It’s surprising because Democrats were widely expected to put off their tax-increase plans until later. Many lawmakers are wary of hiking them now, when the economy is still struggling with the coronavirus pandemic. If anything, when it came to their stimulus plan, Democrats were focused on cutting taxes, not increasing them.
But they ran into problems complying with the stringent budget rules surrounding so-called reconciliation measures like the coronavirus legislation — especially after some wanted to add provisions like one waiving taxes on unemployment benefits.
If Democrats exceeded their $1.9 trillion budget cap for the plan, they would lose the procedural protections that were used to shield the entire measure from a Republican filibuster in the Senate.
The tax increases Democrats picked to help keep their plan’s cost in check had the political benefit of being arcane. Unlike things like raising the corporate tax rate or upping the top marginal tax rate on the rich, the ones they chose won’t produce many headlines.
They also fit Democrats’ themes of fighting inequality by forcing the well-to-do to pay more.
Since the provisions were added late in the legislative process, lobbyists didn’t have much time to rouse opposition to the plans.
“Everybody was caught by surprise,” said a former Democratic aide. “They picked obscure items — things that were not on the radar.”
Lawmakers are preparing to give final approval to the plan Tuesday. President Joe Biden is expected to sign it quickly, before an earlier round of expanded jobless benefits expires on March 14.
Of course, the real test for Democrats — who promised stiff tax increases on the rich during last year’s campaign — will come later, when they face demands to pay for something big like Biden’s plans for a major infrastructure package.
That will cost trillions, and lawmakers would need far bigger tax increases to defray its cost. Many moderates are less enthusiastic about tax increases, though, and it remains to be seen if lawmakers won’t take the more politically expedient path of deficit financing their plans.
Some say the coronavirus package offers a hint of what’s to come.
“Clearly it’s a signal that Democrats will look to high-income people and large corporations for revenue for the investment package to come,” said Seth Hanlon, a senior fellow at the liberal Center for American Progress.
Many Senate Democrats were concerned that millions of unemployed people would be surprised to learn this tax season that they have to pay taxes on their jobless benefits. They pushed through an amendment to the coronavirus plan exempting the first $10,200 in assistance.
To offset its cost, Democrats turned to a rule Republicans created as part of their 2017 tax cuts. It limits to $500,000 the amount of losses certain people who own unincorporated “pass-through” businesses can use to offset other income and thereby reduce their tax bills.
That issue became a lightning rod last year when lawmakers temporarily suspended that limit as part of a previous stimulus package. At the time, lawmakers were trying to get money into the hands of businesses owners in order to prevent layoffs by making it easier for them to qualify for tax refunds, and the $500,000 limit would have impeded that.
Many progressives criticized the move, calling it a giveaway to the rich.
Democrats’ coronavirus plan stops short of undoing last year’s provisions, though it does extend the $500,000 limit — which, like much of the Tax Cuts and Jobs Act, is currently scheduled to expire at the end of 2025 — by an additional year. The Senate Finance Committee says that will raise $31 billion.
Another provision generates $6 billion by going after executive compensation.
Businesses are normally allowed to deduct employees’ pay on their tax bills, though there are rules limiting those deductions when a CEO and a handful of a company’s other top employees earn more than $1 million. Democrats are doubling the number of officials, to 10, that would be subject to that restriction, which would hit businesses such as investment banks.
A third provision, which budget forecasters say will produce $22 billion, repeals an arcane provision giving multinational companies more flexibility in deciding how to account for their interest expenses when they do their taxes.
To be sure, the tax increases are dwarfed by the amount of tax revenue cut by the legislation — about $590 billion, according to the official Joint Committee on Taxation. Lawmakers are sending another round of stimulus checks to millions of Americans as well as temporarily expanding popular breaks like the Child Tax Credit and the Earned Income Tax Credit.
Rep. Lloyd Doggett, the No. 2 Democrat on the tax-writing Ways and Means committee, complained Democrats could have done a lot more.
“While these modest Senate changes are welcome, they show the tremendous unutilized revenue potential that could be tapped to help families trying to make a comeback,” he said.
“These revenues could be used for extending beyond this year the child tax credit or affording health insurance to more uninsured.”
This may not be the last time Democrats searching for cash turn to some of these particular provisions.
The one dealing with executive compensation could be squeezed even more. Banning altogether deductions for compensation exceeding $1 million — something Doggett has been pushing — would generate tens of billions of dollars in additional budget savings.
And Sen. Sheldon Whitehouse (D-R.I.), who sits on the tax-writing Finance committee, said he hopes Democrats will further extend the “loss limitation” restrictions on unincorporated businesses in subsequent legislation.
“The latest relief bill contained only a small temporary fix, but I hope we make the loss limitation permanent,” he said.