SALT May Make an Infrastructure Package a Bitter Pill to Swallow
Last week, we outlined how the fate of President Joe Biden’s two-part infrastructure package was in the hands of U.S. Senate Majority Leader Chuck Schumer (D-N.Y.), who had been contemplating whether to ask the chamber’s parliamentarian if Senate rules would allow an additional budget reconciliation bill. (Budget reconciliation, as that post also explained, allows certain legislation to avoid the Senate filibuster, enabling the party in control of the chamber to pass bills with only a majority vote.)
The majority leader did make that ask and, on Tuesday, the parliamentarian agreed. Democrats will get their third reconciliation bill this year and all signs indicate they will use it for infrastructure.
Does that mean that the infrastructure package is now a shoe-in, and that the United States will be building back better sooner rather than later?
Not so fast.
Both chambers of Congress still have to achieve majority support for these two massive packages — and some of the White House’s tax plans, which have been proposed to pay for trillions of dollars in infrastructure spending, are deeply unpopular within the president’s own party. Key tax provisions will have to be attached to the President’s infrastructure legislation to avoid adding trillions of additional dollars to the national debt. Accordingly, the infrastructure package is best thought of as an infrastructure and tax reform package.
Democrats cannot lose a single vote in the Senate in order for infrastructure legislation to pass. In the House, they can afford to lose just two with the death of Rep. Alcee Hastings (D-Fla.) yesterday.
There are three tax proposals in particular that face serious political complications or opposition: the corporate income tax, a global minimum tax, and limits on the state and local tax deduction, or SALT. Let’s take each of these one by one, explaining what they are and identifying who might be the barriers to each.
Who Pays the Corporate Income Tax and Who Opposes Raising It?
The top U.S. corporate income tax is now 21 percent. The 2017 tax reform bill signed into law by President Donald Trump lowered that rate from 35 percent. (That bill was also enacted into law using reconciliation.) Many Democrats, including President Biden, want to raise the level to 28 percent. Some Democrats want an even higher levy.
Very few U.S. businesses actually pay income taxes through the corporate side of the tax code — only about five percent, in fact, according to the Brookings Institution; however, those that do tend to be larger taxpayers. The Tax Foundation reports the corporate income tax raised $230.2 billion in revenue in fiscal year 2019, accounting for 6.6 percent of total federal receipts. The figure was down from nine percent in 2017.
With Democrats eyeing a total $4 trillion (or more) dual infrastructure package, raising the corporate rate will make a dent in the price tag, but not a huge one.
Is raising the rate worth it, then?
According to Sen. Joe Machin (D-W.Va.), a key swing vote in the chamber, it most certainly is not. The senator told a West Virginia radio station that he thinks the corporate levy should be around 25 percent, the global average, and that lawmakers should get rid of “loopholes” before raising the corporate rate. (With news coming out this week that indicated at least 55 U.S. corporations did not pay any federal income taxes last year, this talking point is likely to be a popular one.)
Sen. Manchin also indicated that he is not the only senator who has concerns regarding President Biden’s proposed corporate rate. He said, “There are six or seven other Democrats who feel very strongly about this. We have to be competitive and we’re not going to throw caution to the wind.”
A loss of six or seven votes — or even half that number — would doom infrastructure legislation. Which is why the senator bluntly added, “If I don’t vote to get on it [the infrastructure bill], it’s not going anywhere.”
Is there a way to assuage the senator’s concerns about American competitiveness? The Biden administration will try, but that feat also will not be easy.
Does Yellen Proposal to Set Minimum Global Corporate Tax Rate Have Legs?
As The Associated Press reported, in “an effort to at least partially offset any disadvantages that might arise from” a higher corporate tax rate, U.S. Treasury Secretary Janet Yellen “urged the adoption of a minimum global corporate income tax.” Secretary Yellen’s remarks “essentially serve[d] as an endorsement of negotiations that have been underway at the 37-nation Organization for Economic Cooperation and Development (OECD) for roughly two years.”
The European Union quickly announced that it supported Secretary Yellen’s remarks. Additionally, key Senate Democrats offered a plan this week that includes a global minimum tax. (Though The Hill did note that, while this framework “has some similarities to Biden’s proposal,” it also has some differences.)
The plan itself is relatively simple. Individual governments would still set their own corporate tax rate, but if that nation’s corporations pay lower rates, their government would “top-up” a business’s taxes to the agreed minimum rate.
The plan is designed to eliminate the advantage of shifting profits to a lower-tax country, and it would be costly for many U.S. companies. According to Fast Company, for example, “The most guilty companies are pharmaceutical corporations such as Pfizer and Johnson & Johnson, as well as tech companies such as Microsoft and Apple, which had the most offshore money, at $246 billion (avoiding $76.6 billion in taxes, the report estimated).”
While the idea is popular among Democrats on Capitol Hill, implementing it globally will be tricky, and reassurance about this matter is unlikely to come before the Senate votes on an infrastructure package.
Indeed, U.S. Sen. Pat Toomey (R-Penn.) has thrown cold water on the idea that a global minimum tax would be readily accepted by all OECD nations. Others have agreed. Reuters noted that, while governments “broadly agreed already on the basic design of the minimum tax,” they disagree on where to set the rate. Reuters said, “International tax experts say that is the thorniest issue.”
The OECD also has not hammered out how whether investment funds and real estate investment trusts “would be covered by the new levy or when to apply the new rate.”
In a separate story, Reuters concluded, “An agreement among European countries might not be easy because corporate tax rates in the 27-nation bloc vary widely from nine percent in Hungary and 12.5 percent in Ireland to 32 percent in France or 31.5 percent in Portugal.”
Wrangling the nations of the world on this score might be easier than getting the House Democratic caucus to agree on another matter, however.
Who Wants SALT with Their Infrastructure Bill?
Along with lowering the federal corporate income tax rate, the 2017 tax reform law limited the amount of state and local taxes that individual income taxpayers could deduct from their federal bill. The cap is $10,000 — a threshold that is relatively easy to achieve in a “high tax” state like New York or California.
That is why lawmakers like House Speaker Nancy Pelosi (D-Calif.) don’t like the SALT limit and have been angling to get rid of it since President Trump signed it into law.
Is Speaker Pelosi willing to hold up the president’s infrastructure plan until she gets her way, however? Not likely, but there are already several members of the House Democratic caucus who have said they are — and that number is enough to keep the legislation from passing the lower chamber of Congress.
According to Forbes reporter Andrew Solender, at least eight House Democrats have threatened to vote against the infrastructure package if it does not fully restore the SALT deduction to its previously-unlimited level. The lawmakers — Reps. Mickie Sherrill (D-N.J.), Tom Malinkowski (D-N.J.), Josh Gottheimer (D-N.J.), Tom Suozzi (D-N.Y.), Dean Phillips (D-Minn.), Bill Pascrell (D-N.J.), and Albio Sires (D-N.J.) — told Treasury Secretary Janet Yellen in a letter last week that the SALT deduction “makes a critical difference in helping make ends meet for our middle class.”
The White House opposes restoring the deduction. Press Secretary Jen Psaki said the policy “is not a revenue raiser” and the president only would entertain the idea if the eight lawmakers proposed a plan to “pay for it.” Repealing the cap could be very costly. According to the Tax Foundation, the policy would result in $673 billion in lost revenue over 10 years, significantly raising the cost of an infrastructure package.
Speaker Pelosi is going to try to address these lawmakers’ concern, but it’s unclear how she might do so given the significant price tag. As Politico reported last week, she said she is “sympathetic to their position.”
A Final Wrinkle
As noted above, there is another wrinkle to all of this: some Democrats want an even larger infrastructure package, with even higher tax levies. Rep. Alexandra Ocasio Cortez (D-N.Y.) wants $10 trillion in new spending, for example.
While we don’t see the price tag going anywhere near that level, House and Senate leaders also cannot lose support from the progressive wing of the Democratic party. As New York magazine concluded, “The Democratic leadership finds itself confronting a seemingly impossible dilemma. If they cut the bill’s size, they alienate the progressives; if they debt-finance the package, they lose the Senate’s penny-pinchers; if they pay for it with tax increases, they antagonize Romney-Biden suburbanites” (and, perhaps more critically, Sen. Machin).
Even with a third reconciliation bill, this needle won’t be easy to thread.