August 10, 2022

Biden’s Tax Pledge Limits Options for Infrastructure Deal

WASHINGTON—President Biden’s pledge not to raise taxes on households making under $400,000 helped get him elected and shaped an administration tax plan aimed at corporations and high-income households. Now, that pledge is narrowing the path toward a bipartisan deal on infrastructure.

The White House, citing the pledge and its preference for taxing corporations and high-income people, nixed calls for higher gasoline taxes and user fees to finance a roughly $1 trillion infrastructure proposal. That resistance, combined with Republicans’ blanket anti-tax posture, has left beefed-up Internal Revenue Service enforcement as the main tax option under consideration.

Mr. Biden repeated the $400,000 promise during the election campaign to rebut Republican claims that he would raise taxes broadly.

John Anzalone, Mr. Biden’s chief campaign pollster, cited recent polling by his firm, ALG Research, and Hart Research Associates, showing a majority of respondents supporting raising taxes on those making more than $400,000 a year to pay for Mr. Biden’s agenda, which would expand federal spending on roads, broadband, preschool and community college.

“Middle-class voters are pissed off that they are always shouldering the burden,” he said. “The president has driven this as an agenda item and as economic policy.”

President Biden’s infrastructure plan calls for non-traditional projects like the removal of some highways. What Democrats want for cities like Baltimore says a lot about the President’s goals in the next wave of development. Photo: Carlos Waters/WSJ

That policy has drawn objections from business groups, including the U.S. Chamber of Commerce, which opposes corporate tax increases but backs a gasoline-tax increase, perhaps paired with a way to compensate lower-income households.

“This is not the time to throw options off the table,” said Ed Mortimer, the group’s vice president of transportation and infrastructure. “We think that everyone needs to pay.”

Now that Mr. Biden is in office, turning that promise into policy sometimes requires drawing hard-to-discern distinctions.

“It’s not the most ideal way to do tax law, but from a political point of view, it was a brilliant stroke,” said Frank Clemente, executive director of Americans for Tax Fairness, a progressive advocacy group that backs Biden’s tax-increase plans.

Administration officials insist that the pledge leaves plenty of room for tax increases aimed exactly where Mr. Biden wants them.

“This principle is not constraining,” said David Kamin, deputy director of the National Economic Council. “It was clarifying for the teams and for people in Congress about what the president believes, and also has us working on ideas that are consistent with what the American people support, and that can potentially be enacted.”

The administration built the $400,000 threshold directly into some policies. Its plan for tougher tax enforcement specifies that audit frequency wouldn’t increase for households with actual—as opposed to taxable—income under the limit, a definition set so it affects someone making $700,000 but reporting $100,000.

The administration’s plan to curb tax benefits of private-equity managers’ carried-interest income would make sure those investment-fund profits are taxed as ordinary income, not capital gains. But that applies only to people with taxable income exceeding $400,000.

The $400,000 pledge threshold usually refers to adjusted gross income, but not always. Some Biden proposals—such as taxing unrealized capital gains at death—would effectively expand the definition of income and thus raise taxes on some people who typically made less than $400,000.

The administration used the pledge to rule out gasoline taxes, which can be characterized by some Republicans as an acceptable user fee instead of a tax increase. Biden aides have also rejected fees on electric vehicles as a proxy for the gasoline taxes their owners aren’t paying. The administration’s policy isn’t driven solely by trying to stay within the pledge’s parameters. Officials just prefer taxing corporations to gasoline, a senior Treasury official said.

Pressed on a mileage tax for electric vehicles, White House press secretary

Jen Psaki

said Monday that the president wants to grow the industry.

“It’s a little bit of a challenge, a little bit like both hands are a little bit tied behind your back when one team says no taxes, the other team says no user fees,” Sen. Mark Warner (D., Va.) said last week.

After ruling out gasoline taxes, the White House hasn’t applied the same thinking about who pays the corporate income tax, which hits high-income shareholders hardest but affects middle-income households as well.

“I haven’t figured out in a perfectly consistent way in which they’re applying the pledge,” said

Kyle Pomerleau,

a resident fellow at the conservative-leaning American Enterprise Institute. “From my perspective, it feels very arbitrary.”

Economists estimate that corporate taxes are paid mostly by shareholders. Even if shareholders are the only ones who pay through smaller dividends or lower stock prices, anyone with a 401(k) plan is affected. The corporate tax is less direct than gasoline taxes, the Treasury official said, and the administration had to draw a line.

“Americans fundamentally understand that there is a real huge difference between raising taxes on the middle-class American and raising taxes on a large corporation,” Mr. Kamin said.

Mr. Biden’s proposals feature higher taxes on corporations and high-income households that Republicans can’t accept. They could re-emerge in subsequent legislation that Democrats try to pass without Republican support.

Including corporate taxes, the Biden budget would raise taxes slightly on a majority of middle-income households, even though the group as a whole would get a net tax cut, thanks to provisions such as the expanded child-tax credit, according to an analysis by the Tax Policy Center, a project of the Urban Institute and Brookings Institution. Considering Mr. Biden’s individual tax proposals only, no middle-income households would pay higher taxes.

Barack Obama

made a similar promise during his 2008 presidential campaign, where the thresholds were $200,000 for individuals and $250,000 for married couples. He then signed several tax increases that affected broader groups, including higher tobacco taxes and limits on tax-advantaged health-care flexible spending accounts. He won a second term.

“Biden ran a campaign that was about honesty and reliability, and I would guess that maintaining an air of consistency is a central consideration,” said Vanessa Williamson, a Brookings Institution senior fellow and author of “Read My Lips: Why Americans are Proud to Pay Taxes.”

But, she added, a broken pledge might not matter much in a polarized electorate.

“It would probably feature in Republican attack ads, but that doesn’t mean it would have any impact,” she said. “What will definitely matter for the election is the state of the economy, so getting stimulative policies passed is far more important than any rhetorical commitments.”

Pandemic Recovery

Read more policy articles, selected by WSJ editors

Write to Richard Rubin at [email protected] and Catherine Lucey at [email protected]

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