Democrats have begun telegraphing their plans for potential tax increases to fund an infrastructure package that could total $3 trillion or more.
Now that the $1.9 trillion American Rescue Plan Act of 2021 (ARPA) has been enacted, President Joe Biden and congressional Democrats are turning their attention to a longer-term economic recovery bill. This legislation could include physical infrastructure investment, climate change initiatives, and proposals aimed at “economic infrastructure.” On the tax side, this could translate into tax incentives for alternative energy, enhancements to earned income and child tax credits, and tax provisions aimed at encouraging retirement savings and other employer family benefits. More importantly, Democrats are also considering tax increases to fund much of this spending, which could total $3 billion or more.
Democrats are still debating how much of the cost of their infrastructure bill should be offset by tax increases, and how quickly these tax increases should take effect. Treasury Secretary Janet Yellen has called for “tax increases to pay for at least part of it that would probably phase in slowly over time.” Biden has recently reiterated his pledge to make corporations and high-income taxpayers “pay their fair share,” and promised both a corporate tax rate increase and a “small to significant tax increase” for “anybody making more than $400,000.”
Biden’s campaign platform included tax increases that would:
- Raise the corporate rate to 28%
- Raise the top individual marginal rate to 39.6%
- Raise the capital gains rate to 39.6% for those with income exceeding $1 million
- Phasing out the Section 199A deduction
- Raising the rate on global intangible low-tax income (GILTI) and applying it on a country-by-country basis.
Congressional Democrats will have significant influence on the ultimate shape of any tax legislation, and many of these proposals could be moderated significantly through compromise. Democrats still face major hurdles in the Senate, where they must placate moderates to reach the unanimity needed to pass anything without Republican support.
Democrats are still working through their options for Senate action. The reconciliation process may be needed again to avoid 60 vote procedural hurdles, but it comes with restrictions that could make an infrastructure bill difficult to enact. Democrats have made overtures to Republicans about a potential bipartisan bill, but Republicans have so far been dismissive of Democratic revenue raising priorities. Democrats could also try and pursue separate packages, one vehicle to carry bipartisan initiatives through regular order, and another with tax increases and other controversial changes done by reconciliation. But Republicans may be unlikely to cooperate with that kind of two-track process.
The Democratic plans will become clearer in the coming weeks. Congressional tax writers are holding hearings to discuss their proposals, and the president is expected to detail his tax platform in a Treasury “Green Book” after the administration’s budget is released.
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
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