Infrastructure deal imperiled by differences on financing

President Biden and Republican lawmakers say they’re making progress on an infrastructure package but still disagree on one key area: how to pay for it.

Biden said he was encouraged after meeting with top congressional leaders about the infrastructure deal on Wednesday, but the meeting didn’t delve into financing for the package. The president met Thursday with Republican senators but again suggested the discussion would focus on the scope of the package.

The president is adamant about reaching a bipartisan deal on his $2.3 trillion American Jobs Plan and is optimistic there will be progress on it by the end of May. But the gap over how to pay for any package, regardless of scope, remains a key roadblock. 

“I don’t think we’re quite there yet,” White House press secretary Jen Psaki said Thursday when asked if Biden was willing to pass a package that isn’t fully paid for if that’s what can get bipartisan support. “The president proposed a plan to pay for it because he thinks that’s what we should do.”

Biden has suggested paying for the plan through an increase in the corporate tax rate, an idea against which Republicans have drawn a hard line.

The White House has in recent days signaled a subtle but important shift in its willingness to pay for a package through means other than a corporate tax hike. Psaki has said Biden’s own two red lines are “inaction” and increasing taxes on Americans making less than $400,000 annually.

Transportation Secretary Pete Buttigieg on Thursday left the door open to a different payment method beyond corporate tax increases, though he maintained that was the administration’s preferred route. 

“There may be other ways to get this done that don’t cross anyone’s red line,” Buttigieg said on CNN.

“This is the right time for those who have alternative proposals on how to pay for this to put those proposals on the table and to remember that we can’t lose focus on the actual need here,” he added. 

Republicans have ruled out rolling back the 2017 tax cuts signed into law by former President Trump, even as Democrats bemoan that the legislation overwhelmingly benefited corporations and wealthy Americans. 

Aside from a corporate tax hike, there are few other proposals for how to pay for an infrastructure deal: user fees through a gas or mileage tax, or passing it without a way to pay for it and opting for deficit spending.

The Bipartisan Policy Center released a suggested infrastructure package this week, which would cost $1 trillion, a fraction of Biden’s plan. It would be paid for through a combination of methods including increasing the corporate tax rate from 21 percent to 25 percent, collecting unpaid income tax, and a 15-cent increase in excise fees on motor vehicle registrations.

“I think there is recognition on both sides that you’re going to have to pay for some of this,” said Michele Nellenbach, the Bipartisan Policy Center’s vice president of strategic initiatives. “Our goal was to find those items that we thought had enough bipartisan support that they can go through regular order because we do not think reconciliation is the way to go.”

“The corporate tax is a challenge, which we recognize when we put this out. The Trump tax cuts are, in Republicans’ view, can’t be touched. The 25 percent was the level that companies and others have proposed prior to the Trump tax cuts, so it seems like maybe that was a reasonable middle ground to go to,” she added.

The Tax Cuts and Jobs Act, which is a legacy policy win for Trump, dropped the corporate tax rate from 35 percent to 21 percent. Biden’s proposal would raise it to 28 percent.

“The 2017 tax plan was just a legacy issue for Republicans … so to move from that also signals politically that there are some chinks in the armor, some dents in the armor, of what was a legacy achievement of the administration,” said Roscoe Jones, counsel at Gibson, Dunn & Crutcher LLP and former legislative director to Sen. Dianne Feinstein (D-Calif.). 

Business groups, including the U.S. Chamber of Commerce and Business Roundtable, are lobbying against any raise in the corporate tax rate, arguing it could hurt competitiveness while the U.S. economy recovers from the coronavirus pandemic.

Amazon CEO Jeff Bezos deviated from business leaders and said the company is supportive of raising the corporate tax rate to pay for Biden’s package. At least 55 of the largest U.S. companies didn’t pay taxes in 2020, according to an analysis by The New York Times.  

Michael Desmond, a partner at Gibson, Dunn & Crutcher LLP and previously the chief counsel of the IRS under Trump, also argued that raising the corporate tax rate could hurt U.S. companies. 

“When the corporate rate was 35 percent for many years there was bipartisan agreement that it needed to be lowered. There wasn’t agreement that it needed to go down to 21 percent. But the U.S. was a dramatic outlier compared to trading partners,” he said. 

Biden said this week he’s willing to compromise, but he has remained clear that the burden to pay for an infrastructure deal should not fall on the middle class.

The White House has said that a gas tax is not being considered in the infrastructure plan. Senate Finance Committee Chairman Ron Wyden (D-Ore.) also told The Hill that he thinks it would be a “big mistake” to increase the gas tax instead of raising taxes on corporations. 

The centrist Problem Solvers Caucus has also proposed a gas tax increase to pay for infrastructure measures instead of raising the corporate tax rate.

The timing and optics around raising the gas tax isn’t ideal after a week of gas shortages and escalated prices caused by a cyberattack on the Colonial Pipeline. But Democrats argue that it’s time to raise the gas tax because it hasn’t been increased since 1993.

Efforts to close the tax gap, by increasing IRS enforcement to target individuals and businesses that are underpaying or not paying their taxes, could generate $700 billion in tax revenue, according to the Treasury Department. 

Biden’s American Families Plan, the second component of the infrastructure package, gives the IRS $80 billion to ramp up its audit capacity and systems. 

Experts warn though that the issue is too complex to rely on for funding the infrastructure package although it would theoretically raise revenues without raising taxes.

“If you’re just throwing money at the IRS, that’s not going to be scored as raising revenue,” said Ray Beeman, principal and co-leader of Washington Council Ernst & Young and former tax counsel for the House Ways and Means Committee. “The tax gap is a bit of a magic unicorn. They talk generically about closing the tax gap but when you get into what it is you have to do to actually close the tax gap, it gets really hard, really fast.”

The price tag of the infrastructure package overall is also up for debate. Republicans argue that the package is too broad, especially the American Families Plan that funds issues like child care and community college. 

A GOP infrastructure counterproposal spearheaded by Sen. Shelley Moore Capito (R-W.Va.) would cost $568 billion, though some Republicans have indicated the party may be willing to go as high as $800 billion. 

“The attitude that the president had in the Oval Office with us was very supportive, very much desirous of striking a deal, and I think we all were reflective of that as well,” Capito said following their meeting on Thursday.