The Build Back Better Act was recently pronounced dead by Sen. Joe Manchin (D-W.Va.), who has now said that his priority is to “fix the tax code.” Other Democrats seem to be rushing to jettison the “Build Back Better” label and construct a plan that will win Manchin’s vote in a closely divided Senate. But they shouldn’t be so hasty, because they can both fix the tax code and “build back better” at the same time.
My research has explored how imagination and creativity are hallmarks of creating and interpreting tax law. Too often, however, Congress uses its tax imagination to reward those with wealth and power, rather than to create a fairer tax system.
Republicans did just that with the “bonus” depreciation provision they included in the 2017 Tax Cuts and Jobs Act. Under an income tax, when businesses purchase equipment, they are normally required to deduct the cost over the time that the equipment will be used in the business. This helps to match income and costs — generating a better picture of a business’s net income each year.
But the Tax Cuts and Jobs Act allowed businesses to deduct the full cost of equipment immediately. This “immediate expensing” condenses years of deductions and fundamentally reimagines the relationship between government and business. It has been shown that immediate expensing shifts that relationship from one of government and taxpayer to one of co-investors. The tax savings provided by immediate expensing functions as the government’s contribution to the cost of purchasing the asset. What the government later collects is not taxes but a return on its investment.
Given the opportunity created by Manchin to start negotiations from scratch, why not put Congress’s tax creativity to better use?
Expanding the Child Tax Credit, the Dependent Care Assistance Credit, and the Earned Income Tax Credit — all items included in earlier versions of the Build Back Better Act — are good examples. These proposals show us that Congress can imagine a world in which there is less (and optimally no) child poverty and in which working families receive the support they need to meet child care responsibilities.
But congressional imagination and creativity did not go far enough in these cases. Why pay the Child Tax Credit in advance but not the Dependent Care Assistance Credit? This penalizes working families by making them wait for assistance with expensive child care until they receive their tax refund — months or even a year or more after incurring the costs. And why not make the Earned Income Tax Credit simpler and easier to obtain, rather than constantly harping on error rates and accusing the working poor of fraud?
Ending the so-called “step-up in basis” at death that allows wealthy taxpayers — and their heirs — to avoid paying tax on a lifetime’s worth of capital gains was part of President Biden’s American Families Plan. But it was omitted from the Build Back Better Act. Eliminating the step-up in basis not only would envision and work toward a society without alarming levels of income and wealth inequality but also would raise revenue to offset the cost of expanding credits that benefit low- and middle-income families and workers. Proposals that have circulated for a wealth tax or a “billionaire’s income tax” would serve similar ends.
As part of the Build Back Better Act negotiations, some Democrats have inexplicably championed partial or full repeal of the cap on the deduction for state and local taxes. This deduction and the other tax benefits for homeownership primarily benefit wealthy — and, given patterns of homeownership in the United States, white — taxpayers.
Why tinker with provisions that contribute to inequality based on race and class in ways that exacerbate the problem rather than reimagining how the tax code deals with homeownership? Congress could start by repealing existing tax benefits that do no more than help the wealthy buy bigger and more expensive homes that entail significant environmental impacts. If homeownership is to be encouraged, that revenue could be used more helpfully to fund a credit for first-time homebuyers such as the one that existed fleetingly in the late 2000s. Or perhaps it would be better to take the tax code out of decisions between owning or renting and use the revenue for other purposes altogether.
These are just a few examples of how Congress might use the tax code creatively to work toward a better post-pandemic future. Rather than simply cobbling together a hodgepodge of provisions that can pass the Senate to claim that “something” was accomplished, Congress should let loose its imagination with an eye toward reforming the tax code in ways that advance social justice.
Anthony C. Infanti is a professor of law at the University of Pittsburgh School of Law whose research and teaching focuses on tax law. His most recent book is “Tax and Time: On the Use and Misuse of Legal Imagination” (NYU Press, 2022).