Democrats Weigh Tax Alternatives to Fund $2 Trillion Package Sen. Kyrsten Sinema objected to any increases in top marginal rates on corporations, individuals or capital gains

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Democrats Weigh Tax Alternatives  to Fund $2 Trillion Package  Sen. Kyrsten Sinema objected to any increases in top marginal rates on corporations, individuals or capital gains

Senator James Lankford, a Republican from Oklahoma, left, speaks with Senator Kyrsten Sinema, a Democrat from Arizona before a Senate Finance Committee hearing Tuesday in Washington, D.C.

Democrats worked to quickly find new sources of revenue to pay for their roughly $2 trillion social-policy and climate package, seeking to target businesses and wealthy individuals in novel ways after proposed rate increases ran aground in talks.

The continued opposition by Sen. Kyrsten Sinema (D., Ariz.) to any increases in top marginal rates on corporations, individuals or capital gains has emerged as a major hurdle in the party’s quest to reach a new framework on the legislation. A person familiar with Ms. Sinema’s thinking said she has agreed to enough alternative revenue provisions with the White House to cover the full cost of the spending, creating a potential new path for Democrats to try to finance the cost of the package.

In a town hall late Thursday, President Biden acknowledged that he wouldn’t have the votes to boost the corporate tax rate but expressed optimism that Democrats would find other ways to raise revenue. Though he wasn’t precise, he cited a potential 15% minimum corporate tax rate, a levy designed to raise taxes on companies that are paying low rates now because of legal use of tax breaks, as well as a 15% minimum tax rate on international profits.

“You have 50 [Senate] Democrats, every one is a president,” he said on CNN. “So you’ve got to figure things out.”

But some of the alternatives Democrats are weighing, such as annually taxing billionaires’ unrealized capital gains, face their own dose of skepticism from other centrist Democrats. The legislation will ultimately need the support of every Democrat in the Senate and nearly every Democrat in the House.

“I think anytime you get into stuff that’s not proven in the tax code it becomes a bit dangerous,” said Sen. Jon Tester (D., Mont.), who has previously opposed proposed changes to how capital gains are taxed. “So we’ve got some challenges there.”

Still, top Democrats said they were close to reaching an agreement on a framework for the legislation. Lawmakers are racing to reach an accord on the bill by the end of the next week, when they face a deadline for passing a separate, roughly $1 trillion infrastructure bill. Progressive Democrats have said they would block the public-works legislation without an agreement on the social-policy and climate bill.

House Speaker Nancy Pelosi (D., Calif.), who had said lawmakers could reach a deal on a framework this week, said negotiations over the tax measures were continuing.

“We’ll see what survives, what prevails,” she said.

Ms. Sinema and Sen. Joe Manchin (D., W.Va.), another key centrist, met with White House officials on Capitol Hill on Thursday.

Rep. Richard Neal (D., Mass.), the chairman of the Ways and Means Committee, also met with Ms. Sinema. He said she indicated support for an expanded child tax credit, paid leave, and clean-energy incentives, and he said they discussed the alternative tax options.

“We talked a little bit about it, but I did point out that it’s the ninth inning. When are you going to vet these issues?” Mr. Neal said.

In addition to the challenges Democrats face on raising money to pay for the bill, they are also still sorting through the spending measures in the legislation. How much funding to dedicate toward climate measures, in-home care for elderly Americans and affordable housing are all up in the air as Democrats haggle over the bill.

Mr. Biden said the plan is likely to include four weeks of parental leave, down from the 12 weeks he initially proposed. “The reason it’s down to four weeks is I can’t get 12 weeks,” he said during the CNN town hal.

The president said that covering dental, vision and hearing care through Medicare is a reach because of opposition from moderate senators. He said policy makers are discussing an $800 voucher for dental coverage. He said his proposal for tuition-free community college would also likely not be approved, adding that negotiators are discussing increasing the size of Pell Grants.

In the House, Democrats have proposed raising the corporate tax rate to 26.5% from 21%, moving the top individual rate to 39.6% from 37% and increasing the top capital-gains rate to 28.8% from 23.8%. The corporate rate increase was projected to raise $540 billion over a decade, while the tax rate increases on ordinary income and capital gains would raise nearly $300 billion. Ms. Sinema has for weeks maintained that she opposes any of those tax increases and it isn’t clear whether there are other House-backed tax increases she would block.

“There are many ways to get here, my personal view is that it’s nuts to take the corporate tax rate and higher tax rates on very wealthy individuals off the table,” said Sen. Chris Van Hollen (D., Md.).

Other elements of the House proposal, such as tightening the net on U.S. companies’ foreign earnings and enhancing tax-collection efforts at the Internal Revenue Service, are still part of the negotiations.

Ideas previously not part of Democrats’ tax plans such as the corporate alternative minimum tax and an excise tax on stock buybacks have gained new ground in recent days.

One of the leading alternative ideas for raising revenue comes from Sen. Ron Wyden (D., Ore.), the chairman of the Senate Finance Committee.

The plan aims to redefine longstanding rules for how capital gains are taxed–for the people at the very top of the wealth distribution.

Currently, gains are taxed only when an asset is sold, and no income taxes apply to gains held at death. As a result, taxpayers have a significant incentive to hold on to appreciated assets without selling them.

Mr. Wyden’s plan, by contrast, would tax those unrealized gains annually during life, but apply the levy only to a few hundred billionaires. He proposed the concept in 2019 and the Finance Committee staff has been working on the technical details since then.

For example, consider someone who was worth $100 billion at the beginning of the year and $120 billion at the end of it, all held in stock of a company they founded. Under current law, they would pay no income taxes. Under the Wyden proposal, they would pay capital-gains tax rates–currently 23.8%–on that $20 billion gain. That annual valuation is called a mark-to-market approach.

Even before those annual taxes start, the Wyden proposal includes a one-time tax on existing unrealized gains of billionaires, a move that would tax the stock-price gains they have experienced over the past few years. Something resembling that annual tax could raise more than $800 billion, according to the Penn-Wharton Budget Model.

For Democrats aiming at the very top of the wealth distribution, that is potentially politically appealing, and it could raise substantial revenue. But it comes with several obstacles, including likely legal challenges and figuring out what to do in years when billionaires’ investments lose money.

Sen. John Hickenlooper (D., Colo.) said that he was concerned the tax could affect the value of some assets if they need to be sold to pay the tax.

“I’ve always had questions about anything involving a mark to market on an annualized basis. You begin to pressure the valuation and perhaps the selling of assets, depending on what’s more liquid and that can often distort the value,” he said.

“I favor more adjustments in more different ways without anything so dramatic,” Mr. Hickenlooper added.

Mr. Wyden said raising taxes on billionaires was popular with Democrats.

“I have not heard a member of Congress say that they think it is right or fair for billionaires to pay little or no income taxes for years on end, not a single member of Congress has said it,” Mr. Wyden said.

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