Raising tax rates on corporations and high-income households is a key part of Democrats’ plan to pay for their proposed multi-trillion-dollar social spending plan, but opposition to that approach from Sen. Kyrsten Sinema of Arizona has sent lawmakers scrambling to find alternative ways to offset costs.
Given Sinema’s resistance, there’s a growing chance that the corporate income tax rate could remain untouched in the Democratic budget bill. Even the compromise rate of 25% reportedly preferred by Sen. Joe Manchin appears to be on shaky ground.
The same is true of Democrats’ plan to increase the top personal income rate to 39.6%, up from the current 37%.
Failure to lift the tax rates would come as a disappointment to many Democrats, who have long called for reversing the GOP tax cuts. “Boy oh boy -- that would be a great irony if a Democratic president, House and Senate embraced the Trump tax cuts,” Sen. Mark Warner (D-VA) said Thursday.
It could also be a political loser for Democrats. “Democrats see hiking taxes on corporations and wealthy Americans as a political winner,” Punchbowl News said Thursday. “So giving into Sinema over her opposition to corporate and individual rate hikes will be seen as giving away a potentially big political boost for the party.”
Find the money: Despite Sinema’s intransigence, Democratic leaders continue to insist that their plan will be fully offset. That means Democrats still need to find a lot of revenue.
Goldman Sachs economist Alex Phillips said in a note to clients Thursday that some kind of increase in the corporate tax rate is still likely, though the odds of it passing are falling, as is the expected size of the increase.
A corporate tax hike would provide a significant amount of the revenues Democrats are relying on to offset their spending proposals. The House proposal to increase the corporate income tax rate to 26.5% would generate $540 billion over 10 years — or roughly a quarter of the cost of the latest, slimmed-down Democratic plan, which has a total cost in the ballpark of $2 trillion.
Increasing the top individual income tax rate to 39.6% would raise about $170 billion over a decade. All told, the full set of tax rate increases in the Democratic plan, which include an increase in the capital gains rate and a special surtax on high incomes, would raise about $1 trillion over 10 years, according to Phillips.
Beyond increasing tax rates, Democrats are reportedly looking at a range of other options for raising revenues. According to The Washington Post’s Tony Romm and Jeff Stein, White House officials are considering a tax on the assets of billionaires, which Sinema may support.
A new minimum tax on corporations has also been under discussion, as have a tax on share buybacks and a plan to crack down on tax cheats by beefing up the IRS — all part of what a White House spokesperson called an “expansive menu of options” available to fund the Democratic plan.
“There’s a lot they can do to raise taxes without the rate hikes, but eliminating the rate hikes on corporations makes it a lot harder because it takes away a lot of revenue. But you can do it, especially if the goal is a lot smaller,” Howard Gleckman of the Tax Policy Center told the Post.
Politico reported late Thursday that Sinema has told the White House that she would support tax increases in four major areas (“international, domestic corporate, high net worth individuals, and tax enforcement”) to provide sufficient funding to fully pay for the Democratic plan.
Manchin presents another hurdle: Sinema’s objection to raising tax rates is not the only thing standing in Democrats’ way of reaching an agreement on their budget package. The projected overall spending level has been falling in response to Manchin’s refusal to support a package costing more than $1.5 trillion over 10 years — less than half the $3.5 trillion that many Democrats have been seeking.
To reduce the size of the bill, Democrats have started to shorten the duration of programs and cut back on the benefits they offer. The refundable child tax credit, for example, may be extended for just one year, while the paid leave program would be temporary, offer just four weeks of leave rather than 12, and not start until 2024.
But Manchin threw cold water on that approach Thursday, telling reporters that revenues and new programs need to match. “The thing that I'm very much committed to is if we're going to tell the people we're paying for something and the revenue is a 10-year revenue then the program should be for 10 years,” he told reporters. “If it was important enough for us to have new revenue, adjust our tax code, then the program should last for that. If not, you're not being genuine and saying: Well, we're gonna pay for it with 10 years of revenue, but we're only gonna have a program for 1 or 2 or 3 or 4 years.”
The bottom line: Democrats have options for raising revenues to pay for their plans, but it won’t be easy to do so while satisfying the demands of Manchin and Sinema.