Build Back Better tax break in play for some millionaires

The U.S. House passed President Joe Biden’s Build Back Better plan 220 to 213 on Friday, Nov. 19. The bill now heads to the 50-50 Senate, where it is expected to face unanimous GOP opposition. Sen. Joni Ernst, R-Iowa, has been critical of the bill, tweeting on Nov. 16:

"Hardworking #Iowa taxpayers shouldn’t foot the bill for millionaires to get a tax break, but that’s exactly what Democrats are proposing in their reckless tax-and-spending bill."

She also tweeted on Nov. 18:

"D.C. Democrats want to hand out giveaways to coastal elite millionaires, tax hardworking families, and drive up costs even higher. #TaxAndSpendSpree"

The tweet draws some notice because of the overwhelming support, including from Ernst, for Republican-led 2017 legislation that reduced income tax rates for all income levels but controversially for the nation’s highest paid millionaires and billionaires. 

We’ve written about this previously but the matter remains hot politically, with several Republican senators and Build Back Better bill opponents talking about millionaire tax breaks in the bill. And, keeping with our approach when the bill is not in its final form, we will continue our practice of analyzing such claims without offering a Truth-O-Meter rating. 

If the Senate passes an altered bill, a joint-committee with House and Senate members will need to be created to write a compromise bill. This new bill will then need to be passed in the House and Senate again, before being sent to Biden’s desk.

In an email exchange with PolitiFact Iowa, Ernst Press Secretary Ben Watson wrote that Ernst’s congressional office sourced its claim that millionaires would get a tax break from The Joint Committee on Taxation. The committee projects that 69% of taxpayers earning more than $1 million per year in 2022 would receive a tax cut in 2022 compared to 30% of taxpayers earning between $50,000 and $75,000. The Joint Committee on Taxation attributes this to a provision which raises state and local tax deduction cap, or SALT, from $10,000 to $80,000 per year. 

This provision, which primarily benefits high-income taxpayers, allows taxpayers to deduct the cost of their state and local taxes from the income used to calculate their federal tax liability. So while the Build Back Better plan raises the top marginal individual tax rate from 37% to 39.6% percent, some high-income households would pay less in taxes in 2022 because of the SALT cap. 

The higher SALT cap would raise after-tax income by 1.2% for those making between $370,000 and $870,000. In contrast, households earning between $175,000 and $250,000 would get a tax cut of a little more than $400, or about 0.2%. 

So, while taxpayers making more than $400,000 a year will face a higher marginal tax rate, some taxpayers in this group may pay less in taxes overall because of the SALT cap. 

The Ernst congressional office also used as a source the independent Tax Policy Center, which projected similar results as the Joint Committee on Taxation, Watson wrote. 

However, in a Nov. 11 blog post explaining the analysis, Howard Gleckman, senior fellow at the Tax Policy Center, also wrote: 

"President Biden’s Build Back Better plan would cut taxes on average for nearly all income groups in 2022. The exception: Those in the top 1 percent, who will make about $885,000 or more. They’d pay about $55,000 more than under current law. Those in the top 0.1 percent, who make about $4 million and up, would pay an additional $585,000 on average, a 5.9 percent reduction in their after-tax income."

Why the discrepancy? Because, while some households earning between $54,000 to $176,000 would pay more in taxes in 2022 than under the current tax law, nearly half of all households earning $54,000 to $176,000 would receive a tax cut of $1,000 or more, the analysis showed. 

Beginning in 2023, around 12% of taxpayers earning between $50,000 and $75,000 and around one-fourth of taxpayers earning between $75,000 and $100,000 would see a tax hike with direct taxes – individual income and payroll taxes – according to the Joint Committee on Taxation. This is a much higher percentage of taxpayers than in 2022, where 0.1 % of people in both income brackets would face a direct tax increase. Also in 2023, approximately 47% of taxpayers earning more than $1 million a year would receive a tax cut.

One reason for the change from 2022 is that the Build Back Better bill extends the Child Tax Credit for 2022 only. That credit provides parents $300 per month per child under age 6, and $250 per month per child between six and 17, for joint filers with income up to $150,000 and for unmarried filers earning up to $112,500.

The bill also does not implement a 15% minimum corporate tax it calls for on book income over $1 billion until 2023. Book income is the amount corporations publicly report on their financial statements to shareholders. The Tax Policy Center projects that this corporate tax would be passed indirectly onto lower-income and middle-income workers and investors through lower returns and lower wages.

The Tax Policy Center factors in these declines in after-tax income as having an equivalent pocketbook effect of taxpayers as a tax increase. 

These taxes will not appear on an individual’s tax returns or tax receipt, like other provisions in the bill, so to some experts, the impact on lower-income and middle-income taxpayers is harder to project. 

Ernst’s tweet suggests that the bill will drive costs up further. Inflation climbed to 6.2% in October, the highest since 1990. 

Beliefs about the inflationary-impact of the bill are mixed among economists, but many have stated that they think the bill will cause an inflationary impact, but that it would be brief. 

"I expect Biden’s bills to push upward on inflation, rather than downward," wrote Noah Smith, former assistant professor of finance at Stony Brook University and former Bloomberg opinion columnist. "That said, the inflationary impact will be very small — this is only 0.83% of GDP we’re talking about, at most."

The White House has argued that the bill will reduce inflation, citing a Sept. 15 letter signed by 17 Nobel Laureate economists that states that the bill "will ease longer-term inflationary pressures."

Since the letter was written, the bill has changed from a roughly $3.2 trillion spending plan to roughly $2 trillion plan. The drop in cost comes in part from the removal of several revenue-building provisions from the original proposal, which were some of the provisions cited in the letter.

The Tax Foundation, a right-leaning think tank which monitors the tax and spending policies of government agencies, estimates that the bill will reduce federal tax revenue by about $200 billion and increase direct consumer spending by about $100 in 2022. 

"That would indicate about a $300 billion deficit impact in 2022, amounting to a substantial fiscal stimulus next year that would likely contribute to higher inflation," wrote Alex Muresianu, a federal tax policy analyst at the Tax Foundation. 

The provisions in the bill likely will change during Senate negotiations, so its inflationary impacts cannot be anticipated. 

Although we are making no ruling at this time, Ernst’s tweets suggest that tax cuts to higher-income households will come at the expense of tax hikes to lower- and middle-income households. While there could be some small costs to some lower- and middle-income households, most households making under $500,000 would have more after-tax income in 2022. The top 0.1% of the nation’s taxpayers would face a 5.9% reduction in after-tax income.

When considering only direct taxes, nearly every wage-earning group below the top 1% would face a tax cut, while a slight majority of taxpayers earning more than $1 million will face a tax hike.

Ernst is making predictions about inflation and we cannot know in advance if she will be right. Moreover, negotiations are underway that could change the tax provisions about which she tweeted. But, the proposal the House sent to the Senate contains tax tables that would be favorable to many people earning more than $1 million.