Tax rates tug of war threatens budget package progress

Sen. Sinema’s opposition could rob Democrats of their chance to roll back the 2017 Republican tax law

Sen. Kyrsten Sinema, D-Ariz., arrives at the Capitol for a Senate vote Thursday. (Tom Williams/CQ Roll Call)
Sen. Kyrsten Sinema, D-Ariz., arrives at the Capitol for a Senate vote Thursday. (Tom Williams/CQ Roll Call)
Posted October 21, 2021 at 8:02pm, Updated at 9:28pm

Democrats are facing difficult questions on tax increases to pay for their multitrillion-dollar budget reconciliation bill amid opposition from Arizona Sen. Kyrsten Sinema to raising corporate and individual tax rates, a position that’s threatening to drain hundreds of billions in revenue to pay for social safety net and climate spending.

Senate-proposed options for replacing lost offsets are getting a lukewarm reception among some members of the House tax-writing panel, and they are more complex policies that will be a bigger lift to legislate than dialing up existing tax rates. Sinema’s opposition could also rob Democrats of their chance to roll back the 2017 Republican tax law most have railed against.

“That would be a great irony if the Democratic president, House and Senate embrace the 2017 tax cuts,” Sen. Mark Warner, D-Va., said Thursday.

Democrats are working toward tax and spending agreements that will get Sinema and Sen. Joe Manchin III of West Virginia on board in the evenly divided Senate, where they can’t lose a single vote to pass the filibuster-proof reconciliation bill.

The House assembled a $3.5 trillion-plus package that lawmakers said was fully offset, but Sinema and Manchin have taken issue with various tax increases proposed in that bill. Pressure to lower spending is leading Democrats to discuss a package around $2 trillion.

President Joe Biden acknowledged Sinema won't agree to rate increases during a CNN town hall Thursday night, but said Democrats are down to "four or five issues" in figuring out how to nonetheless achieve a package that requires corporations and the wealthy to "pay their fair share."

"She says she will not raise a single penny in taxes on the corporate side and/or on wealthy people, period," Biden said. "And so that's where it sort of breaks down."

Some Democrats say the revenue raisers will be easier to pin down once the spending provisions are settled, and they are generally optimistic about reaching a deal on both as soon as this weekend. Sinema has refused to publicly discuss what it will take to get her vote, but there were signs of movement Thursday.

Ways and Means Chairman Richard E. Neal said he met with Sinema to discuss reconciliation for the first time Thursday afternoon and is planning to talk to Manchin. Neal said he believes Sinema might entertain his feedback. Biden's comments later Thursday seemed to contradict that, but it's unclear which one of them spoke to Sinema last.

“I did make the suggestion that the rates that we came up with I thought were of great efficiency and they weren’t punitive,” Neal said.

Neal said he explained to Sinema that Republicans told him they only cut the top individual rate to help mitigate their decision to impose a $10,000 cap on the state and local tax deduction in the 2017 law. Democrats are now considering lifting the "SALT" cap, at least temporarily, which would alleviate some pain for upper-income households associated with raising rates.

It's unclear if that argument would resonate with Sinema, however, since Arizona is not a state that is heavily impacted by the SALT cap.

The House reconciliation bill would generate more than $800 billion by raising the top corporate tax rate from 21 percent to 26.5 percent, restoring a top individual income rate of 39.6 percent and lifting the top rate on capital gains from 23.8 percent to 28.8 percent, according to the Joint Committee on Taxation.

Manchin had made clear he’d only accept lower rates in some cases, including a 25 percent corporate rate. But Sinema’s opposition could undercut an attempt to reverse the rates lowered under former President Donald Trump.

"My personal view is it's nuts to take the corporate tax rate and higher tax rates on very wealthy individuals off the table,” Sen. Chris Van Hollen, D-Md., said. “I think it's very much an ongoing, fluid discussion."

Several senators were confident that they could find enough revenue without raising rates to offset spending when they settle on a topline. Still, some said they want rate increases to stay in.

“It just makes no sense to me why you wouldn’t get those rates up,” Sen. Bob Casey, D-Pa., said. “I think it’s like a 40-year injustice around here.”

Taxes on the table

Sinema’s opposition has led Senate Democrats to consider alternatives, including a 2 percent tax on stock buybacks, minimum corporate tax based on earnings reported to investors and an annual tax on unrealized gains from billionaires’ stock holdings and other assets.

Senate Finance Chair Ron Wyden, D-Ore., on Thursday seized the moment to press for his proposal to tax billionaires’ assets, citing support from Biden and adding that Democrats aren’t hearing concerns about the proposal from constituents back home.

“They think it’s basic fairness, and that’s why I’m going to the mat for it,” he said.

The tax, like others Senate Democrats are weighing, would get at the party’s vow to make corporations and the wealthy "pay their fair share." These options would tax corporations and capital without upping current rates.

The Treasury Department, Wyden and other Senate Democrats have introduced bills or drafts of these options, but House members complain they've not been vetted in a committee markup like their proposals. The Senate proposals are also more complex and novel than adjusting existing law.

Sen. Benjamin L. Cardin, D-Md., noted that taxing unrealized gains of the wealthiest Americans isn’t as simple as it sounds, but Democrats are looking at how to do it effectively. Currently, capital gains taxes are only levied when assets like corporate stock, real estate, privately held businesses and art are sold.

A former Senate Democratic aide described the options as less likely before Sinema’s stance, saying some are more challenging policy options to implement and others, like a proposal to require banks to report inflows and outflows for certain accounts to the IRS, are politically tough.

Neal emphasized his continued support for the bill his committee approved. On Thursday he said it’s late in the process to consider the new options. While he said he’s open to the buybacks tax, he said it’s complicated and that he remains concerned with details of creating an annual tax on unsold assets.

“I don’t think we want to rule anything out, but I think it is very late in the business,” Neal said. “It is the ninth inning.”

The House bill includes more than $2 trillion in revenue-raising tax provisions and other offsets that Democrats say add up to $3.5 trillion, including higher taxes on multinationals’ foreign earnings, a surcharge of 3 percent on earnings of people making over $5 million, limiting the deduction for pass-through business income and a net $120 billion from increased funding for the IRS.

Rep. Dan Kildee, D-Mich., said the Senate proposals are “interesting,” but backed rate increases and the rest of Ways and Means’ work.

“I don’t think we get to tax fairness without dealing with that,” Kildee said of raising corporate and individual tax rates. “I think it’s a little difficult for me to understand how [Sinema] can support somehow raising revenue through tax policy, but doing it without increasing rates. It doesn’t seem to compute for me.”

Sinema’s support

Sinema "laid out her priorities" for other parts of the measure, Neal said, including a set of clean energy-related tax breaks in the Ways and Means portion of the reconciliation bill, an expanded child tax credit and paid family and medical leave. But some of those may be trimmed or cut to reduce the price tag.

The child tax credit expansion, originally set for four years in Neal's bill, may be sliced to one year. There’s also been discussion about cutting the House proposal to provide all Americans with 12 weeks of paid family and medical leave down to four weeks, an option drawing objections from some lawmakers.

“I have said that what I would much rather do is do a shorter number of years, but do more weeks because I'm a woman, I've had a baby and four weeks isn't enough,” Congressional Progressive Caucus Chair Pramila Jayapal, D-Wash., told reporters Thursday.

Neal said he’s not sure that Democrats will get his preferred 12 weeks of paid leave in the final bill, but that Sinema is open to 12 weeks and that the issue is her “third priority.”

Biden said during the CNN town hall that the paid leave provision is "down to four weeks" because he can't get support for 12. Manchin has expressed concerns about that provision.

Another possible shift would see the Ways and Means’ plan for energy tax credits in place before moving to Wyden’s proposal to scrap existing tax breaks and establishing three types of credits that are technology-neutral and performance-based. Neal said he’s looking to make the transition after five years, while Wyden is pressing for four, but that he’s expecting a compromise.

David Lerman, Mary Ellen McIntire and Jennifer Shutt contributed to this report.