Senate Democrats are plowing forward with a sprawling tax reform and revenue plan that advances key pieces of President Biden’s legislative agenda, including tax provisions long sought by the party to help front investments in health care and climate.
Democrats say the new bill, dubbed the Inflation Reduction Act, aims to live up to its name and fight inflation, in part, by reducing the deficit.
And some experts agree that the measure could be a significant tool to begin getting a handle on the country’s finances.
“This is really breaking the mold that we’ve been stuck in recently of free lunch economics, where people are constantly trying to justify why they shouldn’t pay for their policies,” Maya MacGuineas, executive director of the Committee for a Responsible Federal Budget, said.
Many experts agree that the bill, which is projected to bring in more than $300 billion in revenue, will cut the deficit. But questions remain about the potential impact it could have on rising prices.
Among the proposals packed into the 700-plus-page bill announced Wednesday is a provision to impose a 15 percent minimum tax on corporations with profits exceeding $1 billion. The bill also contains funding for the IRS to beef up hiring and enforcement of tax laws, among other measures.
Democrats say both components would contribute to more than $400 billion in revenue, along with another tax provision seeking to close the so-called carried interest loophole. The policy item is projected to bring in $14 billion in revenue and is aimed at preventing asset managers, experts say, from abusing the tax code by paying less on their earnings from managing others’ money.
Overall, Democrats say the bill would raise $739 billion in revenue, citing estimates from the Joint Committee on Taxation and the Congressional Budget Office (CBO). That’s compared to the estimated $433 billion in proposed spending for party-backed priorities for energy security, climate and the Affordable Care Act (ACA).
The forecasted figures are far less than the $2 trillion price tag attached to an earlier plan to advance Biden’s agenda, which has been viewed as welcome news by MacGuineas and other budget watchers. That bill, also known as Build Back Better, passed the House before it fell apart amid negotiations last year.
“I literally cannot think of the last time that we started with a huge bill that was unpaid for massively so and shifted through the negotiation process to something that’s incredibly responsible,” MacGuineas said.
A recent brief from the Penn Wharton Budget Model (PWBM) estimated that the bill, in its current form, would cut non-interest cumulative deficits in the roughly 10 years following its potential enactment, though its estimate was about $248 billion, less than Democrats’ forecast.
The report also found that number would see a dip to $89 billion if proposed ACA subsidies are extended.
In a report released by the CBO in May, the agency projected the federal budget deficit would reach $1 trillion in 2022, after hitting $2.8 trillion the prior year. The latter marked the second-largest deficit in history, though it was down $360 billion from the record set in 2020, when the coronavirus pandemic first took hold in the U.S.
The surge in deficits came as the nation saw higher spending in the form of massive relief bills enacted under the current and previous administrations during the pandemic.
As coronavirus spending continues to dwindle, the CBO said earlier this year that the deficit will continue to fall, though it also forecasts increases in the years ahead in its 10-year outlook report.
Data from the Department of Treasury shows that the national debt has climbed more than $30 trillion so far, putting pressure on Congress for action as the nation also grapples with four-decade-high inflation.
Zach Moller, a former Senate Democratic budget aide and director of the economic program at the centrist think tank Third Way, said the new bill “would be the most significant deficit reduction package” since Congress passed the Budget Control Act of 2011.
But despite the name of the new bill, not all experts think the legislation will have a sizable impact on rising inflation, a top issue on voters’ minds months ahead of midterm elections in November.
Josh Bivens, research director at the Economic Policy Institute, said he thinks the bill will have a “small sort of deflationary nudge” by way of reducing the deficit, but he added that he thinks “there are questions about how quickly that takes hold.”
The PWBM found the new reconciliation plan would “very slightly increase inflation until 2024 and decrease inflation thereafter.” However, it added that the “point estimates are statistically indistinguishable from zero,” which it said indicates “low confidence that the legislation will have any impact on inflation.”
Democrats hope to quickly pass the bill in the Senate through a process known as budget reconciliation, which allows them to pass the bill without GOP support.
But it’s unclear if all 50 Democrats will be able to unify on the issue, particularly amid concerns among members over where Sen. Kyrsten Sinema (D-Ariz.), a key centrist, stands on tax proposals.
There are also questions about how Republicans, who have come out in strong opposition to the plan, will respond in the months ahead. Some have voiced issues with their Democratic colleagues after the deal brokered by Senate Majority Leader Charles Schumer (D-N.Y.) and Sen. Joe Manchin (D-W.Va.) was announced.
Republicans voted with Democrats to pass a scaled-down bill on semiconductors after previously opposing bipartisan efforts to craft an expanded version in response to their colleagues reviving their reconciliation push for Biden’s agenda.
A major piece of Democrats’ current deficit reduction plan involves boosting funding to the IRS, a bid they say is targeted at making wealthier individuals and corporations pay their fair share in taxes.
However, Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, said that goal could be diminished depending on how appropriators allocate funding for the agency in ongoing government spending talks for fiscal 2023.
Republicans opposed to the effort say it would lead to increased audits, which could be a bigger factor in funding negotiations later this year, especially if the GOP takes back Congress in the midterm elections.
“There’s no guarantee in there that the appropriators might not cut back where they otherwise would have given knowing that the IRS has this big pool of money,” Holtzblatt said.