- The bottom line: The bill includes a new surtax targeting people who earn more than $10 million, tweaks laws that aim to address businesses that pay no income tax, and proffers a slew of additional revisions to the U.S. code targeting stock buybacks and foreign profits, as well as a new investment in the IRS to pursue tax cheats.
- What critics say: The broader concern among lawmakers is that the package isn’t financed in full, even though official estimates show it is covered over the next 10 years. Beyond that, Sen. Joe Manchin III (D-W.Va.) has questioned if it includes budget gimmicks, including the fact that some programs are authorized only for short periods of time in a bid to lower the overall cost of the package. If those programs are later extended or made permanent, it could conceivably add to the deficit.
- Senate prognosis: Biden helped work out the financing with lawmakers, including Sen. Kyrsten Sinema (D-Ariz.), who had argued against rate increases. So the tax elements are in less doubt than some of the spending provisions in the package. An exception is a change to the State and Local Tax deduction, which is the subject of considerable squabbling among Democrats.
The ideas stop short of repealing the tax cuts enacted under President Donald Trump four years ago, a pledge that Biden and his fellow Democrats made repeatedly throughout the 2020 election. But they do address what Democrats long have described as known deficiencies in an unfair system.
Here are Democrats’ most significant plans.
A surtax on millionaires: Democrats found themselves in a tough political bind as they tried to devise ways to use the tax code to pay for their new in spending. They wanted to raise rates on the wealthiest Americans and most profitable corporations, as Biden had recommended in the spring. But they did not have support within the party to do so, chiefly because of objections raised by Sinema, without whom Democrats lacked the votes to advance their bill.
They ultimately came to a compromise they’re calling “the millionaire’s surtax.” The proposal targets the wealthiest Americans, keeping with Biden’s pledge not to raise taxes on families that make under $400,000 annually. And it does so without lifting tax rates, satisfying Sinema’s objections.
Under the proposal, the government would impose a five-percentage-point surtax on Americans who have income between $10 million and $25 million. For those with $25 million in income, the feds would impose an additional three percentage point surtax.
These surtaxes would come on top of the 37 percent income tax rate that the wealthiest Americans already pay. It would apply to adjusted gross income, which means not only their wages but also capital gains, dividends and pension payouts.
In pursuing a millionaires’ surtax, Democrats ultimately shifted away from an earlier plan that would have specifically targeted billionaires in a much different way. In changing course, they left untouched a key issue: the fact that billionaires often accumulate investments that they never sell, meaning they are never taxed.
A new minimum tax on corporations: The millionaire’s surtax aims to raise taxes on wealthy Americans without touching rates. The alternative minimum tax for corporations aspires to accomplish a similar aim by raising money from profitable corporations without crossing Sinema’s line on rates. In short, it imposes a 15 percent minimum on firms that make more than $1 billion in “book” income, which is money they report to shareholders.
Motivating Democrats is a vast body of research showing that some of the country’s most recognizable brands pay nothing in federal income taxes. The Institute on Taxation and Economic Policy, a progressive think tank, earlier this year found that 55 corporations with more than $40 billion in profits paid $0 and, in some cases, earned federal rebates in the process.
A more powerful IRS (sort of): A critical portion of the Democrats’ plan relies on the adage that you have to spend money to make money. In this case, it’s about empowering the IRS to go after those who fail to pay what they owe Uncle Sam.
The trouble stems from a history of underinvestment in the enforcement agency, which saw its budget fall by 20 percent over the past decade as a result of Republican-led cuts. Fewer dollars has meant fewer staff and fewer audits, all the while the IRS has taken on enhanced responsibilities, including providing multiple rounds of coronavirus stimulus payments and administering new child tax benefits to millions of American families.
The Democrats’ new plan invests $80 billion in the agency with the hope that, over 10 years, the efforts will bring in $400 billion in otherwise unrealized tax receipts. The country’s tax gap is believed to be much larger than that, with some current and former federal officials estimating that the deficit exceeds $1 trillion.
But Democrats did not achieve one of the more significant proposals they originally put forward: a requirement that banks report large transactions to the IRS. Not all Democrats appeared comfortable with the plan, even as party lawmakers tinkered with the threshold at which banks would have to share information in the government in the first place. Republicans also lambasted the idea, representing it as a threat to privacy.
A change to the SALT cap: One of the most hotly contested proposals concerns the state and local tax deduction. The provision concerns the amount in local taxes that Americans can deduct annually from their federal taxes. As part of the 2017 tax cuts under President Donald Trump, Republicans capped this amount at $10,000, a move that Democrats say has hurt residents in some of the high-cost cities and states they represent.
As a result, Democrats in the Build Back Better Act aim to raise the cap to $80,000 through 2030, at which point the amount would return to $10,000. Doing so would ease the burden on families in states such as New Jersey and New York, according to its advocates on Capitol Hill, while still remaining deficit neutral over a 10-year period.
But the idea remains the subject of considerable debate, particularly in the Senate, where lawmakers including Sen. Bernie Sanders (I-Vt.) have fretted that the proposed solution primarily would benefit higher-income earners. The argument is backed by data from organizations including the Tax Policy Center, which analyzed an earlier version of Democrats’ plan and found that only 1.6 percent of middle-income households would receive any benefit with an average tax cut of $20. Nevertheless, Sanders has proposed a different change that primarily would raise the SALT cap for Americans who make $400,000 annually.