Government Spending

It Sure Looks Like Democrats Don't Have the Votes To Raise Enough Taxes To Pay for Their Massive Spending Bill

And it just might reduce the tax burden for the well-off in the short term.

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biden-shum-polspphotos821735 | Michael Brochstein/Polaris/Newscom
(Michael Brochstein/Polaris/Newscom)

No one knows precisely what's in the massive Democratic spending bill—not even the Democrats who are supposed to vote for it. The plan started as a $3.5 trillion climate and welfare bill, and has now been whittled down to somewhere in the range of $1.5 trillion. 

As negotiations have dragged on, however, President Joe Biden and his fellow Democrats have repeatedly claimed that the bill would cost nothing—or, more precisely, as Biden tweeted in September, "zero dollars." 

This was always a fallacious argument: A $1.5 trillion spending bill still costs $1.5 trillion, even if the spending is offset by commensurate tax hikes. If you get a $100 bonus, and then use that money to go out for a dinner that costs $100, the dinner isn't somehow free. It is, however, paid for via additional revenue. 

Being generous, then, this argument was really just that the $1 trillion-plus in new spending would be paid for by tax hikes, which Democrats promised would fall mostly on the wealthy. The bill would cost however much it would cost. But it wouldn't add to the debt. And, Biden and company have hastened to add, the new taxes would fall primarily on the rich. 

Yet, as haggling over the bill has continued, it has become increasingly unlikely that this is a promise that Democrats can actually live up to, even as the bill has shrunk in scope and cost. 

The problem is both simple and not obviously surmountable: Despite controlling both the House and the Senate, it is not at all clear that Democrats have the votes to raise sufficient taxes to pay for their agenda—or even to tax the rich and well-off, who, Democrats insist, will bear the brunt of the cost of their plans. 

That problem has been brought to the fore over the last week, as it became clear that Sen. Kyrsten Sinema (D–Ariz.) would not support any rate increases. Democrats had planned to raise a significant amount of new revenue by reversing some of the rate reductions in the 2017 GOP tax bill, the Tax Cuts and Jobs Act, but since they need every single Democratic caucus vote in the Senate in order to pass the bill, Sinema's no-rate-hikes position left Democrats scrounging for an alternative. 

The proposal they landed on was a so-called billionaire tax, a kind of spiritual successor to the wealth tax long backed by Sens. Elizabeth Warren (D–Mass.) and Bernie Sanders (I–Vt.). The billionaire tax was designed to hit unrealized capital gains for approximately 700 billionaires and individuals whose incomes exceeded $100 million for three consecutive years. 

That idea had numerous inherent problems: Among them, it was almost certainly unworkable, since it was premised in part on annual valuations of unique, hard-to-value, illiquid assets. Also, like Warren's original wealth tax proposal, it was probably unconstitutional, since it could be challenged as either a bill of attainder (an attempt to punish either an individual or small cohort through legislation) or as a "direct tax." 

Even the move to adopt this proposal demonstrated how Democrats were struggling to find plausible revenue raisers to offset the cost of their plans. One argument floated in favor of the billionaire tax was that it was actually fine and perhaps even good that the tax was likely to be struck down by the courts. In this view, it was really just a deficit-reduction fig leaf—a budget gimmick, somewhat like the CLASS Act in Obamacare, that Democrats could use to make their spending package look paid for on paper, even if the tax never went into effect. 

The proposal gained traction among Democrats, but over the last few days, it became clear that Sen. Joe Manchin (D–W. Va.), arguably the most critical Democrat in the spending bill negotiations, might not support it. Some House Democrats also expressed concerns, indicating a deeper well of reservation than just a single moderate senator. 

Once again, congressional Democrats had run into a problem of achieving consensus among themselves. As of this afternoon, multiple reports suggest the idea has already been dropped because Manchin isn't willing to back it. 

Presuming this holds—again, the bill is in flux, and details are changing on an hourly basis—where will Democrats find support for tax increases to pay for the scaled-back $1.5 trillion plan?

It is certainly possible that some deal will still be negotiated, that some other tax mechanism or mechanisms will be found that can raise sufficient revenue to make the tax-and-spending math work. But even if something eventually passes, Democrats' down-to-the-wire struggle highlights the inherent political difficulty of raising taxes, even within a party that is nominally devoted to the idea that higher taxes, especially on the rich and well-off, are a popular political good. And the reason for that difficulty is not the intransigence of tax-hating Republicans, or the existence of the Senate filibuster, but the fact that Democrats are having trouble mustering sufficient support from elected Democrats. 

Indeed, a grace note to this story is that top Democrats, particularly Senate Majority Leader Chuck Schumer (D–N.Y.) and House Majority Leader Nancy Pelosi (D–Calif.) have fought to raise or eliminate the cap on the state and local tax (SALT) deduction. This is a targeted tax carve out that allows people to deduct state and local taxes from their federal tax burden. In effect, it is a subsidy for high state taxes that mostly benefits relatively well off households in blue states and cities with high taxes—which is to say, Schumer's and Pelosi's constituents. 

Even those expected to vote on the bill don't know precisely what is in it at any given moment, but recent reports have suggested that Democrats are intent on raising or eliminating the cap. Indeed, according to Politico, the process was briefly stalled last week when a group of congressional Democrats became worried that President Biden might jettison the SALT provision. There is a definite constituency within the Democratic Party for eliminating the cap, and thus benefiting well-off, blue-state households. 

A recent analysis by the Committee for a Responsible Federal Budget found that, depending on how the final spending bill is structured, repeal of the SALT cap could end up delivering a net tax cut to high earners for the first two years. This is what congressional Democrats want. 

Even if a rough framework emerges this week or next, the bill could always evolve. But it's at least possible to imagine that, despite Biden's repeated, explicit promises, the Democrats' spending bill will add to the debt and decrease the near-future tax burden for the wealthy.