Senate Finance Committee Democrats are considering new taxes on executive pay, stock buybacks, billionaires’ unrealized stock gains and plastic packaging materials among other options as the panel looks to cover costs of their planned $3.5 trillion budget reconciliation package.
The latest list of possible offsets from the panel led by Sen. Ron Wyden of Oregon includes several policies pushed by progressives for taxing corporations and bigger carve-outs from higher taxes on assets that gain value, which could be a positive step for moderates. Options also include fees on carbon and plastic resins and several Wyden-proposed policies for taxing investment gains, according to a document circulating on and off Capitol Hill.
Proposed changes to taxing capital gains would diverge from the White House’s plan, including bigger carve-outs.
Like President Joe Biden, the Finance options include aligning the capital gains rate with the individual income rate, which would likely be a top 39.6 percent levy, and require that taxes be charged when an owner dies and assets are inherited.
But the Finance paper includes a more generous exemption, applying the tax on inherited assets only to property transferred that’s gained value of more than $5 million per person or $10 million per couple, with another $500,000 per couple allowed for homes that are primary residences. On top of that, there's a huge $25 million exemption for family farms — a major messaging point.
Democrats are facing pressure on their plan to end “stepped-up basis.” Currently when someone dies the cost basis for assets passed down to heirs is "stepped up" to the the fair market value at the time of death. Any capital gains from that point on assets such as stock, a home, a small business or a family-run farm, are currently taxed only when sold later.
Progressive Democrats are urging an end to stepped-up basis, describing it as a driver of generational wealth that allows the richest households to avoid taxes. Biden is proposing to do that but allow a $1 million per person exemption, on top of the primary residence carve-out; there's no specific exemption for farms, but Biden would let families that keep running the business delay capital gains tax until the time of sale.
But Republicans — and Democrats who once served in Congress — are hitting hard at the idea, saying it will make passing down family businesses and farms untenable.
The last Democrat to hold the Senate Finance gavel before Wyden, Max Baucus, said in a Wall Street Journal op-ed on Wednesday that eliminating stepped-up basis would be a mistake and force the liquidation of family farms and businesses. Baucus represented Montana and is from a ranching family. Another former Democratic senator from farm country, Heidi Heitkamp of North Dakota, is leading a coalition opposed to the tax.
House Democrats from rural districts have also expressed concern with the Biden plan, including several members with tough races next year.
Stock buybacks, CEO pay
Taxes on the Finance options list that didn’t appear in the Biden administration’s proposals, which were first reported by Bloomberg, include several that would aim to raise revenue and also shift corporate behavior.
Democrats are weighing a levy on public companies that buy back a certain amount of stock or treating stock repurchases as “deemed” dividends to shareholders. Progressives argue stock buybacks do little but reward shareholders at the expense of hiring and capital investments companies could be making.
Another proposal would tighten a deduction allowed for spending on employee pay, imposing a $1 million limit for all employees, rather than the current cap for the CEO, CFO and three other top highest-paid executives.
Another option would tax corporations whose ratio of CEO-to-worker pay is outside certain bounds, a policy previously proposed by Senate Budget Chairman Bernie Sanders, I-Vt. Sanders’ bill would penalize companies that pay their CEOs 50 times a median worker’s pay, or more. Public companies have to report this information publicly under rules added by the Dodd-Frank financial services overhaul that took effect in 2018, and several cities charge similar taxes.
And a proposal from Sheldon Whitehouse, D-R.I., a Finance member, to levy a 20 cents-per-pound fee on producers and importers of "virgin plastics" also appears on the list.
These proposals would both raise money and aim to change companies choices, which would eventually sap the revenue they raise. Sanders’ proposal for taxing based on CEO-worker pay ratios would raise about $150 billion over 10 years if current pay practices persisted, according to an estimate from his office, but it’s meant to lessen income inequality.
Also in the mix is “mark-to-market,” a plan Wyden has pressed for taxing wealth from unrealized capital gains. The proposal would require billionaires to pay annual taxes on publicly traded assets including stock holdings. For assets that can’t easily be assigned a market value each year, they’d be subject to a deferral charge when they’re sold or disposed of. That’s estimated to apply to only about 600 people but raise hundreds of billions in revenue, according to the Finance options paper.
Carbon pricing, plastics tax
Putting a price on carbon and pairing it with a border adjustment tax for carbon-intensive imports and rebates to offset the impact for low-income taxpayers is another option, along with a new proposal to charge a fee on sales of "virgin plastic" used to make single-use plastics.
While a carbon border adjustment to help level the playing field for domestic companies has been on the table since earlier this summer, a carbon tax applying to all emitters has not. It's not clear whether carbon pricing proposals have enough political support to pass, even among Democrats, but options Finance put out include a $15-per-ton tax on fossil fuel extraction and a tax on industrial emissions from manufacturers of steel, cement, chemicals and other carbon-intensive goods.
Whitehouse's bill, which would start the tax at 10 cents per pound next year and scale up over the following two years, would apply to resins extracted from crude oil or natural gas that are used to produce petrochemicals, including plastics. It would tax sales of resins used to make single-use plastics like beverage containers, bags and packaging, according to Whitehouse. Advocates say it will discourage ocean waste and pollution in communities near petrochemical plants.
The list confirms Senate Democrats are weighing a higher corporate tax rate, raising the top individual income rate to 39.6 percent next year, changing the system for taxing multinational corporations’ foreign earnings to charge more and a 15 percent minimum tax on corporate earnings reported to shareholders. For the corporate rate and levy on global intangible low-tax income or "GILTI," rates are left open.
About $80 billion in new funding for the IRS and reporting rules to boost tax compliance remain part of the plan.
It also includes measures that Wyden had previously floated as reconciliation options, including effectively raising taxes on carried interest earned by investment managers, derivatives such as stock options and “pass-through” businesses that earn more than $400,000 per year in taxable income.
Another possible offset is limits on “mega-IRAs,” retirement accounts that reporting by ProPublica has recently shown have allowed billionaires to pay less in taxes. Wyden pressed the issue at a recent Senate Finance hearing on retirement legislation, which largely focused on bipartisan proposals.