President Biden’s Build Back Better agenda has changed several times in the past few months. In September, the House Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. released a draft that included $3.5 trillion in spending and 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. 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 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. s 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 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. persisting, concentrating the deficit impact of the bill in the first year is particularly ill-considered.
| 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.
| 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 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) 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 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. 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.
| 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.
| 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.
| 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. |
||||