Democrats Release Details of Proposed Tax Increase

Democrats aim to use the money to pay for expanding the social safety net and combating climate change, but the committee’s proposal shows how Democrats could find enough money to pay for almost all of their spending agenda, aimed at $3.5 trillion over a decade. In several areas, the committee proposed tax increases that weren’t as far-reaching as the Biden administration. It didn’t propose the structural changes to capital-gains taxes that had drawn opposition from Democrats.

The committee made up the money elsewhere with changes to the estate tax, the 3-percentage-point surtax on people making more than $5 million and several tax increases that would affect closely held companies whose owners pay those business taxes on their individual tax returns.

The capital-gains tax increase would be effective as of today, with special transition rules for deals with binding contracts that haven’t been completed yet, according to a summary released by the committee.

The proposal will test Democrats’ willingness to raise taxes. Some lawmakers, including Senate Finance Chairman Ron Wyden of Oregon, insist that tax politics have changed and that Democrats can win votes by strongly advocating that corporations and wealthy Americans pay more.

But others, including Ways and Means Chairman Richard Neal (D., Mass.), have been more cautious.

“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. And we can do all this while responsibly funding our plans,” Mr. Neal said Monday.

The list of tax increases that Mr. Neal proposed on Monday is extensive and will prompt a lobbying flurry from businesses and their allies. Republicans are expected to oppose all of it.

For individuals, the top marginal tax rate would rise to 39.6% from 37% starting in 2022. That tax rate would kick in at taxable income of $400,000 for individuals and $450,000 for married couples, below where the Biden administration had proposed.

The 3-percentage-point surtax would apply to individuals and married couples with adjusted gross income above $5 million.

The proposal released by the committee on Monday is silent on the state and local tax deduction, which was capped at $10,000 in 2017. Raising or repealing that cap is a priority for Democrats from high-tax states such as New York and New Jersey, some of whom have threatened to vote against any tax legislation that doesn’t include the change. Some progressives oppose changing the cap, noting that much of the benefit goes to some of the same high-income households that Democrats are trying to tax more.

The basic capital-gains rate would rise to 25% from 20%. When combined with an existing 3.8% investment-income tax and the surtax, the new top rate on capital gains could be as high as 31.8%.

Pass-through businesses, which don’t pay the corporate tax but instead pay taxes on their owners’ individual returns, would be affected in several ways. They would face caps on a special deduction created in 2017, with individuals limited to a $400,000 deduction and married couples limited to $500,000.

Those businesses would also no longer be able to avoid paying a 3.8% tax on their active business income. Currently, taxes of that amount apply to wages, self-employment income and passive income but not other types of income.

Corporations would face a series of tax increases. The top tax rate would rise to 26.5% from 21%. That is below the 28% that the Biden administration proposed but above the 25% that some Senate Democrats are seeking. Smaller corporations would get tax brackets with lower rates.

Companies would also face new limits on interest deductions and higher taxes on their foreign income. Notably, the minimum tax on U.S. companies’ foreign income would go up from 10.5% to 16.6%, below the 21% the administration had sought. And companies would be able to use more of their foreign tax credits, softening the blow of that higher minimum tax.

Companies would be able to exclude an amount equal to 5% of their foreign tangible assets from that minimum tax, down from the current 10% but below the administration’s proposal to eliminate that benefit. The minimum tax would be calculated for each foreign country, as the administration has proposed.

The committee also included a series of miscellaneous tax changes. It would reverse the doubling of the estate tax exemption that Congress created in 2017. Instead of that increase expiring at the end of 2025, it would end after 2021. The plan would also limit several estate-planning techniques, including some uses of grantor trusts and asset transfers with discounted values.

High-income people with tax-preferred retirement accounts totaling $10 million or more would no longer be able to contribute to those accounts and would face sharply higher mandatory distributions once the account balances reached that level.

In a provision that would be retroactive to December 2016, the legislation would limit deductions for certain land-rights donations called conservation easements. The government has been attacking those donations in court, arguing that promoters are using inflated values to generate and sell tax deductions.

The plan would also accelerate higher taxes on corporate executive compensation and impose higher taxes on tobacco products.

The Internal Revenue Service would get nearly $80 billion over a decade to beef up enforcement. That matches the administration plan, which would roughly double the size of the tax agency.

The measure does include some tax breaks. It would delay a tax increase slated to start next year that would have hurt companies with significant research expenses. Local newspapers would get a new payroll tax credit for employing journalists.

Write to Richard Rubin at [email protected]