Biden’s Tax Agenda in Peril as Congressional Democrats Respond to Lobbyists
Several prominent Democratic members of the House and Senate have indicated that they are reluctant to approve President Biden’s proposals to raise revenue from high-income individuals and corporations even though these proposals are extremely popular with voters. Given that no Republicans are expected to support Biden’s plan and the Democrats have very slim majorities in the House and Senate, this could prove fatal to many of the tax increases that Biden has proposed.
Former Democratic Sen. Heidi Heitkamp is lobbying to stop one of President Biden’s key proposals to close loopholes for the wealthy in the personal income tax, even though Heitkamp articulated support for Biden’s proposal on live television just four months ago. Biden’s proposals to raise corporate taxes may be held up by Democrats using international negotiations to prevent tax dodging as an excuse for Congress to do nothing.
One tax change that many Democratic lawmakers seem intent on enacting, repeal of the cap on SALT deductions, would slash taxes for the richest one percent. The combination of their desire to repeal the SALT cap and their apparent discomfort with tax increases raises the question of whether the richest Americans will end up paying less than they pay now under the forthcoming legislation.
Former Democratic Senator Heidi Heitkamp Paid to Reverse Her Position on Capital Gains
Part of Biden’s plan would increase personal income taxes for high-income individuals. A cornerstone of these tax increases is Biden’s proposal to repeal the so-called “stepped-up basis rule” allowing people like Jeff Bezos to avoid paying taxes on most of their real income. Because of the stepped-up basis rule, unrealized capital gains on assets, which are normally taxed as income when an asset is sold, are entirely exempt from taxes forever when assets are passed onto heirs.
While speaking on national television four months ago, Heidi Heitkamp, former senator from North Dakota and a Democrat, rightly criticized the stepped-up basis rule. Today she is paid to promote the opposite view and lobbies against Biden’s proposal to repeal that unfair tax loophole for the wealthy.
Heitkamp appeared on ABC News in April of this year, debating Chris Christie, who said increased taxes on capital gains are “double-taxation” and “redistribution.”
In response, Heitkamp said
“…And this is one of the biggest scams in the history of forever on income redistribution. If you have a tax — if you have a stock, you can pass it on to your kids with stepped-up basis, and it’s never taxed. You know that there needs to be reform on unearned income. And, so to demonize it and say it’s going to hurt the little guy, yes, that just is not factual, Chris. And you know it.”
Today, as reported by the Hill, Heitkamp advocates for the opposite position and lobbies against Biden’s proposal.
“A ‘dark money’ group run by former Sen. Heidi Heitkamp (D-N.D.) announced a six-figure ad campaign Friday opposing Democrats’ proposal to tax capital gains at death, a key source of funding for the spending plan.”
Several Democratic members of Congress seem responsive to this lobbying and have indicated that they are reluctant to repeal the tax break.
Heitkamp now says Biden’s proposal to end the tax break will hurt family businesses and family farms and will somehow hurt Black and Hispanic entrepreneurs. All of this is wrong. There are exceptions in Biden’s proposal for family businesses and family farms. The proposal would end a huge loophole for income generated by wealth, and wealth is held disproportionately by white households.
Read ITEP director Amy Hanauer’s twitter thread explaining that Heitkamp is claiming concern about family enterprises and people of color but is actually fighting to protect Jeff Bezos and a tax system that perpetuates a racial wealth gap.
Group of House Democrats Say International Tax Negotiations Justify Inaction by Congress
Another part of President Biden’s plan would increase taxes on profitable corporations. He proposes to raise the corporate tax rate to 28 percent and to ensure that offshore profits of corporations are taxed at a rate of at least 21 percent. Corporations would no longer benefit from using accounting gimmicks to claim their profits are earned in offshore tax havens where they will not be taxed.
International negotiations at the OECD and G-20 are moving towards a global agreement to tax offshore profits at a rate of at least 15 percent. This would make Biden’s proposal work even better because it would reduce the gap between the rate imposed by the U.S. and the rates imposed by other countries.
However, some House Democrats now make a convoluted argument that the international negotiations provide a reason for Congress to do nothing. Eleven House Democrats sent a letter to the chairman of the House Ways and Means Committee, Rep. Richie Neal, arguing that “enacting tax increases above and beyond the final implemented OECD agreement, or getting out too far ahead of our OECD partners, would risk U.S. international competitiveness.”
A letter sent to Chairman Neal from all the major labor unions blasted the eleven Democrats, saying,
“Their position, simply stated, is that the United States should not fix a broken tax system that rewards multinational corporations for moving jobs and profits overseas unless the Estonians and the Irish give their permission. We vehemently disagree with their assessment. There is no good reason for the President and Congress to wait for the OECD negotiations to be concluded or to limit their reforms to those included in the international framework.”
The letter from the labor unions refutes all the points made by the eleven Democrats, explaining that the 15 percent minimum global tax rate being negotiated by the OECD is meant to be a minimum, not a maximum, that could be imposed by the world’s governments.
The eleven Democrats who wrote to Neal claimed to be concerned about American corporations competing for consumers all over the world. The labor unions’ letter reminds them that
“…under the current rules, American multinational corporations claim that huge portions of their profits are earned in tiny countries where there are almost no consumers, like Bermuda and the Cayman Islands, which do not tax corporate profits. These corporations also claim to generate huge profits in countries like Ireland, which has a low tax rate and facilitates schemes to further shift profits to other tax havens.
For example, according to the IRS, American corporations collectively reported in 2018 that they earned $97 billion in Bermuda, a country with only 64,000 inhabitants and a gross domestic product that year of $7.2 billion. In other words, American corporations are using accounting gimmicks to claim that their subsidiaries in Bermuda earned $97 billion, which is more than 13 times the entire economic output of that tiny nation. This is plainly ridiculous, and Congress should not wait to address it.”
The eleven Democrats who wrote to Neal profess concern about American competitiveness, but they are actually fighting to allow U.S. corporations to shift billions of dollars in profits to offshore tax havens like Bermuda.
Many Congressional Democrats Are More Focused on Cutting Taxes for the Rich by Repealing the SALT Cap
While Congressional Democrats remain divided over raising revenue, a vocal group within the caucus demands the repeal of the one provision in the Tax Cuts and Jobs Act that restricts tax breaks for the rich.
The 2017 Tax Cuts and Jobs Act (TCJA) placed a $10,000 cap on federal tax deductions for state and local taxes (SALT). Republican drafters of TCJA could have eliminated or limited any number of special breaks and loopholes to pay for their tax cuts. They chose to focus mainly on limiting the SALT deduction because it disproportionately benefits residents of states with higher taxes, which are mostly “blue” states. This is obviously not a sound way to make tax policy.
But repealing the SALT cap entirely is not a solution. ITEP estimates that if Congress repeals the cap on SALT deductions, federal revenue will drop by around $100 billion in 2022 alone and 61 percent of the benefits will go to the richest one percent while 85 percent of the benefits will go to the richest 5 percent.
Lawmakers could instead choose to replace the SALT cap with a different kind of limit on tax breaks for the rich that would not target particular states. Or they could reduce the reach of the SALT cap without repealing it entirely. A new ITEP report estimates the effects of three different proposals along these lines, which would each cost less than a third as much as repealing the SALT cap.
Democrats in Congress need to consider one of these compromises or simply leave the SALT cap in place. Otherwise, their eagerness to repeal the SALT cap combined with their reluctance to eliminate special breaks for wealthy individuals and corporations as Biden proposes, suggests that the overall impact of their tax bill could be lower taxes for the rich rather than higher taxes.
