Democrats in Congress are trying to build back smaller, but President Biden may not get the tax hikes he’s seeking until after the next presidential election. He’d have to win, obviously.
Democrats still have six months until the November midterm elections to pull together legislation that would include some of Biden’s social-welfare and green-energy goals, and the tax hikes he’d use to fund them. They can still use the so-called “reconciliation” process to do it, if all 50 Democratic senators vote yes. Biden, for his part, hasn’t changed his mind and would doubtless love to get part of his “build back better” agenda enacted as long as Democrats still have control of Congress.
But Democrats have clearly lost their mojo as voters demand action on just one thing: inflation. Biden has made the case that green-energy investments would lower energy costs, and that new programs such as subsidized child care would lower costs for working families. That logic is iffy, however, and even if Biden is right, consumers wouldn’t see results for years. Some Democrats, meanwhile, have gotten spooked about big new spending programs because the last one—the American Rescue Plan, passed 13 months ago—probably had a role in pushing inflation to a sizzling 8.5%.
Sen. Joe Manchin of West Virginia is keeping hope alive by continually telling anybody who will listen what he’d be willing to accept in a build-back-smaller bill. Manchin is key because he pulled the plug on a big Biden bill last December, saying it was too costly and too gimmicky. Without Manchin’s vote, Democrats couldn’t reach the majority needed to pass the bill.
That bill was a $1.75 trillion package of green-energy investments and new social programs such as universal pre-school and federal subsidized paid leave. So what could Manchin vote for today? First, he says he’d support a hike in the corporate income tax rate from 21% to 25%, not far from the 28% rate Biden wants. He’d also raise the top capital gains rate from 20% to 28% and eliminate some tax loopholes. He wants half of the new revenue to reduce federal debt, leaving perhaps a couple hundred billion dollars for a range of energy investments. Manchin has little enthusiasm for Biden’s social programs.
But Democrats may now lack the votes to raise taxes. High inflation makes it riskier to make big changes to the economy, even if they’re phased in or delayed until, say, next year. A handful of Senate Democrats in close re-election races don’t want to do anything remotely controversial with their seats on the line. Then there’s Sen. Kyrsten Sinema of Arizona, who doesn’t face reelection until 2024 but has resisted nearly all Democratic efforts to raise taxes. There may be rumblings of a new Democratic tax law during the next couple of months, but Democrats will continue to struggle from the lack of cohesion that has plagued the party since it took full control of Congress in 2021.
If Democrats add to their slim majorities in the House and the Senate in this year’s elections, that would be an endorsement of Biden’s agenda, which would open the door to tax hikes in 2023. But Biden’s weak approval rating, around 42%, suggests voters don’t really want the Biden agenda, or at least they want him to solve inflation first. That’s why Republicans are now heavily favored to retake control of the House, with perhaps even odds they’ll retake the Senate.
There’s obviously no chance a Republican-controlled Congress would approve any tax hike in 2023 or 2024, short of a national emergency. But Republicans do have to plot a strategy on taxes, because many of the Trump tax cuts, which went into effect in 2018, expire at the end of 2025. Making some of those cuts temporary was the only way to stay within budget parameters necessary to get the deal done at the time.
The Trump tax law cut the top business rate from 35% to 21%, permanently. It also lowered the top individual rate from 39.6% to 37%, while lowering tax rates for most other income brackets. Those changes are temporary, however, which means they’ll go back to the earlier, higher rates if Congress does nothing.
‘A big forcing mechanism’
That could make tax changes imperative in 2025, no matter which party controls Congress.
“There are some tax policies that need a big forcing mechanism,” Beacon Policy Advisors wrote in an April 28 analysis. “That’s coming at the end of 2025 when the individual provisions of the Tax Cuts and Jobs Act expire.”
If Democratscontrol Congress and the White House in 2025, that could be when Biden’s biggest tax ideas finally have a chance, including higher rates on businesses and the wealthy and a renewed expansion of the child tax credit that ended last year. Democrats also bristle at the $10,000 limit on state and local tax deductibility (known as SALT) that was in the Trump tax law, which affects blue states more than red ones. That limit is due to expire in 2025, as well, and Democrats would almost certainly let it die.
Republicans would obviously have a very different agenda, which could include finding a way to make the individual tax cuts permanent, or at least extend them for another eight or 10 years. They’d keep the $10,000 SALT limit in place, or maybe kill the deduction altogether, effectively raising taxes (again) on wealthy blue-state residents.
The most interesting scenario might be a split government in 2025, with the president’s party facing opposition in at least one chamber of Congress. Doing nothing is an option, if a split government couldn’t reach bipartisan agreement. Taxes would rise on individuals, and each party would blame the “tax hike” on the other. Americans would get even more fed up with government than usual.
But that’s three years away! For 2022, expect a lot more talk than action. When Biden’s term hits the halfway point, he probably won’t be able to point to a single, substantive tax hike he was able to enact. That’s not necessarily a bad thing.