Four-Page Document Includes Details of $3.5 Trillion Reconciliation Package

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Top corporate tax rate rises to 26.5% from 21% | Cuts some estate-tax discounts, no effect on family farms and businesses


— Budget reconciliation updates:

  • Sen. Joe Manchin (D-W.Va.) said Sunday he will not support the $3.5 trillion price tag for the economic bill and that "there's no way" Congress can meet the timeline set by House Speaker Nancy Pelosi (D-Calif.) to pass it (she aims to have the proposal fully written by Sept. 15 and passed by October). Manchin instead called on Democrats to whittle down the amount, perhaps by more than half. Appearing on CNN’s State of the Union, Manchin reiterated his broader concerns that a tax-and-spending measure as large as $3.5 trillion could add to the deficit and worsen the country’s troubles with inflation. Echoing an op-ed earlier this month, he called on Democrats to pause their legislative work. The potential for spending cuts troubled Sen. Bernie Sanders (I-Vt.), who described a smaller economic package as “unacceptable… “It would be a really sad state of affairs for the American people, the Congress, if both of those bills went down,” he said.
  • White House comments. White House spokesman Andrew Bates said in a statement Sunday that the tax ideas under discussion by the Ways and Means Committee (see below) meet "two core goals" of Biden: not raising taxes on Americans making under $400,000 and reversing parts of former President Trump's tax cuts for the wealthy and corporations.
  • Four-page doc reveals Dems’ reconciliation game plan. First, here are some highlights, with some details following.

    Highlights:

     — Top capital gains rate increases to 25% from 20%

     — Top corporate tax rate rises to 26.5% from 21%

     — Increases carried-interest holding period to five years from three

     — Cuts some estate-tax discounts, no major effect on family farms and businesses (lowering the estate tax exemption level will have an impact)

     — Cuts tax rate for businesses with income of less than $400,000 to 18%

     — Crypto subject to wash sale and disguised sale rules

     — Estimated revenue from corporate-tax changes likely to total $900 billion

     — Estimated revenue boost from high-income individuals ~$1 trillion

Details:

  • House Democrats eye 26.5% corporate tax rate, from the current 21% level, and a 3 percentage-point surtax on individual income above $5 million (a measure that raises more than $127 billion), according to a four-page document cited by several media outlets. There would be a tiered system for the corporate tax rate: Only firms with incomes above $5 million would pay the new 26.5% rate. Businesses that earn between that benchmark and $400,000 would see their taxes stay at 21%, and those with less than $400,000 in revenue would actually see a tax cut to 18%.
  • The draft tax proposal includes a smaller-than-expected increase in the capital gains rate paid by investors from 20% to 25%. Biden’s plan had suggested approximately doubling the capital gains rate. The tax increases would be part of the House Ways and Means Committee’s plans to pay for the party’s spending in the “social” infrastructure bill, including an expanded child tax credit, a national paid-leave program and renewable-energy tax breaks (more details below).
  • The Ways and Means panel is set to debate the tax portions of the bill Tuesday and Wednesday. The panel has yet to formally release legislative text on tax increases, so details could still change. With thin majorities in both chambers, Democrats can afford just three defections in the House and none in the Senate as they use a process called budget reconciliation that allows them to bypass Republicans.
  • Raising the minimum tax on U.S. companies’ foreign income to 16.5% from 10.5% and increasing the top capital-gains tax rate to 28.8% from 23.8% are also in the likely category.
  • High-income households would face a series of tax increases. The top rate would increase to 39.6% from 37%, with that top bracket starting at $400,000 for individuals and $450,000 for married couples.
  • What is not in the four-page document: big changes to capital gain taxes that the ag sector has fought. However, increases in the estate-tax exemption that are scheduled to expire after 2025 would now end Dec. 31 — the proposal would cut in half the estate and gift tax exemption for married filers on Dec. 31, 2021, four years earlier than set in the tax cuts passed under former President Donald Trump. It also doesn't mention the Biden administration's proposal to have banks and other financial institutions report annual account flows to the IRS.
  • Many business owners also would begin facing a 3.8% tax on their profits. Currently, a tax at that rate applies to wages of high-income individuals and to passive income, but active business profits are exempt. The proposal would impose that 3.8% tax on high-income business owners. Combination of changes would mean that some taxpayers could face a top marginal federal income-tax rate of 46.4%.
  • Pay-fors. The document spells out how Democrats would get to $3.5 trillion to pay for their spending and tax cuts over a decade. It includes $1 trillion in tax increases on individuals, $900 billion on corporations, $700 billion from drug-pricing policy changes, and $120 billion from tougher tax enforcement. The list includes other changes and an assumption that the economy will grow. The proposal would raise an estimated $16 billion by limiting deductions for executive compensation and $96 billion by higher taxes on tobacco and nicotine products, including e-cigarettes. Democrats are proposing to include cryptocurrency in general tax rules, to treat it the same as other financial instruments and to prevent taxpayer abuse of the rules. Doing so would generate an estimated $16 billion in revenue. Bottom line: Preliminary estimates that the new proposals would raise $2.9 trillion in revenue when combined with $700 billion in revenue and cost savings from Medicare drug price changes. To fully pay for the president’s plan, the proposal factors in $600 billion from the estimated economic growth effects of the spending increase. It would further limit the deductions on U.S. taxes that firms with headquarters abroad can claim. The proposal relies on a budgetary move known as dynamic scoring that takes into account the economic activity generated by federal spending.
  • SALT tax: Notably absent from the document is any discussion of lifting the $10,000 cap on the state and local tax (SALT) deduction, raising questions about the fate of that costly proposal.
  • A tax credit of up to $12,500 would be offered to consumers for the purchase of electric vehicles for 10 years under a proposal unveiled Friday. House Ways and Means Committee’s plan would provide a base credit of $7,500, another $4,500 credit for vehicles made in a union facility and an additional $500 credit for vehicles using a domestically manufactured battery for first five years. Last five years would provide a base credit of $7,500 for electric vehicles made in the U.S., a $4,500 credit for vehicles made in a union facility and $500 additional bonus for vehicles that use a domestically manufactured battery. Credit would only apply to vehicles that have a manufacturer’s suggested retail price of less than $55,000 for a car, $64,000 for a van, $69,000 for an SUV and $74,000 for a pickup truck. Credit would have annual income limitation of $400,000 for individual, $600,000 for heads of household and $800,000 for couples. Plan would eliminate current cap of 200,000 vehicle per manufacturer for tax credit.

       — Proposal extends wind production tax credit for full amount through 2031, and phases down to 80% in 2032 and 60% in 2033. Proposal also extends investment tax credit used by solar industry through the end of 2031, after which it phases down in 2032 and 2033.
       — Proposal expands investment tax credit to include energy storage.
       — Proposal also would create a credit for electricity produced from nuclear power plants.

  • The fate of a pathway to citizenship for millions of immigrants is dependent on a key Senate staffer who is expected to decide whether the policy can be included in the Democrats’ social spending package. As many as 8 million people currently in the country could be impacted. The immigration policy can be included only if it conforms to a special set of Senate rules and can be shown to be directly related to the federal budget. The Senate’s parliamentarian is tasked with making that call. Elizabeth MacDonough, appointed by former Senate Majority Leader Harry Reid (D-Nev.), is the current parliamentarian. Congressional aides met with her behind closed doors Friday.  It is unknown whether a final decision will be reached before the House Judiciary Committee meets today to consider the immigration provisions in the bill. If MacDonough rejects the pathway to citizenship, an alternative proposal would change existing law to make more people eligible for a green card. This plan, contacts advise, would probably not cover as many people, especially farmworkers and essential workers who arrived in the country in recent years.
  • House Ag Committee markup continues today, after a nine-hour marathon on Friday. Provisions under jurisdiction of the House Ag committee are expected to cost $94 billion and of that, $89.1 billion is expected to be deficit spending. Some sources signal proposed language (PDF link) by Sen. Kirsten Gillibrand (D-N.Y.) could be added relative to debt relief provisions. Democrats on Friday scrambled to get the votes to sustain a motion to table an appeal by ranking member Rep. G. T. Thompson (R-Pa.) of Scott’s ruling that an amendment by Rep. Randy Feenstra (R-Iowa) was not germane. Feenstra’s amendment called for USDA Secretary Tom Vilsack to certify that reconciliation did not result in raising taxes for farmers with adjusted gross incomes of less than $400,000 before spending reconciliation funds. Feenstra said the amendment would test promises by Biden and congressional Democrats that reconciliation-related tax changes would not affect individuals with incomes below $400,000. Rep. Al Lawson (D-Fla.) initially voted against the motion but eventually changed his vote to support the tabling. Scott kept the vote open until missing members were rounded up to vote virtually for the motion. The final vote was 27-24 to sustain the motion and Scott’s decision.

 

 

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