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Democratic budget agreement sets stage for tax hikes

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Tax Hot Topics newsletter Senate Budget Committee Democrats have agreed in principle on a $3.5 trillion reconciliation budget that would allow Democrats to enact their tax platform with only 50 votes in the Senate.

The agreement is an important first step for Democrats hoping to advance their massive tax agenda, but many hurdles remain. Budget Committee Democrats must still sell the package to the rest of their party. The compromise has been endorsed by Senate Majority Leader Chuck Schumer, D-N.Y., and several important moderates, but it will need the support of every Democratic senator and nearly all House Democrats. Speaker Nancy Pelosi, D.-Calif., recently noted that House Democrats may want to tweak some of the Senate’s priorities in the budget resolution once the package is transitioned from the Senate to the House.

Democrats will also need to flesh out the details behind the proposed budget resolution. Reconciliation instructions in a budget resolution generally prescribe only top-line revenue targets for each committee and do not need to include specific policy instructions. A budget agreement will not necessarily represent an agreement on all the elements of the eventual reconciliation package, though there appears to be broad agreement on the major policy objectives. The $3.5 trillion cost is intended to be offset by tax increases, healthcare savings (drug pricing reform), and long-term economic growth.

The Senate Finance Committee will be responsible for writing the tax legislation to fulfill reconciliation instructions for revenue. Significant tax increases would be required to cover both the spending portions of the bill and Democratic proposals to address the cap on the state and local tax deduction, enhance energy incentives, and extend enhancements to the earned income, child, and child and dependent care tax credits. The full gamut of tax proposals offered by President Joe Biden will be on the table, though significant compromises will likely be needed. Democratic lawmakers are also discussing raising revenue from a tariff or tax on carbon-intensive imports. Few details are available on this potential “methane reduction and polluter import fee,” but it appears to be modelled on similar tariffs proposed in the European Union.

Schumer has set a July 21 deadline to vote on both the budget resolution and the Senate’s $1.2 trillion bipartisan infrastructure package in an attempt to move both bills on similar timelines before the August recess. Pelosi has indicated that the House will not vote on the bipartisan infrastructure deal without the Democratic reconciliation bill, though Republicans have objected to Democrats linking the two bills together.

Negotiations on the details of the infrastructure compromise have also hit recent snags. Lawmakers had tentatively agreed to raise as much as $100 billion from increased IRS enforcement through IRS funding increases and administrative provisions. These provisions have since run into both scoring challenges and political and policy concerns. Lead negotiators recently indicated they have been stricken from the agreement, sending lawmakers scrambling for other funding mechanisms.

The outcome of the bills remains in flux, and both inter-party and intra-party disagreement could threaten the future of both bills. If a budget is passed before the August recess, lawmakers would not be expected to write the reconciliation bill itself until the fall.

Contact:
Dustin Stamper
Managing Director
Washington National Tax Office
T +1 202 861 4144

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