There are no tax hikes in the “bipartisan” infrastructure bill President Biden negotiated with some key senators last week. But tax hikes are probably coming all the same.
Biden is engaged in political jujitsu with a handful of Senate Republicans who want to get credit for supporting an infrastructure deal without appearing to enable other Democratic priorities. Biden threw them off balance on June 24 by linking the bipartisan bill to a second, Democratic-only measure likely to contain dozens of programs Republicans would never agree to. Biden basically said he’d sign both, or neither. That made Republicans look like dupes, and they squealed, risking support for the bipartisan bill.
A few days later Biden blinked, saying he’s not linking the two bills, after all. That gave Republicans cover to recommit to the bipartisan bill. Yet everybody in Washington knows Democrats still plan to do exactly what Biden outlined on June 24: Pass a bipartisan infrastructure bill with at least 10 Republican senators, to overcome a filibuster, then use the Senate “reconciliation” process to pass another bill with all the goodies Republicans won’t vote for.
It’s that second reconciliation bill that will contain the tax hikes Biden wants to impose on businesses and the wealthy. Overall, Biden is calling for nearly $4 trillion in additional spending on social welfare, infrastructure, green energy and many other priorities. The bipartisan bill would include about $1.2 trillion in new spending, more than $2 trillion short of Biden’s goal. So the partisan reconciliation bill could target $2 trillion or so in spending, and more if progressives like Sen. Bernie Sanders get their way.
The likeliest tax increases
That bill will also include tax hikes to pay for some or most of the new spending. Three tax hikes seem especially likely. The first is a business tax hike. Biden wants to raise the corporate tax rate from 21% to 28%, but a few Democrats say 28% is too high. Sen. Joe Manchin of West Virginia—the key swing vote among Democrats—says he could live with a 25% rate. That’s the informal target for Democrats, now.
Biden also wants to raise the top individual income tax rate from 37% to 39.6%, which was the rate before Republicans cut it in 2017. That would only affect Americans earning more than $510,000, and it’s popular with voters. Democrats shouldn’t have a hard time doing that.
Third is the capital-gains tax rate. Biden wants to raise it from a top rate of 20% to 39.6% for people earning more than $1 million per year. Some Democrats think that is too high, which means there probably aren’t enough votes for that to squeak past very narrow Democratic majorities in both houses. But handicappers think a compromise of around 28% is possible. “We continue to think the odds favor a $1-$2 trillion package passing through reconciliation that modestly increases taxes on capital, corporation and high earners,” analyst Isaac Boltansky of Compass Point Trading & Research explained in a June 28 research note.
There are other tax hikes in Biden’s plans that might be tougher for Democrats to pass on their own. A minimum corporate tax rate of 15% on about 50 huge companies would assure none of them wriggle out of taxes completely in any given year, but that would also undermine other elements of the tax code meant to encourage innovation. That could prompt enough disagreement among Democrats to scuttle the idea.
Biden also wants to eliminate a tax break in the estate tax for the wealthy. Republicans will wail about how this will affect family farms (whether true or not) and Democrats might drop it. There are a few tax breaks for real-estate investors and private-equity firms that Biden wants to repeal, but they wouldn’t raise a lot of money and may not be worth the fight.
A few other tax changes could sneak into the Democrats’ reconciliation bill, such as the green-energy incentives Sen. Ron Wyden (D., Ore.) has proposed. Wyden would repeal 40-odd tax breaks that affect energy producers and replace them with three tax breaks rewarding producers for generating energy that’s cleaner than average.
One of Biden’s biggest fundraising proposals is more funding for the Internal Revenue Service, to help collect some of the $500 billion or more that tax evaders owe each year, but don’t pay. That’s included in the bipartisan bill, however, as perhaps the only way to raise a meaningful amount of revenue without new taxes. So it won’t be available for the Democrats’ bill, which is likely in the fall.
The stock market rose modestly on June 24, when Biden announced the infrastructure bill, without any tax hikes. That was a cheer for new spending that might boost corporate profits, without taking anything away on the tax side. That’s only half the story, however, and markets may need to adjust for the other half, which is a core part of the Democrats’ plans, no matter how Biden characterizes it.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.