Not so Fast: Why Congress May Not Raise Taxes This Year

BakerHostetler
Contact

BakerHostetler

When Democrats won the Georgia Senate elections in January, giving the party control of Washington for the first time in more than a decade, progressive lawmakers began promoting a series of sweeping tax increases that they said would help pay for trillions of dollars in planned new spending.

With their newfound majorities, Democrats could fast-track tax changes without Republican legislative obstruction, making a sweeping overhaul of the tax code seem like a foregone conclusion.

Rolling back key provisions of the 2017 Tax Cut and Jobs Act was just the appetizer for what leading congressional Democrats envisioned. Corporations would pay higher rates and global minimum taxes, wealthy individuals would see higher marginal rates, investors would face steep new taxes on capital gains, and estates and heirs would be singled out, too.

Chief financial officers and corporate tax executives scrambled to model how these swirling changes would affect their ability to innovate, generate revenue and create jobs. Wealthy individuals considered the potential tax implications of future asset sales as well as gamed out new estate-planning scenarios.

Turns out raising taxes is hard, even when the same party controls both ends of Pennsylvania Avenue in Washington. Democrats’ wafer-thin majorities in Congress may leave them lacking the votes to enact any tax increases.

Sen. Joe Manchin, D-W.Va., receives attention as the swingman in the 50-50 split Senate. He is the most moderate Democratic senator, and President Joe Biden received less than 30 percent of the vote in West Virginia in 2020 – leaving Manchin politically free to buck his party’s leaders.

But Manchin’s outsized Senate role overshadows Democrats’ math problem in the House, where the majority is fewer than five seats, with several current vacancies. While progressive lawmakers represent the largest block of the party’s caucus, House Democrats are not ideologically monolithic. Dozens of Democrats are members of the moderate New Democratic Caucus or the Blue Dog Caucus, and seven House Democrats represent districts won by then-President Donald Trump in 2020.

When it comes to taxes, Democrats’ fissures are not solely ideological. Lawmakers from New Jersey, New York, California and other states with high income and property taxes are demanding that any tax bill remove the 2017 change that capped the federal deduction for state and local taxes, or SALT, at $10,000.

But that SALT change would represent a massive tax cut for wealthy taxpayers, complicating progressive Democrats’ rhetoric around higher-earning Americans paying their fair share. Opposition to expanding the SALT deduction has created an oddball coalition of progressives such as Sen. Bernie Sanders, I-Vt., and moderate Democrats from states without local income taxes and where residents are mostly not impacted by SALT.

To approve tax increases on a party-line vote in Congress requires a complicated legislative process called budget reconciliation. Despite Democrats’ control of the House and Senate, that reconciliation process is neither quick nor easy to initiate.

Some House Democrats say the party currently lacks the votes even to begin the reconciliation process that could lead to a later tax bill. Even in a best-case scenario, Democrats would not begin that process until this summer, and that would push the later reconciliation tax bill into the broader and politically thorny spending debate about fiscal 2022 appropriations and increasing the debt ceiling and the government’s borrowing authority.

Any tax changes enacted solely by Democrats are expected to be part of a package that includes trillions of dollars for infrastructure projects such as highways, bridges and seaports. Some Democrats also want to see potentially trillions of dollars more in federal subsidies for childcare, universal pre-kindergarten and green energy initiatives, as well as funding for other social programs. But key lawmakers say Democrats lack consensus on what spending should be included and at what levels, or what taxes should be increased to help pay for that spending.

These intra-party cross-pressures create enormous challenges for congressional leaders such as House Speaker Nancy Pelosi, D-Calif. Persuading progressives to taper their demands for sweeping tax increases or persuading moderates to risk their re-elections by voting for higher taxes may prove an impossible task.

Still, it would be a mistake for corporate executives and wealthy taxpayers to breathe a sigh of relief or assume Congress will swing and miss on increasing taxes this year. Pelosi is a legislative master with a legendary history of leading her caucus through tough issues and tough votes. Plus, this could be Pelosi’s final year in office, so she is fully incentivized to deliver. But the toxic politics of raising taxes coupled with the limited maneuverability caused by Democrats’ slender majorities and their ideological divisions could sink the effort to raise taxes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:

BakerHostetler
Contact
more
less

BakerHostetler on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.