Democrats Look for Tax Options If They Have to Ditch Rate Hikes

(Bloomberg) -- After months of focusing on proposals to increase tax rates on income and capital gains, Democrats are exploring alternatives to fund President Joe Biden’s social spending expansion, according to people familiar with the discussions.

The White House, in a call with top Democrats Wednesday, floated a billionaires’ wealth tax and a tax on stock buybacks as alternatives to rate increases. A person familiar with the call said higher corporate taxes seemed less likely now than individual income-tax increases but talks remain fluid.

Congressional Democrats and the Treasury Department are considering ways to avoid increasing top-line tax rates, according to the people, who requested anonymity because the discussions are not public. The talks come as Senator Kyrsten Sinema of Arizona, a moderate Democrat, has continued to say she won’t vote for a package with increases on the corporate and individual tax rates, according to one of the people.

Sinema has been largely silent about what policies and financing mechanism she would back for the multitrillion-dollar economic package Democrats are now trying to nail down. Republicans have vowed to oppose the bill, and the Democratic caucus must be united for it to pass in the 50-50 chamber.

Spokespeople for Sinema did not immediately respond to an email seeking comment. The potential changes were reported earlier by the Wall Street Journal and Washington Post.

Among the options under discussion: increasing Internal Revenue Service audits of the wealthy; a “minimum book tax” to draw revenue from large corporations that report high profits but have little taxable income; and strengthening rules for multinational corporations.

Biden ‘Hopeful’

Biden told reporters before leaving on a trip to Pennsylvania that he continues to be optimistic about getting an agreement among Democratic factions before the end of the month.

“I’m hopeful. I think we’ll get a good deal,” he said.

It isn’t clear how extensively Democrats will need to redo their plan for the revenue portion of the economic package. Democrats gained more flexibility in recent weeks to fund the bill as lawmakers moved toward cutting the overall cost from $3.5 trillion to about $2 trillion.

Several of the options under discussion could face political, legal or administrative challenges that could complicate finalizing the legislation.

Proposals to require banks to release account-flow data to the IRS have faced significant blowback in recent weeks. Legal and tax scholars have questioned whether a wealth tax is constitutional, and if so, if the IRS could enforce it. Minimum taxes on domestic income can have unintended interactions with Democrats’ goal to increase manufacturing in the U.S.

Proposed Hikes

One Democratic lawmaker, who asked for anonymity to discuss private conversations, said Sinema’s opposition to tax-rate increases wasn’t a tenable position, and that she would likely have to retreat somewhat. Another person familiar with situation said Sinema is continuing to say she opposes increasing the top marginal income and corporate tax rates. The person said that doesn’t necessarily eliminate those as possibilities, but it has forced Senate and House Democrats to look for alternatives.

Democrats for months have been drafting a bill that would be funded by tax increases on corporations, wealthy households and investors. The House last month proposed to increase the corporate rate to 26.5% from 21% and the top individual rate to 39.6% from 37%, among other tax-code changes to put more of the burden on businesses and the rich.

That House package already had scaled back some tax increases originally proposed by Biden after several moderate members raised concerns. For example, Biden proposed a 28% corporate rate, compared to the 26.5% in the House bill. House Ways and Means Committee Chairman Richard Neal also rejected Biden’s plan to eliminate the carried interest tax break and instead made it more difficult for investors to qualify for special tax treatment.

In the Senate, Majority Leader Chuck Schumer has said he wants an outline of the major elements of the overall bill this week.

‘Not Punitive’

Democrats are looking to spend roughly $2 trillion on climate programs, child care and health benefits, and have pledged to fully offset the cost with additional revenue. Lawmakers will likely struggle to fund that much money by relying solely on measures that derived from the existing tax code, one of the people said.

Neal defended the rate increases that his panel approved last month. 

“I think 39.6% is a reasonable position for high earners,” he said. “I think our 26.5% on the corporate side raises revenue, but at the same time, it’s not punitive.”

Neal said he hoped to speak with Sinema soon to discuss ways to compromise.

Eliminating some tax increases from the legislation is likely to disappoint some progressive Democrats who see overhauling the tax code as a crucial way to address wealth inequality and make long-term economic changes. The options being considered to placate Sinema aren’t about achieving good policy, but rather about getting a bill that can pass, according to one person familiar with the matter.

Republicans, for their part, see Sinema’s resistance as a chance to blunt the impact of the tax increases that Democrats are pursuing.

“She understands and gets the impact that these tax increases have on businesses,” No. 2 Senate Republican John Thune who says he talks with Sinema regularly, said Tuesday. “I’m glad that some of the things she’s passionate about, in the case of this big tax-and-spending spree, sync up with the views of some of our members.”

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