(Bloomberg) -- The biggest set of U.S. tax increases in a generation took a major step forward on Wednesday with approval by the House Ways and Means Committee of $2.1 trillion in new levies mostly focused on corporations and the wealthy.
The vote largely along party lines -- there were no Republican votes in favor -- brings President Joe Biden’s $4 trillion longer-term economic agenda one step closer to enactment. The tax package will help pay for the biggest expansion in social spending in decades, in a budget bill currently penciled in at $3.5 trillion.
While the committee agreed to key elements, including tax increases on businesses and the wealthy, an extension of refundable child tax credits along with a bevy of incentives for clean energy, differences remain with legislation being developed in the Senate. With slim majorities in both chambers, Democrats expect weeks of wrangling to smooth out the disputes.
“We celebrate success in this nation. But we can also ask the biggest companies and the ultra-wealthy to contribute a bit more to the common good,” Ways and Means Chairman Richard Neal said. “While the increases that we propose will go a long way in responsibly paying for our planned investments, the rates will still remain lower than they were before to the 2017 tax law.”
Among key measures yet to be determined is addressing the $10,000 cap on the federal deduction of state and local taxes, or SALT. Neal on Monday had agreed to “meaningful” changes from the 2017 GOP-imposed measure that largely affects high-tax, Democratic-run states. His panel punted SALT talks to Speaker Nancy Pelosi to resolve later, likely at the House Rules Committee, which governs the chamber’s floor action.
After his committee voted on the tax hikes, Neal said “conversations continue” on how to address SALT in the final package.
“Obviously before we come to final passage on anything we are going to have to address that issue,” he added.
He said it is “hard to say” how long it would take to come to an agreement.
Representative Tom Suozzi, a New York Democrat and fierce advocate for the deduction’s restoration said, “I have spoken with the chairman. I’ve spoken with the speaker, I’ve spoken with” Senate Majority Leader Chuck Schumer “and I’m confident that we will resolve the issue of SALT.”
For businesses, the legislation approved by Ways and Means would:
Increase the top corporate tax rate to 26.5% from 21%, while offering a lower rate to smaller businessesExtend tax rules on sales of equities to cryptocurrencies and commodities for the first timeLargely leave untouched breaks for oil and gas companies, in a move that angered environmental groupsBoost taxes on overseas earnings for U.S. multinational companies, by increasing a minimum levy enacted in 2017 during the Trump administration. It would also reduce an exemption for some of that incomeReinstates a key debt-refinancing tool for state and local governments and creates a Build America Bonds-style debt program
Top marginal income tax rate is restored to the 39.6% that preceded the 2017 GOP tax overhaul signed by President Donald TrumpA 3% surtax is imposed on incomes of more than $5 millionCapital gains rate rises to 25% from 20% for transactions by high-income individuals made after Sept. 13, 2021New limits are set for large individual retirement accountsA boost to the net investment income tax will generate an estimate $252 billionThe doubling of the estate tax exemption enacted by Trump would come to an end in 2022The up-to-$3,600 per year monthly child tax payment Democrats enacted this year will be extended through 2025
The bill on net is estimated to raise $871 billion, after the value of the tax breaks are taken into account. Democrats say they will be able to pay for additional social spending in the so-called reconciliation package by counting some $600 billion in savings from Medicare spending on drugs, along with funds from increased tax enforcement and added revenue stemming from the faster economic growth that’s anticipated as a result of the overall bill. The drug pricing proposal failed to pass another committee Wednesday because of opposition from Democratic moderates, raising questions about its viability.
Republicans are united in opposition to both the tax increases and the social spending they would help fund. GOP members of the House Ways and Means panel argued over four days of votes on amendments that the Democratic proposal would stymie the economic recovery and lead to a wave of companies leaving the U.S. They zeroed in on tax breaks like a $12,500 electric vehicle credit that can be claimed by the well-off, while blasting a doubling of tobacco taxes -- which hits the poor.
“Never has our government wasted so much to kill so many American jobs, drive prices even higher, and hook a whole new generation of the poor on government dependency,” the committee’s top Republican, Kevin Brady, said ahead of the final vote.
The 24 to 19 committee vote reflected the “no” cast by moderate Democrat Stephanie Murphy of Florida, who is concerned over the planned $3.5 trillion price tag for the overall bill. Last week, the panel by a similar margin approved the largest expansion of Medicare in two decades -- including dental, vision and hearing benefits for the first time -- along with provisions allowing Medicare to negotiate on drug prices.
Pelosi can only afford to lose three votes when the legislation comes to the floor, so changes to satisfy Murphy and other moderates are likely. Modifications to the tax bill could come when it is sent to the House Rules Committee or through an amendment on the House floor.
Along with SALT changes, House Democrats are also still considering the Biden administration’s proposal to require banks and other financial institutions to report customers’ account flows to the Internal Revenue Service.
Neal said that provision is still in play, with members working with the White House and Treasury to come up with a plan that Democrats can agree on. Biden’s proposal, which would kick in for accounts with gross flows of $600 or more, has faced backlash from banking and credit union trade associations, as well as consumer protection groups.
Challenges for the tax legislation remain in the Senate. The fast-track reconciliation process that Democrats are using bypasses the normal 60-vote requirement to defeat a filibuster, removing the need for Republican support. However, all 50 members of the Democratic caucus would be needed for passage, and not all of them are on board with the $3.5 trillion program. Senator Joe Manchin of West Virginia wants a smaller-scale bill and has suggested a 25% corporate tax rate.
Senate Finance Committee Chairman Ron Wyden is also looking at additional tax increases, like a 2% tax on corporate stock buybacks and another excise tax on excess CEO compensation. Wyden’s energy tax plan is also different from the House, with a focus on credits closely linked to carbon emissions reduction.
Wyden has also complained that the House panel does not do enough to tax billionaires. Even so, a proposal by the White House to tax unrealized gains of millionaires and billionaires at death is all but dead in the House, according to Neal. He indicated this week that ending the benefit, known as “step-up in basis,” didn’t have enough support to garner the 218 votes needed for it to pass the full House.
“I talk to Senator Wyden as much as anyone can talk to him,” Neal said.
(Updates with Neal comments, in sixth, seventh and final paragraphs.)
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