Democrats Focus on Turning Tax Talk Into Action

“We’re going to build the plan, figure out what people want, what they’re willing to pay for, but also not to be deterred,” House Ways and Means Chairman

Richard Neal

(D., Mass.), said in an interview Friday. “There’s this moment, when we’re talking about Great Society achievements and we’re talking about New Deal achievements. This is it.”

Democrats raised taxes each of the last two times they controlled the government—in 1993 and 2010—after bruising political battles that drew objections from moderates inside the party.

Now, some Democrats are convinced that tax politics have changed and public concern about inequality and corporate tax avoidance make the issue less toxic. The goal: approach 1990s levels of taxes, as a share of the economy, without reversing middle-class tax cuts enacted since then or raising taxes directly on households making under $400,000, a level that covers all but 2% of Americans.

“There’s been a dramatic shift in the last decade,” said

Sen. Ron Wyden

(D., Ore.), chairman of the Senate Finance Committee. “It used to be: ‘Democrats, oh my goodness’…never bring up the word taxes. Now the American people are supportive of our basic theory that everybody ought to pay their fair share.”

But there are pitfalls everywhere and few votes to spare. Only some Republicans, including Sen.

Rob Portman

of Ohio, backed a bipartisan infrastructure framework last week, emphasizing that they did so only because the agreement excluded tax increases.

Republicans’ reluctance to reverse parts of their 2017 tax law or vote for any tax increases leaves Democrats with a narrow path for a one-party bill, using procedures known as reconciliation that avoid a Senate filibuster. They must adopt a budget and a subsequent bill, keeping their entire Senate caucus together and losing only a handful of House members.

Any one Senate Democrat or any group of five House Democrats—citing concerns about the broader agenda or a particular provision—could sink the whole endeavor.

Messrs. Wyden and Biden are pushing for significant tax increases. The White House plan would raise the corporate tax rate, increase taxes on U.S. companies’ foreign earnings, roll back some individual tax cuts, tax capital gains at death and raise the top capital-gains rate to 43.4%. Mr. Wyden said Friday that he is working on a range of proposals for Democrats to consider.

Mr. Neal, in the House, has been more cautious, not rejecting the administration’s tax-increase plan without explicitly embracing it either.

“One of the things I have done with the committee members, I’ve encouraged them not to take, again, absolutist positions and not to volunteer revenue, until we see what the final architecture looks like,” he said. “Then we’re going to have to measure the appetite of those who want these initiatives as to what they’re willing to vote for.”

For now, Democrats have a two-bill strategy. The first would pair spending on roads, bridges and infrastructure with a grab bag of revenue-raising provisions that Republicans can accept, including expanded tax enforcement.

The second, partisan bill would include other Democratic priorities—such as extending the expanded child tax credit and spending on preschool—and be paired with tax increases. That linkage could build support among Democrats for the whole package, while Republicans might be reluctant to pass the infrastructure bill if they know it enables the tax increases.

“A lot of Democratic voters are moderate to conservative. A lot of Democratic voters have low trust in government,” said Syracuse University political scientist Christopher Faricy. “You have to tie it to something that is popular, that you can sell to people that will be an improvement in their day-to-day lives.”

Mr. Biden has pushed to cover the full cost of the eventual legislation with new revenue, a difficult task as some moderate Democrats push for more modest tax increases and others seek more ambitious spending proposals.

An early Senate draft budget had nearly $6 trillion in spending, more than what Mr. Biden has laid out, with roughly half covered by new revenue. The $3 trillion in revenue in that draft is below the roughly $4 trillion in revenue the White House has called for with its tax plans.

Several tax increases proposed by the White House have already drawn resistance from Democrats. Lawmakers expect that they will only be able to raise the corporate tax rate to 25% from 21%, not the 28% Mr. Biden proposed.

“Personally I don’t think that’s realistic” to cover the full cost of a reconciliation package, said House Budget Committee Chairman

John Yarmuth

(D., Ky.). “I think everybody realizes it would be hard to get to, particularly if you compromise on the corporate tax, if you go to 25 instead of 28, that takes the revenue numbers down. ”

The proposal to raise the top capital-gains tax rate prompted objections from some Democrats, who want to preserve a lowered rate as an incentive for investment, and lawmakers in farm districts, who worry that changes to capital gains taxation at death could cause families to sell or divide farmland.

Despite such concerns, “there’s remarkable unity in the Democratic caucus in the House,” said Democratic Rep. Ron Kind, whose western Wisconsin district will get a presidential visit this week. Mr. Kind said he still has some questions about the capital-gains proposal.

Then there is the state and local tax deduction. Lawmakers from New York, New Jersey and other high-tax states have been pressing for repeal of the $10,000 cap on that break. They have enough votes to demand a concession, but progressives counter that the benefits of the deduction go to the highest income households.

“We’ve got to find something,” Mr. Neal said. “I haven’t quite figured out what it is yet.”

Write to Richard Rubin at [email protected] and Andrew Duehren at [email protected]