What’s in Democrats’ Tax Plan? Wealthy, Companies In Their Sights

(Bloomberg) -- The House Ways and Means Committee on Monday released the most detailed picture yet of the tax overhaul that Democrats are designing to help pay for a major expansion in spending on social programs -- the bulk of President Joe Biden’s longer-term economic plan. 

The House panel, the traditional origin of tax legislation in Congress, issued draft text that’s aimed for inclusion in a broader bill Democrats pushing forward without Republican support. Other committees are handling other aspects of what could be a $3.5 trillion, 10-year spending package.

The proposed tax increases would raise government revenue by $2.1 trillion over 10 years according to Congress’s official scorekeeper. When tax breaks are taken into account, the Ways and Means plan would provide $871 billion in net new revenue to be used for other spending priorities, the Joint Committee on Taxation said.
 

Proposed tax changes in the draft legislation are mainly aimed at companies and wealthy Americans. Biden has pledged that those making less than $400,000 a year won’t face higher taxes. Following are highlights from the plan, which will be debated by the panel on Tuesday and Wednesday:

Income Taxes

House Democrats are proposing to raise the top personal income tax rate to 39.6%, from 37%. That higher rate would reverse a cut signed into law by Trump. The committee also proposed a 3% surtax on individuals with adjusted gross income of more than $5 million, an idea not included in Biden’s plans released earlier this year.

In addition, Democrats propose to raise $252 billion by expanding the net investment income tax to cover income derived in the ordinary course of business for wealthy taxpayers.

Capital Gains

The House bill would increase the capital gains rate to 25% from 20% for “certain high income individuals,” short of the 39.6% proposed by Biden to equalize the taxation of investment and wage income. A 3.8% Obamacare tax on investment would then be added on top, meaning the richest would pay a 28.8% federal rate on realized investment returns.

It’s not clear what will come of Biden’s plan to end a long-standing capital gains tax break on inheritances known as “step-up in basis,” which allows heirs to use the market value of assets at the time of inheritance -- rather than the actual purchase price -- as the cost basis for capital gains at the time of transfer to the heir. The House panel’s draft text didn’t address this topic, but it could still come up in amendments or in the Senate.

Corporate Taxes

President Donald Trump’s 2017 corporate-tax cut would get significantly rolled back, bringing the top rate to 26.5% from 21%.

The corporate rate is likely to be one of the most prominent tax issues debated in the bill. Biden has pushed for 28%, but Senator Joe Manchin, a West Virginia Democrat whose support is critical in that chamber, has said he can only support up to 25%.

Instead of a flat corporate rate, Democrats are proposing a 18% rate on the first $400,000 of income, a 21 % on income up to $5 million, rising to 26.5% after that.

The legislation omits a Biden plan to institute a 15% minimum tax on the profits that a company claims for financial-reporting purposes. That idea was aimed at preventing firms that historically paid low effective tax rates, including Amazon.com Inc. and FedEx Corp., from racking up tax breaks to whittle down their tax bill to nothing.

Tobacco, Nicotine

House Democrats are proposing to double the current rate of excise taxes on cigarettes, small cigars and roll-your-own tobacco. It also effectively imposes taxes on e-cigarettes by adding levies on other types of nicotine not used in tobacco products.

A document circulated among lawmakers says the tobacco and nicotine provisions would generate $96 billion in revenue.

IRS Audits

The legislation calls for about $80 billion in additional funding for the Internal Revenue Service to increase audits on companies and wealthy individuals. 

Carried Interest

The carried interest tax break used by private equity fund managers to lower their tax bills would be restricted under the Democrats’ plan but not eliminated, as Biden had proposed.  

The House plan would generally require investment funds to hold assets for more than five years -- up from three years -- for managers to get a preferential tax rate on their share of the fund’s profits, known as carried interest. Assets that meet the holding period requirement are subject to the smaller long-term capital gains tax rate, rather than the rate for ordinary income.

SALT Deduction

The legislation sidesteps, for now, how to expand the $10,000 deduction for state and local taxes, or SALT, which has been a key priority for Democrats representing high-tax areas in New York, California and New Jersey. 

New York Representative Tom Suozzi, a Democrat co-leading the effort to reverse the limit, said in a statement Monday that he’s “confident that a SALT fix will be part of the final package.” He joined a statement with Ways and Means Chair Richard Neal and New Jersey Representative Bill Pascrell saying they are “committed to enacting a law that will include meaningful SALT relief.”

Oil and Gas 

Environmentalists fumed as the House plan fell short of Biden’s proposal to eliminate a raft of tax preferences targeted to the oil and gas industry, including credits for marginal, low-producing wells and write-offs of some drilling expenses.

Instead, the House measure would double a tax on the sale of chemicals and reinstate a 16.4 cents-per-gallon tax on crude and imported petroleum products to fund Superfund cleanups of toxic sites.

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