House Build Back Better Act: Details & Analysis of Tax Provisions in the Budget Reconciliation Bill

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Democratic lawmakers in the House of Representatives have advanced updated legislation containing the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. elements of President Biden’s Build Back Better agenda. The House bill may differ from the Senate’s version of the legislation. This analysis contains estimates of the budgetary, economic, and distributional impacts of the House bill as specified in the House Rules Committee Print 117-18 released on November 3, 2021 and amended on November 4, 2021, and reflects subsequent analysis of the bill by the Congressional Budget Office.

Using the Tax Foundation General Equilibrium Model, we estimate that the tax provisions, IRS enforcement, and drug pricing provisions in the House bill would increase federal revenues by about $1.7 trillion over the next decade, before accounting for $658 billion in expanded tax credits for individuals and businesses, resulting in a net revenue increase of about $1 trillion. Excluding the anticipated revenue from increased tax compliance and the drug pricing provisions, the bill would raise about $521 billion from net tax increases over 10 years.

We estimate that the House bill would reduce long-run economic output by nearly 0.5 percent and eliminate about 125,000 full-time equivalent jobs in the United States. It would also reduce average after-tax incomes for taxpayers across every income quintile over the long run.

Table 1. Combined Long-Run Effects of the Updated House Build Back Better Act

Long-run Gross Domestic Product (GDP)	-0.48%
Long-run Gross National Product (GNP)	-0.47%
Capital Stock	-0.97%
Wage Rate	-0.35%
Full-Time Equivalent Jobs	-125,000
Source: Tax Foundation General Equilibrium Model, November 2021.

Major Provisions of the Updated House Build Back Better Act

The updated draft legislation would include the following major changes, effective January 1, 2022, unless otherwise noted:

Individual Income Taxes

• Create a new surcharge on modified adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” (MAGI), defined as adjusted gross income less investment interest expense, equal to 5 percent on MAGI in excess of $10 million plus 3 percent on MAGI above $25 million.
• Extend the American Rescue Plan Act (ARPA) Child Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (CTC) expansion through 2022, and make the entire CTC fully refundable on a permanent basis
• Extend the ARPA’s temporary expansion of the Earned Income Tax Credit (EITC) eligibility, phase-in rates, and amount through 2022
• Limit Individual Retirement Accounts (IRAs) contributions when balances reach $10 million and accelerate required minimum distributions for those accounts
• Raise the cap on the state and local tax (SALT) deduction from $10,000 to $80,000 and extend this cap through 2030. The $80,000 SALT cap amount would also apply to the 2021 tax year. For 2031, the SALT deduction cap would be set at $10,000.

Pass-through Business Taxes

• Expand the base of the 3.8 percent Net Investment Income Tax (NIIT) to apply to active business income for pass-through firms
• Make permanent the active pass-through loss limitation enacted in the 2017 Tax Cuts and Jobs Act (TCJA)

Corporate and International Taxes

• Impose a 15 percent minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after December 31, 2022
• Create a 1 percent excise tax on the value of stock repurchases during the taxable year, net of new issuances of stock, effective for repurchases after December 31, 2021. Excluded from the tax are stock contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs).
• Change the Global Intangible Low-Taxed Income (GILTI) regime, effective for tax years beginning after December 31, 2022, including:
  • Reduce the deduction for GILTI to5 percent, resulting in a tax rate of 15 percent
  • Calculate GILTI on a country-by-country basis
  • Reduce the deduction for Qualified Business Asset Investment (QBAI) to 5 percent
  • Reduce the foreign tax credit (FTC) haircut to 5 percent and allow FTCs to be carried forward for 5 to 10 years and disallow FTC carrybacks
  • Exempt GILTI from expense allocation rules
  • Include foreign oil and gas extraction income (FOGEI)
• Reduce the deduction for Foreign-Derived Intangible Income (FDII) to 21.875 percent, resulting in a tax rate of 15.8 percent, effective for tax years beginning after December 31, 2022
• Create a new limitation on interest expense deductions for certain multinational corporations, effective for tax years beginning after December 31, 2022
• Modify the base erosion and anti-abuse tax (BEAT) for multinational corporations
• Create a new limitation on foreign company base sales and services income

Other Modeled Tax Proposals

• Delay the requirement to amortize research and development (R&D) expenses over five years, instead of taking immediate deductions, to begin after 2025 instead of after 2021
• Modify, extend, and create a variety of tax credits for green energy and other efforts primarily through 2031 or 2033
• Reinstate the Superfund tax on crude oil and imported petroleum at 16.4 cents per barrel (indexed to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. ), and double the reinstated Superfund tax on the sale of chemicals
• Levy a federal excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on nicotine specified at $50.33 per 1,810 milligrams of nicotine.

Significant Proposals Not Modeled

• Extend or make permanent certain ARPA expansions of premium tax credits, including allowing higher-income households to qualify for the credits and boosting the subsidy for lower-income households
• Make tax changes targeted at cryptocurrency, including imposing rules related to common control and wash sales

Economic Effects of the Updated House Build Back Better Act

While the latest proposal steers clear of some of the major tax rate increases of the original Ways and Means bill, this proposal would still raise taxes on work and investment, disincentivizing productive activity. We estimate the new House bill would reduce long-run GDP by about 0.5 percent and long-run American incomes (as measured by gross national product, or GNP) by about 0.5 percent. The bill would also reduce the capital stock by about 1 percent and wages by nearly 0.4 percent, while eliminating 125,000 full-time equivalent jobs.

The proposed 15 percent minimum tax on corporate book incomeBook income is the amount of income corporations publicly report on their financial statements to shareholders. This measure is useful for assessing the financial health of a business but often does not reflect economic reality and can result in a firm appearing profitable while paying little or no income tax. is the most economically damaging provision in the bill, reducing GDP by 0.1 percent and costing about 27,000 jobs. The tax increases on high-income earners also contributes to the job losses: the surcharge on MAGI above $10 million eliminates 29,000 jobs while the tax increases on pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income eliminate 16,000 jobs.

The international tax increases imposed on U.S. multinationals (MNEs), including the higher taxes on GILTI and new limit on interest expense, reduce long-run GDP and GNP by about 0.1 percent and eliminate 8,000 full-time equivalent jobs. There is an additional negative impact on GNP that we have not modeled (due to a lack of empirical studies) arising from the incentive for U.S. MNEs to avoid the higher GILTI taxes by selling foreign assets to foreign competitors not subject to GILTI.

For purposes of estimating the bill’s impact on federal budget deficits, interest payments, and resulting changes in GNP, we have estimated about $2.13 trillion of net outlays over the period 2022-2031 inclusive of scored tax credits. In the years beyond 2031, we assume the proposals have no impact on deficits (to comply with the reconciliation process in the Senate).

We estimate that the bill would result in $838 billion of accumulated deficits (including interest payments) during the first decade, leading to an increase in payments to foreign owners of the national debt and a 0.02 percent reduction in long-run GNP. We treat the spending as transfer payments with no associated impact on the economy in the long run.

Table 2. Long-run Economic Effects of the Updated House Build Back Better Act

Provision	Change in GDP	Change in GNP	Change in Capital Stock	Change in Wages	Change in Full-time Equivalent Jobs
Apply a surcharge equal to 5% on MAGI in excess of $10 million plus 3% on MAGI above $25 million.	Less than -0.05%	-0.1%	-0.1%	Less than -0.05%	-29,000
Apply the 3.8% net investment income tax to trade or business income over $400,000	-0.1%	-0.1%	-0.1%	-0.1%	-4,000
Make the active pass-through loss limitation permanent	-0.1%	Less than -0.05%	-0.2%	Less than -0.05%	-12,000
Limit IRAs with large balances	Less than -0.05%	Less than -0.05%	Less than -0.05%	Less than -0.05%	-2,000
Make permanent refundability of the CTC	Less than -0.05%	Less than -0.05%	Less than -0.05%	Less than -0.05%	-15,000
Reinstate the federal Superfund program	Less than -0.05%	Less than -0.05%	Less than -0.05%	0%	-10,000
Impose tax on nicotine	Less than -0.05%	Less than -0.05%	Less than -0.05%	0%	-1,000
Make changes to the international tax system, including raising the GILTI tax rate, tightening GILTI rules, and imposing a new limit on interest expense	-0.1%	Less than -0.05%	-0.1%	-0.1%	-8,000
Impose a 15 percent minimum tax on corporate book income for corporations with profits over $1 billion	-0.1%	-0.1%	-0.3%	-0.1%	-27,000
Create a 1% excise tax on net stock buybacks	Less than -0.05%	Less than -0.05%	Less than -0.05%	Less than -0.05%	-1,000
Miscellaneous corporate tax increases*	-0.1%	-0.1%	-0.2%	-0.1%	-17,000
Impact of spending and budget deficit	0%	Less than -0.05%	0%	0%	0
Total Economic Effect	-0.48%	–0.47%	–0.97%	-0.35%	-125,000
Note: We treat this spending as transfer payments with no associated impact on the economy in the long run. * “Miscellaneous corporate tax increases” are worth about $129 billion as scored by the JCT and include the increased base erosion and anti-abuse tax (BEAT) rate and smaller corporate tax provisions that are modeled as an increase in the effective tax rate faced by corporations. Economic effects do not include about $49 billion in other tax provisions scored by the JCT. Source: Tax Foundation General Equilibrium Model, November 2021. Items may not sum due to rounding.

Revenue Effects of the Updated House Build Back Better Act

On a conventional basis, the House bill would raise about $1 trillion in federal revenue from 2022 to 2031. The bill includes about $1.7 trillion in gross revenue raisers, composed of about $470 billion in corporate tax increases, $530 billion in individual tax increases, $148 billion net from additional IRS tax enforcement, $340 billion from the drug pricing provisions, and about $177 billion in net revenue from Ways & Means items scored by the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO).

The gross revenue is reduced by about $658 billion in tax credits, resulting in about $1 trillion in increased revenue net of tax credits.

We relied on estimates provided by the JCT for tax provisions we did not model. To estimate the spending, we used estimates provided by the CBO, which include about $1.48 trillion in additional outlays net of the spending’s revenue impacts. Including the $658 billion in tax credits, the bill includes about $2.14 trillion in additional outlays over 10 years.

Table 3. Additional Spending in the Updated House Build Back Better Act, 2022-2031

Spending Item	Spending (Billions)
Family benefits (childcare, paid leave, universal pre-K)	$585 billion
Climate spending	$235 billion
Medicaid home and community-based services	$150 billion
Medicare hearing benefit	$35 billion
Affordable housing support	$175 billion
Health-care workforce spending	$25 billion
Workforce spending	$40 billion
Immigration reform	$110 billion
Other spending/investments	$110 billion
Total Spending	$1.48 trillion
Total Spending Including Tax Credits	$2.14 trillion
Note: Total spending including tax credits does not include the gross outlay of expanding the SALT deduction cap for 2022 through 2025. Source: Congressional Budget Office, Committee for a Responsible Federal Budget.

The largest revenue raiser is the 15 percent minimum tax on corporate book income for corporations with average annual adjusted financial statement income that exceeds $1 billion for any three consecutive tax years, beginning in 2023. While we estimate that the provision raises $203 billion over the next decade, this may be an upper bound, as it does not account for any behavioral responses, i.e., avoidance, since the structure of the tax is unique. Actual revenue could be less if, for instance, companies respond by reducing reported financial income.

Another novel revenue raiser is the 1 percent excise tax on net stock buybacks, which we estimate would raise $62 billion over the next decade, again assuming no behavioral responses. Actual revenue may be reduced to the extent companies choose to reduce stock repurchases and instead hold excess cash, for instance. On the other hand, revenue may be higher than our estimate if firms shift toward dividends in response to the new excise tax, as dividends are often taxable at ordinary income tax rates.

A third major revenue raiser is the surcharge on MAGI above $10 million. We estimate this provision would raise $186 billion over the next decade, and relatively little in the first two years due to reduced realizations for capital gains. Actual revenue may be reduced further to the extent high-income individuals engage in other avoidance techniques that result in less reported income.

Another element of the House bill that could significantly reduce net revenue is the use of temporary tax policy, particularly the one-year extension of this year’s child credit. If this credit were extended permanently, it would reduce net revenue by nearly $1.5 trillion over the next decade.

On a dynamic basis, i.e., accounting for the reduced size of the economy resulting from the tax increases, we estimate the House bill would raise in total about $854 billion in revenue net of tax credits over the next decade.

Distributional Effect of the Updated House Build Back Better Act

Over the long run, the updated House tax proposals would raise marginal income tax rates faced by higher earners and corporations. In 2022, however, the tax increases on high earners are more than offset by a more generous SALT deduction cap, which mostly accrues to households with higher incomes.

The proposals would increase the after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. of the bottom quintile by about 15.2 percent in 2022 on a conventional basis, which is largely driven by the expanded child tax credit (CTC). The top 1 percent of earners would experience a 0.8 percent increase in after-tax income in 2022 due to a more generous SALT deduction.

Table 4. Distributional Effects of the Updated House Build Back Better Act (Percent Change in After-Tax Income)

Income Group	Conventional, 2022	Conventional, 2031	Dynamic, long-run
0% to 20%	15.2%	0.5%	-0.1%
20% to 40%	4.6%	Less than -0.05%	-0.6%
40% to 60%	1.9%	-0.1%	-0.7%
60% to 80%	1.2%	-0.2%	-0.7%
80% to 90%	0.8%	-0.4%	-0.7%
90% to 95%	0.8%	-0.7%	-0.7%
95% to 99%	1.7%	-1.4%	-0.9%
99% to 100%	0.8%	-4.0%	-3.2%
Total	2.0%	-1.0%	-1.1%
Note: This table omits the impact of additional spending on after-tax incomes. Source: Tax Foundation General Equilibrium Model, November 2021.

After the expanded CTC expires in 2022, the bottom 20 percent of filers would see a smaller increase in after-tax incomes, reflecting the remaining expanded credits. The bottom quintile would experience a 0.5 percent increase in after-tax income by 2031 on a conventional basis. The top 5 percent of income earners would experience a drop in after-tax income due to higher individual and corporate taxes in addition to the reinstated $10,000 SALT deduction cap. The top 1 percent would see a 4 percent drop in after-tax income.

On a long-term dynamic basis, the smaller economy reduces after-tax incomes relative to the conventional analysis and most of the expanded tax credits will have expired. On average, tax filers in every quintile would experience a drop in after-tax incomes.

Modeling Notes

We use the Tax Foundation General Equilibrium Tax Model to estimate the impact of tax policies, including recent updates allowing a detailed modeling of U.S. multinational enterprises. The model produces conventional and dynamic revenue and distributional estimates of tax policy. Conventional estimates hold the size of the economy constant and attempt to estimate potential behavioral effects of tax policy. Dynamic revenue estimates consider both behavioral and macroeconomic effects of tax policy on revenue.

The model also produces estimates of how policies impact measures of economic performance such as GDP, GNP, wages, employment, the capital stock, investment, consumption, saving, and the trade deficit.

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