WASHINGTON – As they scout for income to pay their sprawling spending bill and attempt to unite a fractured caucus, Democrats are attempting to rewrite the U.S. tax code in days, proposing the kind of sweeping changes in the how America taxes businesses and individuals that would normally take months or years to adopt.
The effort effectively sidelined billions of dollars in carefully crafted tax increases President Biden proposed during the election campaign and which top Democrats rolled out in Congress. Instead, lawmakers are throwing a slew of new proposals into the mix, including a billionaire tax, in the hopes that they can pass both legally and within their own party.
The frantic attempt to overhaul the complex U.S. tax code remained in motion on Wednesday, with Senator Joe Manchin III and some House Democrats expressing reservations about a billionaire tax proposed earlier today by Senator Ron Wyden of the Oregon. On Tuesday, Mr Manchin shot down a plan that would have given the Internal Revenue Service more visibility into the bank accounts of some taxpayers in order to catch tax evaders, forcing a group of Senate Democrats who support the provision in an attempt to negotiate a compromise.
Mr Manchin’s opposition to a new federal paid vacation program also seemed to doom his chances of being included in final legislation, though supporters of the provision said they would fight to keep it intact.
Senator Mark Warner, a Democrat from Virginia, acknowledged on Wednesday that the rapid pace of the legislative process presented risks and said it would be best to “allow some of this very, very complicated tax policy to be released from the air. appropriate manner “.
The need to roll out new tax proposals stems in large part from concerns from business groups – and moderate Democrats – who effectively killed Mr. Biden’s original plan to raise the corporate tax rate from 21% to 28% to pay for its own energy and social policy. initiatives. Other ideas proposed by the White House, including increasing the top marginal rate for the wealthiest taxpayers and doubling the capital gains tax, were also scrapped.
The new policy proposals include elements of the type of wealth tax Mr Biden avoided in his campaign for further tax increases. Under the new plan, billionaires, who often pay little or nothing in federal income taxes, would have to pay taxes on the increased value of certain liquid assets, like stocks and bonds, even if those assets were not. sold and the gains were not realized. . A second proposal, which Biden has supported in the past, would impose a 15% tax on companies that report at least $ 1 billion in profits to their shareholders but have little or no federal tax payable due to tax deductions and other loopholes.
If passed, the taxes would likely apply to fewer than 1,000 businesses and individuals. But the breakneck speed at which changes are being envisioned and crafted is shaking corporate groups and some powerful Democrats, who have expressed concern about the consequences of such rapid change.
“We are very concerned that Congress is contemplating some really fundamental changes in tax policy with very little time to verify unintended impacts and consequences,” said Neil Bradley, director of policy at the State Chamber of Commerce. -Unis, one of the main business lobby groups. “I don’t think anyone fully understands the implications of what is being proposed.”
The US Renewable Energy Council has warned that the new 15% minimum corporate tax could actually undermine some existing clean energy incentives, as companies would no longer benefit from deductions for wear and tear on their properties. which would increase their tax bill. The council urged lawmakers to amend the bill to ensure the protection of depreciation benefits associated with renewable energy projects.
“The predictable result will be higher costs and slower deployment of renewables which directly defeat Congress’s goal of decarbonizing the power sector,” the group said in a statement.
Democrats rushed to reach agreement on what to include in their social safety net and climate change bill – and how to pay for it – before Mr Biden leaves for Europe on Thursday , including a climate conference in Scotland. Progressive Democrats have insisted that the framework of the bill be finalized before voting for a $ 1 trillion infrastructure bill that is also at the heart of Biden’s economic agenda. Democrats have said they want both bills passed before the end of the year.
While there is broad agreement on some of the spending, including funding for child care and clean energy projects, areas of disagreement remain and many programs have been cut or cut.
The tax side has proven to be even more complicated given demands by Mr Manchin and Senator Kyrsten Sinema of Arizona, who insisted the legislation be paid but opposed several tax increases. With Democrats holding a slim majority in the Senate, they can’t afford to lose just one vote, forcing them to find ways to increase the income that passes with Mr Manchin and Ms Sinema.
The Democrats’ scramble to craft such drastic legislation on the fly is reminiscent of the 2017 tax overhaul, when Republicans were also under pressure to pass legislation by the end of the year. At the time, Democrats like Mr. Wyden, who is now chairman of the Senate finance committee, attacked Republicans for “rushing to pass this bill without knowing the full cost.”
“It’s really striking to me that the same Democrats who mocked Republicans for allegedly rushing a partisan tax cut in 2017 are now imposing massive tax hikes on a party line vote, including a tax on unverified and probably unconstitutional fortune, on the sole argument that failure is not an option, âsaid Brian McGuire, former chief of staff to Republican leader Senator Mitch McConnell.
The backbone of the tax code remained virtually unchanged for three decades after President Ronald Reagan signed a bipartisan bill in 1986 that reduced many tax rates, but also closed several avenues available to individuals and businesses. to reduce their tax bills.
In 2017, Republicans ushered in a series of tax cuts and essentially implemented a new system of taxing profits that multinational companies earn abroad, in hopes of making it more lucrative for companies to ‘invest in the United States. They created this system quickly – less than two months have passed since the first draft of the bill was published and President Donald J. Trump signed the final version of the law – but Republican lawmakers had laid the groundwork for change for years, including releasing a detailed tax framework led by former Michigan Camp Representative Dave.
Still, Democrats criticized Republicans for rushing the bill and failing to hold hearings on many key provisions. Some parts of the overhaul barely made any mention as the vote approached, such as creating so-called opportunity zones that provide tax benefits to people who invest in projects in underserved areas.
The final bill contained several drafting errors, such as the so-called grain glitch that hit farmers. It also left enormous leeway in the implementation of parts of the law at the Treasury Department, which in some cases weakened provisions to reduce potential tax bills for businesses.
Democrats took the trouble this year to say they would be different. Mr Biden has proposed trillions of dollars in tax increases on businesses and high incomes in the 2020 campaign, and his Treasury Department fleshed them out further in his “green paper” this spring, listing the changes potential tax that the administration supports.
Tax experts warned this week that embarking on a list of untested ideas could create new problems. Some have predicted that billionaires could move their assets to industries like real estate that wouldn’t be subject to the annual tax, which could lead to lower stock prices for other investors. Others have suggested that companies could change the way they report their profits to shareholders to escape the new accounting income tax.
In the case of the billionaire tax, Democrats could face a host of legal challenges similar to what followed after the Affordable Care Act was passed in 2010. The tax has elements that would likely be ripe for a well-funded lawsuit. The Constitution says that “direct taxes”, which are not clearly defined, must be distributed among states so that residents of each state pay a share equal to the share of the state’s population.
The proposal would levy a tax on anyone with more than $ 1 billion in assets or more than $ 100 million in income for three consecutive years, or roughly 700 people in the United States. Initially, the legislation would impose the long-term capital gains tax – 23.8% – on the capital appreciation of billionaires’ marketable assets, such as stocks, bonds and cash, on the basis of their original price. Lawmakers have been careful not to characterize the policy as a wealth tax, but the fact that it has a threshold based on wealth could be problematic.
Treasury Secretary Janet L. Yellen said in an interview with CNN on Sunday that the tax “would help achieve capital gains, which are an extremely large part of the income of the richest people.” However, Ms Yellen earlier this year expressed doubts about the feasibility of implementing a wealth tax and senior Treasury officials, including Natasha Sarin and Rebecca Kysar, have previously written on constitutional issues and income that he might face.
Daniel Hemel, professor of left-wing tax law at the University of Chicago reflected on twitter that Democrats would be better off just raising tax rates and closing inheritance tax loopholes.
“Why do the one thing where the constitutionality is not very clear?” ” he said.
Alan Rappeport reported from Washington and Jim Tankersley from Rome. Jonathan weisman contributed to Washington reporting.