No New Tax Hikes? Sinema Sends Dems Scrambling

No New Tax Hikes? Sinema Sends Dems Scrambling

Speaker of the United States House of Representatives Nancy Pelosi (Democrat of California) weekly press conference
By Yuval Rosenberg and Michael Rainey
Thursday, October 21, 2021
Happy Thursday! President Joe Biden will soon be holding a town hall event in Baltimore, hosted by CNN, to promote his economic agenda and continue his push for a multi-trillion-dollar “Build Back Better” package. But while Biden fields questions from the public, Democrats are still working on answers to just what the package will look like. Here’s an update on where things stand.
Democratic Disagreements on Taxes and Spending Complicate Deadline Dealmaking

Democrats are scrambling to finalize a framework agreement for a roughly $2 trillion economic plan, still hoping to get it done by the end of the week. While a number of Democrats say a deal is in sight, there may still be some obstacles ahead given that members of the party remain split over key elements of the bill — and how to pay for it all.

“We've rounded the turn, and we're almost to the stretch,” House Speaker Nancy Pelosi (D-CA) told reporters Thursday. “And we're making great progress to our goal of securing a framework agreement for Build Back Better in a timely fashion.”

Pelosi added that Democrats were still in the process of narrowing their spending programs and the options for paying for them, but she insisted that the package will be fully paid for.

Other key players sounded far less optimistic about the chances of securing a deal by week’s end. “This is not going to happen anytime soon,” Sen. Joe Manchin (D-WV) said Thursday. “Until you see the text and the fine print, it’s pretty hard to make final decisions.”

On the spending side, Democrats have yet to settle some of their thorniest disagreements. “Some of the largest remaining obstacles,” Politico reports, “include paid leave, Medicare expansion, prescription drug pricing and climate, according to Democrats familiar with the discussions — all issues that risk alienating key factions of the party.”

Among the big issues:

A one-year extension of the expanded child tax credit. Some Democrats have pushed back on the proposal reportedly made by President Biden to shorten then extension of the tax credit to one year, preferring the original plan to keep the credit in place through 2025. Pelosi told reporters that she wants the credit made permanent but would go along with Biden. “This is the president's big issue,” she said. “If it's acceptable to him, in light of the bill, it's acceptable to me.”

Allowing Medicare to negotiate drug prices. Some key Democrats have objected to a proposal included in the House version of the legislation to allow Medicare to negotiate prices for prescription drugs, an idea that the pharmaceutical industry has long opposed.

Senate Finance Committee Chair Ron Wyden (D-OR) and Budget Committee Chair Bernie Sanders (I-VT) both reportedly insist that final legislation will include drug-price negotiation. “We’re going to go to the mat on it,” Wyden said Thursday. “We understand that the American people expect that Congress and Democrats specifically will deliver.”

The version of the provision included in the House bill could reportedly still be changed, with some elements of the plan phased in to ease concerns that the measure could impede the development of new medications. “But with at least three House Democrats opposing the toughest version of the measure, and at least one Senate Democrat, Kyrsten Sinema of Arizona, against it, government negotiating power appears almost certain to be curtailed, if not jettisoned,” The New York Times reports.

Climate provisions: Manchin’s opposition to a key clean energy program has left Democrats scrambling for other ways to meet Biden’s emission-reduction goals. The White House said Thursday that Biden and the administration could take action on their own. “We can do it without Congress,” said White House spokesperson Karine Jean-Pierre said.

The bottom line: Democratic leaders have set an October 31 deadline for their two major pieces of legislation, a bipartisan infrastructure bill and the Build Back Better social spending plan. But they reportedly have also begun to discuss an option to buy some more time by providing another temporary extension of surface transportation funding, this time through December 3.

“We expect negotiations to remain very hectic over the next 10 days,” Evercore ISI analysts Tobin Marcus and Peter Williams wrote in a note to clients Thursday, according to Bloomberg News. “We see a 50-50 chance that Democrats can reach a high-level deal on a reconciliation bill in the $1.8 – $1.9 trillion range by the end of next week.”

Democrats Back Off Raising Tax Rates on Corporations, Wealthy

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.

Send your feedback to please tell your friends they can sign up here for their own copy of this newsletter.


Views and Analysis