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As Biden-GOP infrastructure talks escalate, two Northwest senators play key role in biggest sticking point: how to pay for it

Sen. Ron Wyden, D-Ore., talks with Sen. Mike Crapo, R-Idaho, before the Senate Finance Committee, on May 12, 2021 on Capitol Hill in Washington.   (Pete Marovich/The New York Times via AP)
Sen. Ron Wyden, D-Ore., talks with Sen. Mike Crapo, R-Idaho, before the Senate Finance Committee, on May 12, 2021 on Capitol Hill in Washington.  (Pete Marovich/The New York Times via AP)

As the White House and Republican senators make a final push to strike a deal on a bipartisan infrastructure package, two veteran Northwest senators are at the center of what may be the biggest sticking point: how to pay for more than $1 trillion of investments in the nation’s roads, bridges and more.

Sen. Ron Wyden, D-Ore., and Sen. Mike Crapo, R-Idaho, lead their respective parties on the influential Senate Finance Committee, which is tasked with tax and revenue issues. In interviews with The Spokesman-Review, they laid out dramatically different visions of what federal taxation should look like.

Infrastructure talks picked up steam last week as President Joe Biden met Wednesday with the lead Republican negotiator, Sen. Shelley Moore Capito of West Virginia, who heads a negotiating group that includes Crapo and five other GOP senators.

The White House has said it wants to finish negotiations by Monday, though that is likely a soft deadline. After Biden and Capito talked again on Friday, a terse readout from Capito’s office said they “discussed the Republican infrastructure framework and the Biden administration’s proposal” and “agreed to connect again on Monday.”

The two parties have gradually closed the gap between their top-line numbers after the GOP’s initial $568 billion offer fell far short of the $2.3 trillion Biden wanted to spend over eight years, but they remain far apart on how Congress should pay for it. The White House plan aims to raise taxes only on corporations and the wealthiest taxpayers, but Republicans say even such targeted tax increases would have indirect effects on average Americans.

Just three years after Republicans used a procedure called budget reconciliation to bypass the Senate’s filibuster rule and pass a massive set of tax cuts over Democratic objections in 2017, Democrats are now eyeing the same tactic to roll back some of those cuts for corporations and the highest-income taxpayers. But Capito’s fellow West Virginia senator, centrist Democrat Joe Manchin, holds a critical swing vote and has said he wants his party to compromise with Republicans.

If that happens, Crapo and Wyden’s long history of working together on issues important to the rural Northwest could help them play a central role in shaping the tax code for the years ahead.

Here are some of the biggest issues the parties would need to hammer out to reach a compromise:

Corporate tax

After the Republicans’ 2017 Tax Cuts and Jobs Act lowered the corporate income tax rate from 35% to 21%, Biden initially proposed splitting the difference and raising that rate to 28%. Manchin has said he could only support an increase to 25%, but Crapo said even that increase would defeat the purpose of the 2017 bill.

“The United States needed to move from (having) by far the highest corporate tax rate in the world,” Crapo said, “We’re competitive now, and so the question is: What would moving back up to a 25% tax rate do? … We would once again put the United States at a competitive disadvantage.”

Howard Gleckman, a senior fellow at the nonpartisan Tax Policy Center, said the pre-2017 corporate tax rate did make the United States an outlier, but other wealthy countries that tax corporations at a lower rate rely heavily on a value-added tax on goods and services, while no such tax exists in the U.S.

“If all you’re doing is looking at corporate income tax in isolation, it doesn’t tell you a whole lot,” Gleckman said. “That said, you don’t want to be in the position that the United States was before 2017, where it had pretty much the highest corporate tax rate in the world.”

Most economists, Gleckman said, agree a rate in the mid-20s would maximize revenue without dampening economic activity or pushing corporations to take their tax revenue out of the country.

After Capito called any corporate tax hike a non-starter Wednesday, Biden pressed her to support a 15% minimum tax rate for corporations, which routinely use deductions to pay less than the statutory rate. Spokane-based Avista Corporation, for instance, reported an effective tax rate of just 5.2% in 2020.

At least 55 of the nation’s largest corporations paid no corporate income taxes despite making a profit in the most recent fiscal year, an April report from the Institute on Taxation and Economic Policy found.

On Thursday, the Washington Times reported the GOP negotiating group would likely reject the tax floor idea, which they saw as “merely substituting one tax hike for another.” On Saturday, the top economic officials from the “G7” group of advanced economies announced an agreement to set a 15% global minimum corporate tax rate, signaling the Biden administration intends to pass that measure with only Democratic support in Congress if needed.

Capital gains tax

Biden wants to increase the income tax rate for the highest-earning Americans – individuals who make more than $518,400 a year would pay 39.6%, up from 37% – the bigger change would come to the capital gains tax, due when stocks or other assets are sold for a profit.

Capital gains from assets held for at least a year are currently taxed at a maximum rate of 20%, which applies only for those who earn more than $441,000 a year. Biden wants to tax capital gains at the same rate as ordinary income for households earning more than $1 million a year.

“If you look at the spread of capital gains in America, the benefits disproportionately go to the most affluent,” Wyden said. “If you’re a nurse in Medford, Oregon, and you’re taking care of COVID patients, you’re required to pay taxes with every single paycheck.”

“If you’re a billionaire,” he said, “to a great extent, with your lawyers and your accountants, the tax system is optional for you. You can pay what you want when you want, so there’s a double standard.”

In Gallup surveys in 2020, 55% of Americans reported owning stock, but 84% of all stock was owned by the richest 10 percent of the population, a New York Times analysis found in January. The wealthiest 1% of taxpayers earned 75% of all long-term capital gains in 2019, according to the Tax Policy Center.

Crapo, meanwhile, warned taxing capital gains even for the very rich could discourage those people from investing their money in research, infrastructure and other things that benefit the broader economy.

“There are those on the other side who like to say that capital means rich people, but capital is what drives growth in the United States,” Crapo said. “And when you tax something, you make less of it, and so increasing the capital gains tax will reduce the availability of capital.”

Gleckman said Democrats are right when they say capital gains overwhelming benefit high-income people, but Republicans also have a point when they say capital impacts everyone. The right tax rate, he said, depends on what the goal is.

“Like everything else in economics, this is about a balancing act,” Gleckman said. “How much do I want to raise capital gains taxes so that I’m going to generate revenue? But I don’t want to raise it so high that I’m going to discourage people from making sensible economic decisions, rather than tax-based decisions, about where they put their money.”

Closing the ‘tax gap’

In the decade that began with fiscal year 2010, the Internal Revenue Service’s budget was cut by 20% and its staff reduced by 22%, according to the IRS. As a result, IRS audits of the richest Americans have dropped while the agency has used its limited resources to target the less complex returns of low-income taxpayers.

Because of that lack of resources, the IRS failed to audit more than 897,000 wealthy people who didn’t file tax returns over a three-year period despite owing nearly $46 billion in taxes, the Treasury Inspector General for Tax Administration found in 2020.

The difference between what taxpayers owe and what they actually pay, referred to as the “tax gap,” may be the one issue where Crapo and Wyden see mostly eye to eye.

“They have spent years and years hollowing out the budget,” Wyden said of GOP lawmakers. “It got to the point where I and others did so much hollering about the fact that they were auditing poor people … more than wealthy tax cheats, (Republicans) began to say, ‘Well, we’ve got to do more to deal with the tax gap.’”

By 2018, according to IRS data, millionaires were 80% less likely to be audited than they were in 2011 and the top 1% of earners were audited at roughly the same rate as low-income taxpayers who claimed the Earned Income Tax Credit.

“I don’t have any disagreement with the notion that we should reduce the tax gap as much as we can,” Crapo said. “There are vast differences in the analysis of what that amount is.”

IRS Commissioner Charles Rettig told the Finance Committee in April the tax gap could be as big as $1 trillion a year, but Crapo pointed to a model by the University of Pennsylvania’s Wharton School of Business that estimated Biden’s proposal would raise just $480 billion over a decade through improved enforcement.

Biden has called on Congress to spend $80 billion to improve IRS enforcement, estimating that investment would return $700 billion in otherwise unpaid taxes over a decade.

Crapo also has objected on privacy grounds to a Biden proposal that would require banks to report deposits and withdrawals to let the IRS compare reported income with deposits in an effort to catch tax fraud.

Gleckman said there are two problems with this proposal that need to be worked out. First, the volume of information Democrats are asking for would overwhelm outdated IRS computer systems.

“The other question,” Gleckman said, “is looking at deposits and withdrawals is a pretty crude measure of income, because you could put that money somewhere else. You could put it under a mattress, give it to your spouse, or put it in foreign accounts.”

“The bottom line of it all is: How much can you realistically expect the IRS to collect?” Gleckman said. “It can collect a significant amount of money, but will it collect $700 billion over 10 years, which is what the administration is estimating? That might be a reach.”

How much power does the Finance Committee have?

Both Crapo and Wyden spoke highly of each other and the two senators have worked together on legislation related to rural schools, fighting wildfires and more. Yet both also expressed regret that they couldn’t work directly with each other to negotiate a compromise.

“Sen. Wyden and I are long-term friends,” Crapo said. “I have to say, though, there is also a presidential initiative here that Sen. Wyden doesn’t necessarily have the ability to negotiate away.”

Wyden, meanwhile, pointed to a comment by Senate GOP Leader Mitch McConnell’s in May, when the Kentucky senator said, “100% of my focus is standing up to this administration.”

“It used to be that tax bills were written in the Senate Finance Committee,” Gleckman said. “Those days are long over. Now, tax bills are written in the majority leader’s office.”

“Left to their own devices, Wyden and Crapo are both guys who instinctively want to find a middle ground where they can – could probably draft a middle-of-the-road tax bill that would probably pass.”

Both parties’ leadership, however, seem unwilling to budge from their basic positions: Republicans want no tax increases, and Democrats want to roll back as many of the Trump-era corporate tax cuts as they can to finance aggressive spending to address social inequity and the nation’s run-down infrastructure. If the negotiations don’t succeed soon, Democrats likely will move forward with the reconciliation process and pass tax reforms on their own before Congress breaks for its annual August recess.

Orion Donovan-Smith's reporting for The Spokesman-Review is funded in part by Report for America and by members of the Spokane community. This story can be republished by other organizations for free under a Creative Commons license. For more information on this, please contact our newspaper’s managing editor.

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