House Dems propose one of the largest tax increases ever to pay for Biden’s $3.5T spending bill

House Democrats on Monday proposed one of the largest tax increases in U.S. history to pay for President Biden’s $3.5 trillion expansion of the federal safety net.

Democrats on the House Ways and Means Committee released an 881-page bill outlining a series of tax hikes and one-time revenue generators they say will ensure Mr. Biden’s big-spending domestic agenda is fully funded.

“Our proposals allow us to both address our perilously changing climate and create new, good jobs, all while strengthening the economy and reinvigorating local communities,” said Ways and Means Committee Chairman Richard Neal, Massachusetts Democrat.

As part of the proposal, Democrats are eyeing tax hikes across the board, including on individuals and corporations. The proposal calls for:

• Raising taxes on tobacco products.
• Hiking the corporate tax rate from 21% to 26.5%.
• Increasing the capital gains tax from 20% to 25%.
• Raising the top rate on individuals from 37% to the pre-Trump era high of 39.6%.
• Imposing a wealth tax in the form of a 3% surcharge on individuals with income above $5 million.
• Increasing the minimum tax on foreign income derived by corporations, from 10.5% to 16.6%.

Republicans, who are unified in opposition to the entire package, said the tax increases are a recipe for disaster. They said the taxes would fuel inflation and cripple economic growth.

“American families and businesses are still working to get back on their feet. Now is not the time to raise their taxes,” said Rep. Mike Bost, Illinois Republican.

Democrats plan to pass the bill in party-line votes and to use a special procedure to force it through the Senate without allowing a GOP filibuster.

The tax increases are only one part of the Democrats’ strategy to raise enough money to pay for Mr. Biden’s ambitious agenda that includes new education and health care benefits, amnesty of illegal immigrants and climate change programs.

Mr. Neal and his colleagues are also plotting to scrap or limit dozens of income tax deductions.

For instance, Democrats proposed to cap the special deduction for pass-through entities, including law firms. They also want to curb estate-tax exemptions that former President Donald Trump pushed for in his landmark 2017 tax cuts.

Altogether, the proposal amounts to one of the largest tax increases in U.S. history.

Critics say the increases would hobble the economy and contribute to the offshoring of jobs. They note that the corporate tax rate proposed by House Democrats is higher than that of many foreign competitors, including China.  

“Raising the corporate tax rate is Biden’s next big mistake,” said Grover Norquist, president of anti-tax Americans for Tax Reform. “A corporate tax hike will decrease wages, increase prices, and hurt American competitiveness.”

Mr. Neal dismissed such concerns, arguing that the social welfare programs being funded by the tax hikes are desperately needed.

“We seek to help families better afford essentials with the continuation of the expanded Child Tax Credit and investments that will lower the cost of prescriptions and health insurance premiums,” he said. “And we can do all this while responsibly funding our plans.”

The proposal from the tax-writing Ways and Means Committee is a crucial element of the $3.5 trillion packages that Democrats are rushing to finalize.

They are pitching the spending plan to voters as “human infrastructure.” They suggest the package complements the $1.2 trillion bipartisan infrastructure bill that focuses on roads, bridges and airport projects.

The Senate passed the smaller bill last month, but House Speaker Nancy Pelosi, California Democrat, wants to make progress on the $3.5 trillion bill before taking up the infrastructure deal.

The bigger bill amounts to a wish list of liberal priorities such as proposals to fight climate change by promoting electric vehicles and weaning the electric grid off fossil fuels, adding vision and hearing benefits to Medicare, and providing tuition-free community college and government-paid family leave for all workers.

Democratic infighting, however, threatens to derail the package. Moderate Democrats facing tough reelection races next year in swing districts are threatening to oppose the package if the State and Local Tax, or SALT, deduction is not restored.

“I have been consistent for six months, No SALT, no deal,” said Rep. Tom Suozzi, a New York Democrat who is facing a tough reelection challenge next year.  

The SALT deduction allows individuals to write off certain taxes they pay to state and local governments annually. In coastal states such as New York and California, where the local tax burden is extensive, the deduction was long seen as especially beneficial.

Mr. Trump’s tax cuts capped the deduction at $10,000 per year. It also changed the eligibility criteria, allowing filers to deduct property taxes and state income or sales taxes, but not both.

Opponents of SALT argue that it delivers a huge federal subsidy to high-tax states and local governments.

The issue currently splits Democrats, with far-left lawmakers saying it is a giveaway to the wealthy who pocket the most savings from SALT deductions.

“Personally, I can’t stress how much I believe [SALT] is a giveaway to the rich,” said Rep. Alexandria Ocasio-Cortez of New York, a leader of the far-left “Squad” of young Congress members. “There’s a conversation to be had, I think, about the cap itself and at what level it’s appropriate and where we can help families that are really deeply impacted.”

Given that the package faces universal Republican opposition, Democrats can only afford three defections in the narrowly divided House if they are to pass the bill.

To date, Mr. Biden has sided with the progressives by not prioritizing the deduction in his $3.5 trillion spending package.

The proposal released by the Ways and Means Committee does not include SALT among the tax changes it hopes to incorporate into the $3.5 trillion deal. Mr. Neal clarified that he “committed to enacting a law that will include meaningful SALT relief,” but stopped short of promising it would be included within the bill.

Both the nonpartisan Tax Foundation and the liberal-leaning Brookings Institution concluded that the SALT deduction was a tax break for the wealthy.

“Households making $1 million or more a year would receive half the benefit of repealing the $10,000 federal cap on the state and local tax (SALT) deduction,” a study by the Urban-Brookings joint Tax Policy Center found. “Seventy percent of the benefit would go to those making $500,000 or more.”

The study further found that 96% of middle-income households would get no tax reduction at all by restoring SALT. On the other hand, nearly 93% of households earning more than a million dollars annually would receive a tax cut averaging $48,000.