Wealthy Business Owners Are at Center of Fight Over Biden’s Tax Plan

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Democrat Joe Manchin said Senate Majority Leader Chuck Schumer’s plan to expand taxes on some businesses to bolster Medicare needs more scrutiny and again raised alarms about inflation, potentially complicating Democrats’ attempt to pass a broad economic package.

The West Virginia senator, who has been negotiating the contours of an economic plan with Schumer for weeks, said the proposal rolled out last week to increase taxes on pass-through entities, like limited partnerships and other small businesses, should be analyzed to make sure that it doesn’t fuel inflation or harm taxpayers. 

“That’s very concerning right now. The only thing I’m doing, I’m looking at anything that can basically make the system fairer,” Manchin told reporters Wednesday. “I don’t think we should be raising taxes, but the bottom line is, there are loopholes that can be closed.”

As he has for months, Manchin expressed concern about the impact of federal spending on inflation, just hours after the government reported that the consumer price index shot up 9.1% in June. That concern already has forced Democrats to scale back their ambitions. “Everyone should be extremely cautious,” he said. 

Manchin said the tax proposal, a linchpin in Schumer’s effort to enact some part of President Joe Biden’s economic program, needs “a little more scrubbing.” Schumer said last week it had support among all Democrats, but any hesitation by Manchin can thwart the plan in the 50-50 Senate.

Senate Finance Chair Ron Wyden said the scrubbing is the work his panel is doing on the “technical language” of the tax plan.

Schumer’s plan to extend Medicare funding through tax hikes would expand a 3.8% net investment income tax to the profits pass-through entities distribute to their owners, so long as those individuals earn more than $400,000. Under current law, the investment tax only applies to individuals and estates.

Despite weeks of talks between Manchin and Schumer about a climate, health and deficit reduction plan funded by tax hikes, there are few public signs of progress in reaching an agreement. Business groups are urging lawmakers to scale back the proposed levies, while progressives are urging Democrats to preserve the tax increases for wealthy individuals.

“We estimate up to 1 million small and family-owned businesses, representing over half of all pass-through business activity, would be at risk of having their rates increased under this policy,” hundreds of business groups, including the US Chamber of Commerce, wrote in a letter this week. “This small business tax hike would hurt the ability of businesses that survived the worst global pandemic in a century to remain viable in the coming months.”

Republicans have used this proposal as an opening to attack Democrats, particularly those who face close races in the mid-terms this fall. In battleground states of Georgia, Nevada, Arizona and New Hampshire, the majority of workers are employed by pass-throughs, GOP leader Mitch McConnell told reporters on Tuesday.

He and other Republicans have sought to put pressure particularly on Manchin, who doesn’t face re-election this year but represents a heavily Republican state.

“And in West Virginia — just to pick another state out of the blue — in West Virginia a whopping 95% of businesses are pass-throughs,” McConnell said about Manchin’s state.

In addition to debate over the tax increase on pass-throughs, progressives are urging Senators to preserve other tax increases that would affect the wealthy.

One focus for progressives is the millionaires’ surtax, which would put a 5% surcharge on incomes over $10 million and an additional 3% levy on incomes over $25 million, which is at risk of being cut from the package. Other tax hikes, such as raising the top tax bracket or increasing capital gains rates, were eliminated from the negotiations last year amid concerns from some vulnerable Democrats.

Progressives fear that dropping proposals like the pass-through tax expansion and a surcharge on the ultra-wealthy, would mean that rich Americans would face little-to-no tax increases in a bill initially envisioned as a major tax hike on top earners.

The millionaires’ surcharge is “the only tax increase specifically designed to tax the very wealthy,” the Patriotic Millionaires, a progressive group of wealthy Americans, said in a letter to senators Wednesday. “It would be very unfortunate and a missed opportunity if Congress were to pass such important legislation and not specifically increase tax rates on billionaires and the ultrarich.”

Schumer has said he wants to pass the bill by early August, a tight deadline for legislation that has languished for months. Manchin has suggested the negotiations could go up to the Sept. 30 deadline, when the Democrat’s ability to fast-track the bill in the Senate expires.

More stories like this are available on bloomberg.com

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