Getting major tax legislation across the finish line and onto the president’s desk has never been a particularly neat and tidy process, but even in that context, 2021 presented an unusual case. With Democrats in control of the House, Senate, and White House, the year started off looking promising for tax reform. And there were some big achievements, notably the temporary expansion of the child tax credit and earned income tax credit in the American Rescue Plan Act of 2021 (P.L. 117-2).
But the signature bills of the year, the Infrastructure Investment and Jobs Act (H.R. 3684) and the Build Back Better Act (H.R. 5376), quickly ran into difficulties as Congress worked to enact President Biden’s framework into law. Chief among them was that despite having control of Congress, Democrats lacked a unified vision, and in some cases, were deeply divided. At the center of the vortex, attracting much of the attention — and plenty of the ire — were Sens. Kyrsten Sinema, D-Ariz., and Joe Manchin III, D-W.Va., but several other Democrats played significant roles in shaping the major tax bills of the year. That’s why they are collectively this year’s Tax Notes’ persons of the year.
After a busy summer of proposals and negotiations, Democrats, with the help of some Republicans, secured a win on the infrastructure bill, which was signed into law on November 15 (P.L. 117-58). However, the budget reconciliation process that was supposed to conclude with the passage of a large package of social spending and climate initiatives, as well as corporate and individual tax reforms, in the Build Back Better Act still hasn’t concluded, even though Democrats don’t need, or expect, to have any Republican votes.
The result of trying to thread the needle to garner the support of Manchin, Sinema, the progressives, the moderates, and the “No SALT, No Deal” contingent was an increasingly disconnected set of tax policies in the reconciliation bill. The common theme running through most of the tax provisions under consideration was raising revenue, which was perhaps presaged by the menu of tax options developed by Senate Finance Committee Democrats earlier in the year.
Except when it wasn’t. Case in point: The furor over the SALT deduction limit. The child tax credit and EITC expansions were the other major costly tax benefits under consideration, but credits for purchases of electric vehicles and electric bicycles also had negative revenue scores. The total effect of the reconciliation bill was a mostly scattershot tax reform, with the exception of the international changes. House Ways and Means Committee Chair Richard E. Neal, D-Mass., admitted in November that if the reconciliation bill weren’t changed before passage, it would contribute to a considerable increase in tax code complexity. The complexity problem arose because the point of the proposed tax changes was “because you need the revenue,” Neal said.
Manchin and Sinema were often characterized as moderates, because they hold the key to 51 votes in the Senate, and that may be reasonable regarding their positions on taxes, as evidenced in the reconciliation bill package heading into the end of the year. But they individually pushed back against items that the moderate Democratic caucus, the New Democrat Coalition, largely approved of, even as they resisted some progressive proposals.
That intraparty tension was largely responsible for placing Sinema and Manchin in the crosshairs regarding the reconciliation bill, and it was evident in the tax provisions, but perhaps less so than in the other parts of the package. For her part, Sinema commanded a central position on both the infrastructure and reconciliation bills because she was one of the chief negotiators assembling the infrastructure bill.
The costars of the Senate this year further shared the experience of being confronted about legislative issues while carrying on their non-legislative lives. Sinema was followed by activists with cameras into a bathroom at Arizona State University, and others floated over to tell Manchin their views at his houseboat, Almost Heaven, in the Potomac River. Manchin assured the flotilla that making sure everyone pays their fair share was the number one concern.
Manchin
As the Senate successor to Robert Byrd, it was almost preordained that Manchin would command a large degree of influence over tax rules, even though he isn’t on a taxwriting committee. Byrd’s greatest tax-related legacy is the eponymous Byrd rule, which allows the removal of extraneous provisions from budget reconciliation bills and has shaped how tax laws made through the reconciliation process are written. Manchin’s impact may be more temporary, but at least this year, his rules — and those of Sinema — were the ones by which the Senate had to play.
Manchin has been in the Senate since 2010, having won the special election to fill the seat after Byrd’s death. Before his Senate run, he served as West Virginia’s governor. After a bruising election in 2018, he indicated that he wouldn’t run again, but the several million dollars already amassed in his campaign war chest as of this summer suggest he might have changed his mind.
Manchin has greatly affected the reconciliation bill’s bottom line. In concert with Sinema, he was a principal driver in scaling back the original $3.5 trillion reconciliation package. On September 2 he advocated in The Wall Street Journal for a “strategic pause” on the reconciliation legislation. The idea was to take time to determine the trajectory of the pandemic and the longer-term inflation risk, as well as to perform a complete analysis of the implications of the bill and allow more time to debate its elements in House and Senate committees. Manchin wrote that he disagreed with the idea that “spending trillions upon trillions will have no negative consequence for the future” and argued that it was important not to ignore the fiscal consequences of policy choices for the next generation.
Manchin took a stand against the broad financial account information reporting regime that the Biden administration proposed as a revenue offset for the bill. Shortly after House Speaker Nancy Pelosi, D-Calif., promised that the information reporting proposal would be included in the final reconciliation package, Manchin said on October 26 that he thought the proposal was “going to be gone,” based on a discussion he’d had with Biden in which Manchin asserted that the provision was unacceptable.
In late October the White House announced a revamped — and smaller, at $1.75 trillion — framework for reconciliation that was evidently meant to appease Manchin and Sinema, as well as garner the support of the other 48 Senate Democrats. (Prior coverage: Tax Notes Federal, Nov. 1, 2021, p. 693.) It omitted the billionaire’s tax proposed by Finance Committee Chair Ron Wyden, D-Ore., and added a surtax on the top 0.02 percent of taxpayers. It left out the taxation of unrealized capital gains at death.
Not all of Manchin’s ideas came to fruition, which might show the limits of his influence. In October he briefly promoted a “patriotic tax” of 15 percent on billionaires who escape taxation. He also suggested lowering the phaseout threshold for the child tax credit to $60,000 from $75,000 for single filers and reinstating an earned income requirement. Those ideas were never introduced as legislative text.
Manchin’s spot in the middle of Senate negotiations this year has not been an easy one. “I’m totally out of sync with 48 other Democrats,” he told reporters in late October, summing up many months of attempting to find a middle ground financially and politically in the reconciliation package.
Sinema
Manchin regularly aired his views during strolls around the Capitol this year, while Sinema hasn’t spent as much time talking to reporters. The marathon-running senator had an accident while in a race this summer that landed her with a broken foot and a hands-free crutch, or a “peg leg,” as she put it while jokingly requesting that photographers try not to feature her foot as she and other members of Congress made their way to the White House for the announcement of the bipartisan agreement on the infrastructure bill. Sen. Mitt Romney, R-Utah, who is friendly with Sinema, suggested with a grin, “It’s amazing what she’ll do to get the cameras to follow her.” The frequently mum Sinema replied, “I’m the opposite. I think you’re confusing me with Joe.”
They both had a point. Sinema isn’t Manchin’s doppelgänger in any respect. But she’s not a top candidate for the title of most camera-shy senator, either.
The infrastructure bill is rightly classified as one of Sinema’s chief accomplishments this year. She played a key role in the negotiation of the bipartisan bill, which passed the Senate on August 10 and was signed into law on November 15. She worked with Finance Committee member Rob Portman, R-Ohio, on that legislation, and garnered public praise from Sen. Thom Tillis, R-N.C., for her position on the filibuster and her work in keeping the infrastructure bill bipartisan.
Sinema also had a role in attempting to smooth out the contentious debate over new tax rules for digital assets. She joined a bipartisan group of senators led by Senate Banking Committee ranking member Patrick J. Toomey, R-Pa., in offering an amendment to the cryptocurrency reporting rules that would have clarified the definition of broker. (Prior coverage: Tax Notes Federal, Nov. 15, 2021, p. 995.)
Sinema’s congressional career began in the House in 2013. She moved to the Senate in 2019 after flipping a long-held Republican seat. Like Manchin, Sinema is up for reelection in 2024, if she chooses to run again.
Although Sinema refused to be pushed into publicly explaining exactly what she wanted in the reconciliation bill, she was reportedly very willing to provide detailed proposals in private negotiations with her colleagues and in discussions with the White House. That appears to be typical of how she approaches her role as a key legislative player. But there were clearly elements of the original plan that she wouldn’t budge on, including the price tag. In August she announced that she didn’t support a $3.5 trillion bill. By late October, following the White House’s release of the framework for the reconciliation bill, Sinema said in a statement that “we have made significant progress” and that she looked forward “to getting this done, expanding economic opportunities and helping everyday families get ahead.”
If the reconciliation bill passes, the tax provisions will bear Sinema’s imprint. At her behest, the bill doesn’t increase the corporate and top marginal individual rates on the grounds that those measures would hurt the economy. The Ways and Means Committee had proposed increasing the corporate rate to 26.5 percent from 21 percent.
Sinema wouldn’t support a proposal to reverse the Tax Cuts and Jobs Act by increasing the top individual income tax rate to 39.6 percent from 37 percent, to the dismay of Neal, who said he’d had no success in trying to persuade her to change her mind. The result was a new 15 percent minimum tax on large corporations and an excise tax on stock buybacks by public companies.
The New Democrat Coalition and the ‘CTC Six’
The expanded child tax credit is one of the major policy achievements of Biden’s first year as president, but despite its prominence, its future beyond 2021 hung precariously in the balance for most of the year. The impetus behind the credit was the “CTC Six” — as Finance Committee members Michael F. Bennet, D-Colo., and Sherrod Brown, D-Ohio; Sen. Cory A. Booker, D-N.J.; Ways and Means Committee member Suzan K. DelBene, D-Wash.; and Reps. Rosa L. DeLauro, D-Conn., and Ritchie Torres, D-N.Y., deemed themselves — who championed the expansion in ARPA and kept up the calls to extend it.
DelBene chairs the New Democrat Coalition, the largest House Democrat ideological caucus, and with that and her Ways and Means Committee membership, she was well-positioned to lead the effort to extend the child tax credit. DelBene was clear that she didn’t want changes made to the credit beyond those proposed in the House draft of the reconciliation bill and that she opposed scaling back the credit or lowering the current phaseout threshold, which had been under discussion in order to reduce the estimated revenue loss. (Prior coverage: Tax Notes Federal, Oct. 25, 2021, p. 550.) Democrats could afford to lose only three votes in the House on a party-line vote. Earlier in the year, DeLauro also rejected the idea that ARPA expansion was overly generous with an income phaseout of $150,000 for married couples filing jointly.
Congressional Progressive Caucus
The Congressional Progressive Caucus also favored a permanent, or at least longer, extension of the child tax credit. The caucus, led by House Budget Committee member Pramila Jayapal, D-Wash., endorsed the extension as part of its principles for tax reform, along with other measures intended to increase progressivity in the code, including adding more individual tax brackets, treating capital gains and qualified dividends as ordinary income, and returning the estate tax to 2009 levels.
On corporate tax reform, the caucus endorsed revenue-positive, base-broadening changes, in addition to a carbon price and a financial transactions tax. The impact of the progressives has perhaps been less evident in the tax text of the reconciliation bill than in the overall priorities, process, and revenue score, which, although trimmed back, is still large.
The intraparty tension between the progressives and moderates erupted over the process by which Democrats passed the infrastructure bill and considered the reconciliation bill. Throughout the fall, progressives insisted that the bills be linked, with Jayapal and Senate Budget Committee Chair Bernie Sanders, I-Vt., encouraging members to vote no on the infrastructure bill. In October Jayapal noted that dozens of Congressional Progressive Caucus members still wanted the bills to be voted on together. (Prior coverage: Tax Notes Federal, Nov. 1, 2021, p. 695.) That resolve eventually crumbled, although six members of the caucus voted against the infrastructure bill.
The total cost of the reconciliation bill was slashed because of Sinema’s and Manchin’s disapproval, but progressives and Sanders were influential in the opening bid. Over the summer, Sanders floated a $6 trillion package that wouldn’t have been completely offset with new revenue. But once the budget resolution pinned the number at $3.5 trillion that was mostly, if not entirely, paid for, Sanders enthusiastically pitched voters on the $3.5 trillion proposal, likening it to Franklin D. Roosevelt’s New Deal.
Progressives didn’t put up an especially big fight over one of the most contentious, and least progressive, tax items in the reconciliation bill debate — the state and local tax deduction limit. Jayapal said she’d prefer that the bill not include SALT relief at all but acknowledged that it was a major item for some Democrats. (Prior coverage: Tax Notes Federal, Nov. 8, 2021, p. 838.) Sanders, the sole Senate member of the caucus, offered a revised version of the SALT proposal that would repeal the $10,000 limit for taxpayers making under $400,000. (Prior coverage: Tax Notes Federal, Dec. 6, 2021, p. 1406.)
Wyden
As expected, Wyden played a pivotal role in the development of the tax provisions debated this year. Finance Committee Democrats had a menu of options to pay for the reconciliation bill, some of which were proposals Wyden had previously developed, such as his Modernization of Derivatives Act. (Prior coverage: Tax Notes Federal, Sept. 13, 2021, p. 1705.) When it became apparent that items like raising the corporate and individual tax rates wouldn’t make it into a final reconciliation bill, Wyden offered alternatives.
One of the most prominent of those proposals was the billionaire’s income tax, which he introduced October 27 and would apply to roughly 700 taxpayers with more than $1 billion in assets or more than $100 million in income for three consecutive years. Their publicly traded assets would be marked to market annually.
Elon Musk criticized the proposal and shortly thereafter conducted a Twitter poll in which respondents indicated that he should sell 10 percent of his Tesla stock, which he then sold. Wyden responded, “Whether or not the world’s wealthiest man pays any taxes at all shouldn’t depend on the results of a Twitter poll.” He reiterated that the billionaire’s tax was needed.
Also in October, Wyden proposed a 15 percent corporate minimum tax alongside Finance Committee member Elizabeth Warren, D-Mass., and Sen. Angus S. King Jr., I-Maine, as an alternative to raising the rate. The tax would apply to approximately 200 companies that report more than $1 billion in profits annually to shareholders.
Once it was settled that the $3.5 trillion cost of the reconciliation bill would be lowered, Wyden said he’d favor shortening the number of years the tax provisions would last. The question whether to fund fewer priorities for a longer time or tackle more items on Democrats’ wish lists temporarily permeated discussions as the reconciliation bill took shape.
Wyden also waded into the heated debate over the financial account information reporting regime proposed by the Biden administration. He proposed an amendment that was supposed to trim back the breadth of the plan by “protecting the privacy of American taxpayer and small business tax information while only reporting large financial account balances to the Internal Revenue Service, to ensure those evading the tax system pay what they owe.”
Neal
Former Ways and Means Committee Chair Dave Camp probably has some sympathy for the plight of current chair Neal. In the Tax Reform Act of 2014, Camp produced hundreds of pages of carefully vetted statutory text that his colleagues proceeded to cherry-pick. This year Neal presided over the compilation and passage through the House of hundreds of pages of tax provisions, but in order to get there, he first saw hundreds of pages of proposed statutory text cut from his committee’s draft in a late October attempt to lower the cost of the overall reconciliation bill at the behest of Sinema and Manchin. Plenty of the cost-trimming resulted from shortening the periods during which tax benefits were offered, but policy priorities vanished from the plan too.
Amid the tussle over the top-line number, Neal also had to contend with the fractious debate over the SALT deduction limit. In November he summed up his experience: “This is punishment on earth for me, the SALT deduction.” Democratic Ways and Means Committee members Thomas R. Suozzi of New York and Bill Pascrell Jr. of New Jersey have been particularly vocal in insisting on raising the limit imposed by the TCJA. On the other side are progressives who view it as a giveaway to rich taxpayers and as fundamentally opposed to the social policy objectives of the bill.
The scramble to find revenue and appease Sinema and Manchin caused Neal’s committee to be bypassed on what might be one of the more complex and novel aspects of the bill, the billionaire’s tax. Neal noted that the proposal hadn’t been vetted by Ways and Means or any other committee. “None of us in the Democratic Caucus in the House have any problem with asking billionaires for more money. That’s fine,” he said. However, the suddenness of the proposal over a month after the Ways and Means Committee put together its tax provisions meant that there might be insufficient time to examine the complexity of the proposal.
For some policies, there’s always next year. Provisions on automatic retirement plan enrollment were struck from the House reconciliation bill but may end up on the agenda in 2022. Neal has worked on that proposal for years.
It’s Not Over Till It’s Over
As of mid-December, the political prospects for the reconciliation bill getting a vote in the Senate are unclear, and it may be pushed into 2022. As a practical matter, a delay could mean that at least the January advance payments of the child tax credit will not go out. A delayed vote likely doesn’t mean that the trajectory of negotiations or the content of the bill will change much, although with Manchin still a bit of a wild card on the plan — Sinema has reportedly agreed to it in private — more changes may be in store. Biden has already promised that whatever winds up on the cutting room floor following the reconciliation bill’s passage will continue to be a priority for at least the next three years.
Correction, December 13, 2021: The Ways and Means Committee had proposed increasing the corporate rate to 26.5 percent, not 25 percent.