden’s roughly $2 trillion Build Back Better legislation.

This spring, the White House unveiled more than $3 trillion in new proposed taxes on the wealthy and corporations aimed at closing loopholes, improving the efficiency of the tax code, and targeting many of the Americans who they believed should pay more.

Roughly seven months later, the White House’s tax plans have been dramatically overhauled and are now estimated to bring in over $1 trillion less than the original goal in line with a smaller spending target.

In 2021, Sen. Joe Manchin III (D-W.Va.) changed his top line spending number for President Biden’s agenda more than half a dozen times. (Video: JM Rieger/The Washington Post, Photo: Jabin Botsford/The Washington Post)

The White House’s initial tax plans included raising the corporate tax rate for the largest firms from 21 percent to 28 percent, taxing investment income earned on assets such as stocks like ordinary income for those earning more than $1 million per year, and closing a loophole that allows the wealthy to pass down vast inheritances tax-free. The White House also wanted to raise the top tax bracket to 39.6 percent, which would have affected most taxpayers earning over $500,000 per year.

Those plans have now been shelved, due to Sinema’s steadfast opposition to raising corporate or individual tax rates and rural Democrats’ opposition to taxing inheritances at death. The White House is now proposing roughly $1.5 trillion in new tax hikes on businesses and the wealthy, which administration officials are adamant would still go far to rebalance the tax code and adhere to Biden’s pledge to require the rich and corporations to “pay their fair share.”

Sinema's silence on spending bill vexes many Democrats as she digs in out of public view.

“Biden had proposed substantial tax increases, and the bulk of what he’d proposed is now gone,” said Dean Baker, a liberal economist. “I never thought he’d get what he asked for, but I thought he’d get something much closer.”

Some of the items that are now on the congressional cutting room floor were either core elements of the initial proposal or pieces that some Democrats had tried but failed to add at the last minute as a way to bring in more revenue. Oftentimes, the ideas would have raised taxes on the wealthy or businesses, only to run into resistance from key lawmakers who had a range of concerns.

A senior Democratic aide, speaking on the condition of anonymity to describe Pelosi’s thinking, said the speaker’s objections to the billionaire tax were a timing issue. Senate Finance Chair Ron Wyden (D-Ore.) had not yet produced legislation for the billionaire tax by late October when the White House was about to submit a revised tax proposal that Democrats were trying to speed through Congress. The plan had not been vetted by House lawmakers, and questions have also emerged about whether the proposal could have been struck down by the Supreme Court.

A Sinema spokeswoman did not return a request for comment. While the changes she pushed exempted those earning between $5 million and $10 million per year, Democrats’ revised plan includes an additional 8 percent “surtax” on income above $25 million per year.

Blumenauer’s concerns could create a new round of headaches for the White House, in part because House Democrats were hoping to vote on the bill next week.

The legislation includes an exemption that would allow firms to continue using clean energy credits to reduce the overall tax liability. But the minimum tax is expected to limit existing breaks allowing companies to write off the value of large capital asset purchases, which renewable groups say would slow the rate of clean energy deployment the legislation would otherwise achieve.

The loss of the tax benefits will lead to a “15 to 20 percent increase in the cost of clean energy and an increase of 820 million metric tons of carbon dioxide compared to the base bill,” according to an analysis by the American Clean Power Association. A White House official, speaking the condition of anonymity to reveal the administration’s thinking, said there is no strong evidence that the tax break has any “significant effect” in investment.

The American Benefits Council also said in a letter last week that the new minimum tax would as written hit defined benefit pension plans and have a “devastating impact” on pensioners. The White House official also disputed this, saying less than .00075 percent of U.S. businesses would pay the tax.

“We don’t have any time to waste in our transition toward clean renewable energy, and this is a real concern,” Blumenauer, a member of the House Ways and Means committee, said in a statement. “I’m working with my colleagues in the Senate to ensure that the climate provisions of this legislation are as bold and robust as possible, including by allowing accelerated depreciation to offset the Corporate Alternative Minimum Tax.”

Democrats’ billionaire tax would heavily target 10 wealthiest Americans, but alternative plan is emerging

The administration and many tax experts say these plans would still amount to a substantial improvement in the tax code, amounting to the biggest increase in taxes on the rich and large corporations in decades. The new “surtax,” while not the same as the administration’s initial capital gains proposals, would still amount to a major tax increase on wealthy investors in line with Biden’s original proposals.

“These plans are fiscally responsible … and they don’t raise taxes on anyone making less than $400,000 a year,” Biden said when introducing his revised plan. “I want everyone to be able to — if they want to be a millionaire or billionaire, to be able to seek their goal. But all I’m asking is: Pay your fair share.”

But other tax experts cast doubt on the remaining elements of Biden’s tax plan. Some experts have been skeptical about the amount of money the administration claims to be able to bring in through more funding for the Internal Revenue Service, for instance.

“Biden’s original tax proposals were progressive; they raised a lot of money from the top end; they were efficient and effective without creating new loopholes,” said Steve Rosenthal, a policy expert at the Tax Policy Center, a nonpartisan think tank. “Now, it seems we are left grasping at ridiculous revenue-raisers and a bunch of gimmicks.”