(Bloomberg) -- A key Biden administration proposal to collect more tax revenue from wealthy individuals appears poised to be watered down by lawmakers, and may even be removed entirely from the Democrats’ tax and social spending agenda, according to people familiar with the matter.
Democrats in the House and Senate are moving toward scaling back or potentially dropping President Joe Biden’s proposal to significantly limit the tax exemption known as step-up-in-basis for assets passed on at death to heirs, the people said on condition of anonymity because the talks are private.
Biden had proposed raising the capital gains tax rate for top earners to 39.6% from 20%. If Democrats drop the plan to treat death as a taxable event for capital gains for individuals with real-estate and other asset appreciation over $1 million, then a capital gains rate above 28% would likely cost the federal government money.
The situation remains fluid, with efforts to draft the tax portion of the Democrats’ $3.5 trillion social-spending plan expected to run through the weekend, the people said.
The Biden proposal aims to both tax inherited wealth and help offset programs like a multi-year extension of an expanded child tax credit or paid family medical leave. Tweaks to Biden’s plan could mean Democrats also have to pare back their aspirations toward equalizing treatment of work income and long-term investment income, a stated priority of progressives.
Third-party estimates of how much money the Biden administration’s plan would raise range from $213 billion to approximately $400 billion over 10 years.
Representative Bill Pascrell, a senior member of the House Ways and Means panel, said in an interview Friday that he believes the administration’s proposed changes to step-up-in-basis faced an uphill climb for inclusion in the committee’s draft legislation, downplaying its chances compared to those related to addressing the cap on state and local tax deductions, or SALT.
“If I was a betting man I’d probably think that that does not have as good a chance, as of this moment, as a SALT reprieve or a SALT change of threshold,” said the New Jersey Democrat, who has made repeal of the $10,000 SALT-writeoff limit a top priority.
The White House didn’t immediately respond to a request for comment.
Senate Democrats are already planning for the possibility of scaling back some of Biden’s proposals by focusing revenue-raising efforts more toward businesses than individuals.
Earlier Friday, Senate Finance Committee Chairman Ron Wyden introduced two new proposals likely to be included in the Senate’s overarching bill later this month: an overhaul of tax treatment for business partnerships and a 2% excise tax on stock buybacks that was co-sponsored by Senate Banking Committee Chairman Sherrod Brown of Ohio.
Such proposals are seen as less politically risky than the 28% corporate income tax rate the White House wants, since multiple Democratic senators have said they prefer a corporate rate closer to 25%, while generating other revenue to make up the difference.
On taxing gains on inherited assets, Bloomberg reported last week that Democrats were considering larger exemptions -- $5 million per person and $10 million per couple -- meaning taxation of inherited assets would begin after those totals.
Democrats were also looking into a special carve-out of an additional $25 million in value per couple for family-farm property passed on to heirs, though that exemption could go even higher when the Senate’s tax language is introduced later this month.
The proposed exemptions reflect the high-profile opposition to the proposal from congressional Democrats who represent farming areas, as well as broader concerns among rank-and-file members in both chambers over the politics and effects of making death a taxable event for more Americans.
Democrats including House Agriculture Committee Chairman David Scott of Georgia, senior House Ways and Means Committee member Mike Thompson of California and Montana Senator Jon Tester have all expressed reservations about the administration’s proposal.
“The stepped-up basis proposals Senator Tester has seen to date would have a negative impact on Montana’s family farms, ranches and small businesses, and he is going to keep fighting to defend those folks from shortsighted policies that put their continued operation in jeopardy,” Tester spokesperson Roy Loewenstein said in an email. “As this important process moves forward, Senator Tester is committed to working with his colleagues to make sure any package is fully paid for and works for rural America.”
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