Does the Inflation Reduction Act violate Biden’s $400,000 tax pledge?

On Aug 5, 2022

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Senate Democrats’ package of climate change, health-care, drug pricing and tax measures unveiled last week has proponents and opponents debating whether the legislation violates a pledge President Joe Biden has made since his presidential campaign, to not raise taxes on households with incomes below $400,000 a year.

The answer isn’t quite as simple as it seems.

“The fun part about this is, you can get a different answer depending on who you ask,” said John Buhl, an analyst at the Tax Policy Center.

The White House has used $400,000 as a rough dividing line for the wealthy relative to middle and lower earners. That income threshold equates to about the top 1% to 2% of American taxpayers.

The new bill, the Inflation Reduction Act, doesn’t directly raise taxes on households below that line, according to tax experts. In other words, the legislation wouldn’t trigger an increase on taxpayers’ annual tax returns if their income is below $400,000, experts said.

But some aspects of the legislation may have adverse downstream effects — a sort of indirect taxation, experts said. This “indirect” element is where opponents seem to have directed their ire.

What’s in the Inflation Reduction Act

The legislation — brokered by Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-W.Va., who’d been a key centrist holdout — would invest about $485 billion toward climate and health-care measures through 2031, according to a Congressional Budget Office analysis issued Wednesday.

Broadly, that spending would be in the form of tax breaks and rebates for households that buy electric vehicles and make their homes more energy-efficient, and a three-year extension of the current Affordable Care Act subsidies for health insurance.

The bill would also raise an estimated $790 billion via tax measures, reforms for prescription drug prices and a fee on methane emissions, according to the Congressional Budget Office. Taxes account for the bulk — $450 billion — of the revenue.

Critics say corporate changes could affect workers

Specifically, the legislation would provide more resources for IRS enforcement of tax cheats and would tweak the “carried interest” rules for taxpayers who earn more than $400,000. Carried-interest rules allow certain private equity and other investors to pay a preferential tax rate on profits.

Those elements aren’t controversial relative to the tax pledge — they don’t raise the annual tax bills middle and low earners owe, experts said.

The Inflation Reduction Act would also implement a 15% corporate minimum tax, paid on the income large companies report to shareholders. This is where “indirect” taxes might come into play, experts said. For example, a corporation with a higher tax bill might pass on those additional costs…