WASHINGTON — After Republicans slashed tax rates in 2017, Democrats won control of the House of Representatives partly by promising to undo the “GOP tax scam.”
Democrats campaigned on taxes almost as aggressively as they ran on saving the Affordable Care Act. But now that they’re in power — and working on a major domestic policy bill funded by tax hikes on the rich — Democrats are barely touching the changes Republicans made with the Tax Cuts and Jobs Act under President Donald Trump.
“The irony of a Democratic president, Democratic House, Democratic Senate, if we don’t deal with rates?” said Sen. Mark Warner (D-Va.). “An implied endorsement of the Trump tax cuts. It’s pretty wacky.”
The party’s reversal is largely due to one lawmaker: Sen. Kyrsten Sinema (D-Ariz.). The senator has not addressed the issue publicly, but her office released a statement last month saying she thought increasing tax rates “will not in any way address the challenge of tax avoidance or improve economic competitiveness.”
Sinema’s position against raising rates ― even a little ― put Democrats in a real bind. She and other moderate members of her party have insisted the Build Back Better Act not add to the budget deficit. Democrats need her vote to pass the social spending and climate package, so they need to find other ways to help pay for the bill and make it deficit neutral.
Democrats originally planned to push the top marginal tax rate for individuals back up to 39.6%, where it had been before Republicans reduced it to 37%. They also wanted to nudge the corporate tax rate from 21% to 28%. (It previously it had been 35%.) Just those two rate changes would have raised more than $700 billion over a decade, according to the Joint Committee on Taxation.
As an alternative, Democrats are now moving forward with new “surtaxes” on people earning more than $10 million annually, plus an expanded corporate alternative minimum tax and an excise tax on corporate stock buybacks.
So Democrats will still be taxing the rich, just not in the same way they said they would. For campaign sound bites, the policy difference probably doesn’t matter.
“I think it’s very important that we make the wealthiest pay their fair share. We’re going to make real progress on that,” Rep. Sean Patrick Maloney (D-N.Y.), chairman of the Democratic Congressional Campaign Committee, told HuffPost.
“It’s a sorry state of affairs, and it didn’t need to be this way, because Biden laid out a clear agenda on things like rate increases [and] taxing capital gains at death that were pretty straightforward.”
– Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center.
Democrats criticized not only the policy changes in the Republican tax bill, but also the rushed process Republicans followed in drafting their law — a framework was negotiated in secret, and it was followed by quick committee approvals without hearings on novel policy ideas.
Now Democrats are doing basically the same thing, though arguably in an even more shambolic fashion, with committee markups in the House but no corresponding legislation in the Senate.
“It’s a sorry state of affairs, and it didn’t need to be this way, because Biden laid out a clear agenda on things like rate increases, taxing capital gains at death, that were pretty straightforward,” said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
Sinema’s opposition to tax rate increases is especially confusing because she voted against the Tax Cuts and Jobs Act as a House member in 2017. Her stance has pushed Democrats toward more complicated policies, such as expanding the corporate alternative minimum tax instead of just raising the corporate tax rate.
“There’s no sensibility to what she’s doing at all,” Rosenthal said.
Democrats are following through on undoing one part of the 2017 tax law: a $10,000 cap on deductions for state and local taxes paid. Their latest Build Back Better draft would lift the cap to $80,000. The limit targeted high-income taxpayers in Democratic states that used high income and property taxes to fund more generous social programs.
Even though the deduction overwhelmingly benefits the richest taxpayers ― namely the people with the most expensive houses ― Democrats from New York, New Jersey and California have been thrilled to trumpet the return of the so-called SALT deduction.
“I’m particularly pleased that we’re also going to undo the parts of the Trump tax scheme that screwed states like New York by taking away state local tax deductions, and we’re gonna fix that,” Maloney said.
Democrats dropped a proposal to tax investment profits when they’re transferred to heirs, which is a way family dynasties lay up wealth for generations. They also have decided against undoing changes to the estate tax Republicans made in 2017.
But Democrats have embraced a tax on stock buybacks, which surged in 2018 and became a symbol of the Tax Cuts and Jobs Act’s overly generous corporate tax cut. Companies buy back their own stock to boost the value of remaining shares. This benefits shareholders as well as company executives, who are typically compensated partly with stock. Democrats previously talked about banning buybacks, but have settled on taxing them, potentially raising more than $124 billion over a decade.
Rep. Kevin Brady (R-Texas), one of the main authors of the Tax Cuts and Jobs Act, estimated that 95% of the law would remain intact. The 5% of the 2017 law that Democrats are changing encompasses the SALT deduction and changes to the ways corporations are taxed on income earned overseas.
“But everyone knows these discussions aren’t over,” Brady said. “This fight isn’t over at this point.”
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