U.S. Tax Overhaul Shelved, Imperiling Credits, Millionaire Levy
(Bloomberg) -- A host of Biden administration and Democratic tax priorities sank into deep jeopardy on Sunday, imperiling the backbone of the party’s messaging for the midterm elections.
Moderate Democratic Senator Joe Manchin’s opposition to Biden’s economic agenda threatens the party’s ability to maintain expanded child tax-credit payments -- with the final disbursement out in mid-December -- or to enlarge the federal deduction for state and local taxes.
Democrats hoped those two tax-cutting efforts would help them maintain House and Senate majorities, particularly in suburban swing districts where the cost of raising children and property taxes are top concerns for many voters. Also shelved: a surtax on those earning more than $10 million that was designed to help address inequality.
“Failure is not an option” with regard to the tax and social and environmental spending bill, Senate Finance Committee Chair Ron Wyden said in a statement Sunday. “The Finance Committee has put forward a revenue menu with more than enough options to permanently pay for these priorities.”
Biden’s efforts to remake the tax code to shift more of the burden onto wealthy taxpayers and corporations was a key part of his presidential campaign. The plan for the largest tax increase in a generation is of particular importance to progressive Democrats who ran on higher levies on the rich and big firms to pay for expanded social services and climate spending.
Scuttling the $1.75 trillion Build Back Better bill would mean Democrats have little to show after months of negotiations. In the House, where the party is projected to lose its majority in next November’s midterm elections, some lawmakers in swing states had to take a tough vote last month for a package that contained priorities for both moderates and progressives -- a move that their political opponents could use against them.
Meanwhile, House Democrats now have limited paths to expand the SALT deduction. The tax break was capped at $10,000 to help pay for the Republican tax cuts in 2017, a limit disproportionately hitting residents of high-tax states like New York, New Jersey and California.
Without a large tax-and-spending vehicle in which to include a higher SALT cap, it’s unlikely the measure could be considered as a standalone bill, because the idea is not favored by many progressives.
The tax-hike provisions currently in the bill had already been scaled back significantly from the ideas Biden first proposed earlier this year. The bill calls for a 15% minimum tax on corporate financial-statement profits, higher levies on U.S. companies operating abroad and the surtax on individuals earning at least $10 million.
Other ideas -- including raising the 21% corporate tax rate, higher capital gains levies and a higher rate for individuals -- were jettisoned from the legislation because of opposition from moderate Senator Kyrsten Sinema, as well as some Democrats representing rural areas.
The watered-down version of the tax plan that remained and passed the House in November has broad support among Democrats -- including Manchin, who has said he supports some tax increases on the wealthy and businesses so that they pay their fair share.
However, because Manchin is at odds with colleagues over many of the spending elements in the bill being funded by the new taxes, that portion may never become law.
The bill’s potential collapse raises another headache for the White House: The legislation included measures necessary to implement a sweeping global tax agreement that the Biden administration had helped negotiate this year, and which is now supported by almost 140 countries.
The deal aims to limit the flight of corporate profits to low-tax havens by introducing a global minimum tax, and to resolve widespread disputes over cross-border digital commerce with a new formula for sharing the rights to tax profits at the biggest multinationals. Its success would represent a major international achievement for Biden, but it might also fall apart if Congress doesn’t hold up the U.S. end of the bargain.
Build Back Better would have put U.S. tax law into line with the minimum tax component, known as Pillar Two. A separate measure is expected in mid-2022 to enable the tax reallocation part, or Pillar One.
Lily Adams, a spokesperson for the U.S. Treasury Department, played down the potential impact of Sunday’s massive setback for the wider legislation.
“The global agreement commits countries to implement Pillar Two in 2022, with the rules coming into force in 2023,” Adams said. “We are confident we will meet that commitment.”
Even so, other big partners to the agreement are already worried over whether Congress will follow through on the deal. Delays that reach mid-year could seriously undermine that already shaky confidence, according to Jacob Kirkegaard, a senior fellow based in Brussels at the German Marshall Fund.
“We are still in the window of opportunity until, say, May or June, after which I guess the midterms kill prospects for congressional passage, which the rest of the world will not appreciate,” he said.
At that point, he added, many countries might contemplate reimposing digital commerce taxes that were banned under the agreement. An earlier round of such laws led to a near trade war between the U.S. and several European allies.
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