Comparing Tax Provisions in Different Versions of the House Build Back Better Act

November 10, 2021

President Biden’s Build Back Better agenda has changed several times in the past few months. In September, the House Ways and Means Committee released a draft that included $3.5 trillion in spending and tax credits, paired with roughly $2.1 trillion in tax increases (resulting in a net tax increase of about $1 trillion). On October 27, the House Rules Committee released a $1.75 trillion package that included roughly $1.5 trillion in tax increases, which was amended twice last week, most notably to raise the cap on state and local tax (SALT) deductions.

The most recent versions of the bill are improvements on the original, as they abandoned the original draft’s most economically harmful component: raising the corporate tax rate to 26.5 percent. The plan would still reduce economic growth and average after-tax incomes for the top 80 percent of earners in the long run, though not by as much. Additionally, despite the rhetoric about taxing the rich, the latest version of the plan would also provide a tax cut to the top 1 percent of earners in the first few years of its enactment, thanks to the increase in the SALT cap.

The overall effect of the most recent version is to cut taxes temporarily next year, at all income levels, while raising taxes in subsequent years on a permanent basis for all but the bottom 20 percent of earners. While the bill would not massively raise the deficit over a decade, frontloading the tax cuts means it will produce a fiscal stimulus next year. With high inflation persisting, concentrating the deficit impact of the bill in the first year is particularly ill-considered.  

Table 1: Major Differences Between the Original and Updated Ways and Means Drafts
Provisions in Original House Draft (9/14) That Have Been Removed   Provisions Added in Original Rules Committee Print (10/27) Provisions Added in Updated Rules Committee Print (11/3) Most Recent Version (11/4)
Raising the Corporate Tax Rate to 26.5% Corporate Alternative Minimum Tax Lift the SALT Deduction Cap to $72,500 for 2021 to 2031 Lift the SALT Cap to $80,000 for 2021 to 2030, Return to $10,000 in 2031
Raising Long-Term Capital Gains and Dividends Tax Rate to 25% 1% Excise Tax on Stock Buybacks    
Raising the Top Ordinary Income Tax Rate and Lowering the Top Income Tax Bracket Impose a 5% surcharge on modified adjusted gross income (MAGI) over $10 million and 8% over $25 million. The original draft levied a 3% surcharge on MAGI over $5 million.    

Source: Bill text of the Build Back Better Act, https://www.congress.gov/bill/117th-congress/house-bill/5376.

The latest version of the bill would raise the SALT deduction cap to $80,000 while extending the cap from its scheduled expiration at the end of 2025 to 2030. In 2031, the SALT cap would be lowered to $10,000 before expiring at the end of that year. This provision is a tax cut compared to current law for 2021 to 2025 but scores as a revenue increase relative to current law because of the cap’s extension from 2026 to 2031.  

Table 2:  Economic Impact of Both Versions of the Build Back Better Act
  Original Ways and Means Draft, 9/14 Rules Committee Print, 10/27 (No SALT change) Rules Committee Print, 11/3 ($72,500 SALT cap) Most Recent Rules Committee Print, 11/4 ($80,000 SALT cap)
Long-run GDP -0.98% -0.37% -0.38% -0.38%
Long-run GNP -1.01% -0.36% -0.37% -0.37%
Wage Rate -0.68% -0.27% -0.27% -0.27%
Capital Stock -1.84% -0.78% -0.79% -0.79%
Full-time Equivalent Jobs -303,000 -103,000 -107,000 -107,000
Ten-Year Conventional Revenue (net) $1,063 billion $768 billion* $1,018 billion $1,007 billion
Ten-Year Dynamic Revenue (net) $804 billion $615 billion* $865 billion $853 billion

Sources: Tax Foundation Taxes and Growth Model, September 2021; Tax Foundation Taxes and Growth Model, November 2021.

*—This estimate does not include about $145 billion in provisions scored by the Joint Committee on Taxation.

The main reason that the latest version of Build Back Better reduces growth by much less than the original draft is because the latest version leaves the corporate tax rate at 21 percent. Raising the corporate tax rate to 26.5 percent is the most economically harmful provision in the original draft, as that change alone would reduce long-run GDP growth by 0.6 percent.

The $80,000 SALT deduction cap adds $27 billion in revenue on paper over the budget window, and smaller tax increases (like an excise tax on nicotine) were also added to the two most recent updates, which increased expected revenue collection relative to the October 27th version. The estimate for the revenue raised by drug pricing provisions rose from $145 billion to $250 billion after the House included Medicare negotiating prescription drug prices in the plan. Another $145 billion in provisions scored by the Joint Committee on Taxation were also included in the latest version of the proposal.

All four drafts provide large benefits for low-income households in 2022, the first year of enactment. That is because each heavily frontloads benefits, extending the American Rescue Plan’s expansion of the child tax credit and earned income tax credit (EITC) for only one year. Meanwhile, higher-income individuals also receive a tax cut in the latest iteration of the plan thanks to the increase in the SALT deduction cap. 

Table 3: Conventional Distribution of Different Versions of the Build Back Better Act, 2022
  Original Ways and Means Draft, 9/14 Rules Committee Print, 10/27 (No SALT change) Rules Committee Print, 11/3 ($72,500 SALT cap) Most Recent Rules Committee Print, 11/4 ($80,000 SALT cap)
0% to 20% 14.5% 15.3% 15.2% 15.2%
20% to 40% 4.2% 4.6% 4.6% 4.6%
40% to 60% 1.5% 1.9% 1.9% 1.9%
60% to 80% 0.7% 1.2% 1.2% 1.2%
80% to 90% 0.1% 0.7% 0.8% 0.8%
90% to 95% -0.2% 0.4% 0.8% 0.8%
95% to 99% -0.3% 0.6% 1.6% 1.7%
99% to 100% -5.0% -0.5% 0.6% 0.8%
Total Impact 0.3% 1.5% 1.9% 2.0%

Sources: Tax Foundation Taxes and Growth Model, September 2021; Tax Foundation Taxes and Growth Model, November 2021.

By 2031, the tax cut provided by the higher SALT cap in the earlier years of the budget window becomes a tax increase under current law, as the SALT cap is scheduled to expire in 2025. That means higher-earning taxpayers see a larger drop in after-tax incomes in the more recent version of the package with the SALT cap extended through 2031. In the most recent version, the SALT cap is reduced back to $10,000 in 2031, further lowering after-tax incomes for the top 5 percent.

Similar to the SALT cap, the corporate tax increases are fully in place by 2031 in the original draft, which reduces after-tax incomes for high-income earners.

Table 4: Conventional Distribution of Different Versions of the Build Back Better Act, 2031
  Original Ways and Means Draft, 9/14 Rules Committee Print, 10/27 (No SALT change) Rules Committee Print, 11/3 ($72,500 SALT cap) Most Recent Rules Committee Print, 11/4 ($80,000 SALT cap)
0% to 20% 3.8% 0.7% 0.6% 0.6%
20% to 40% 0.4% 0.1% 0.1% 0.1%
40% to 60% -0.1% Less than +0.05% Less than +0.05% Less than +0.05%
60% to 80% -0.1% Less than +0.05% Less than +0.05% -0.1%
80% to 90% -0.1% Less than +0.05% Less than +0.05% -0.2%
90% to 95% -0.2% Less than +0.05% Less than +0.05% -0.6%
95% to 99% -0.3% Less than -0.05% -0.1% -1.3%
99% to 100% -2.5% -1.8% -3.3% -3.7%
Total Impact -0.3% -0.2% -0.5% -0.8%

Sources: Tax Foundation Taxes and Growth Model, September 2021; Tax Foundation Taxes and Growth Model, November 2021.

The long-term dynamic impact of the bill is driven by the permanent tax changes. The absence of the corporate rate increase explains most of the difference between the two most recent proposals and the original draft. By raising the corporate tax rate to 26.5 percent, the original Ways and Means plan would have reduced investment and productivity growth, which would reduce wages and incomes for most income groups. By including fewer tax increases on capital investment, the negative impact of the three more recent versions of the bill is smaller.

For low-income taxpayers, the original bill provides a larger benefit for low-income taxpayers in the long run, as the original bill makes the EITC expansion and refundability of the child and dependent care tax credit (CDCTC) permanent, while the following three versions only temporarily extend the former and abandon the latter.

Table 5: Long-Run Dynamic Distribution of Different Versions of the Build Back Better Act
  Original Ways and Means Draft, 9/14 Rules Committee Print, 10/27 (No SALT change) Rules Committee Print, 11/3 ($72,500 SALT cap) Most Recent Rules Committee Print, 11/4 ($80,000 SALT cap)
0% to 20% 2.6% 0.1% 0.1% 0.1%
20% to 40% -0.7% -0.4% -0.5% -0.5%
40% to 60% -1.3% -0.5% -0.5% -0.5%
60% to 80% -1.3% -0.5% -0.5% -0.5%
80% to 90% -1.3% -0.5% -0.5% -0.5%
90% to 95% -1.4% -0.5% -0.5% -0.5%
95% to 99% -1.8% -0.6% -0.6% -0.6%
99% to 100% -4.7% -2.7% -2.7% -2.7%
Total Impact -1.7% -0.8% -0.8% -0.8%

Sources: Tax Foundation Taxes and Growth Model, September 2021; Tax Foundation Taxes and Growth Model, November 2021.

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The state and local tax (SALT) deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act (TCJA) capped it at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

An 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 make up a relatively small and volatile portion of state and local tax collections.

After-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 after-tax income.

A 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.

The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority like the Internal Revenue Service (IRS), and can even generate a refund, with EITC amounts calculated on the basis of income and number of children.