The White House released on Thursday a framework for the Build Back Better agenda—a massive, $1.75 trillion spending bill that will radically transform the American way of life as we know it—and Democrats in Congress are intent on rapidly moving it immediately. We asked analysts from The Heritage Foundation to examine what is in the bill text. We will update their responses as they come in:
Corporate Tax
The framework claims it will raise $325 billion from a 15% corporate minimum tax on large companies’ book income. Book income is what companies report in their financial statements. Different accounting rules apply for determining taxable income and book income, and that’s by design.
It’s troubling that the rules for determining book income are determined by a Connecticut-based nonprofit, the Financial Accounting Standards Board. Effectively, Congress could be handing some of its taxing authority over to a private organization.
Advocates of the new minimum tax justify the tax on the grounds that some corporations “get away with” not paying tax in certain years.
Corporations often pay zero taxes in a year because of losses in that year or because they accrued net operating losses in prior years. Net operating losses are an efficient, desirable feature of a corporate income tax because they help ensure that the tax code is not biased against businesses with large year-over-year fluctuations in loss and income.
Suppose Company A has $1 million of profit one year and another $1 million profit in the second year. Company B, on the other hand, suffers a loss of $10 million in the first year, followed by a gain of $12 million in the second year. Note: both companies have a total profit of $2 million over the second years. If not for the allowance of net operating losses, Company B would have to pay tax on $12 million of profit in the second year but would get no tax relief for the $10 million of losses incurred in the first year.
Introducing a minimum tax on book income complicates and distorts the net operating losses system by leaving certain taxpayers unable to use net operating losses to offset future gains. Book income does not factor in net operating losses, introducing a bias in the tax code against companies with large fluctuations in loss and income. This bias would extend to companies that have a significant one-time investment expense leading to a taxable loss. Effectively, this plan would force certain Taxpayers to pay taxes on their losses, dollar for dollar, as if they were income.
Since the 2017 Tax Cuts and Jobs Act, companies have been able to immediately expense investments in short-lived assets. By encouraging capital investment, this is one of the most pro-growth policies in the tax code. The minimum tax would counterproductively work to offset these pro-growth expensing provisions, because under current financial accounting rules, such expenses may only be deducted over the course of several years.
Under the present tax system, when companies do consistently avoid paying tax, it is usually because they are able to claim preferential tax credits that are only available to favored businesses or industries. Unfortunately, there are dozens of provisions now being considered that would expand corporate tax credits.
Minimum taxes are burdensome to administer and comply with, as they effectively represent entirely new parallel tax systems. In addition to the corporate profits minimum tax, Congress is also weighing expansion of another minimum tax system in the international tax code. These additional layers of complexity are good news for auditors and accountants, but bad news for businesses that want to focus on improving the goods and services they provide.
– Preston Brashers is a senior policy analyst focusing on tax policy at The Heritage Foundation
Higher Education
Biden’s framework would spend $40 billion to increase the maximum Pell Grant award by $550, send additional subsidies to historically black colleges and universities and minority-serving institutions, and provide additional funding for community colleges and workforce development.
These additional federal subsidies will only encourage schools to raise prices, shifting more of the burden of paying for higher education from the student who benefits to all taxpayers.
Colleges will have received an additional $76 billion in federal spending over the past year and a half in response to COVID-19—a monumental sum nearly equivalent to the Department of Education’s entire annual discretionary budget. This plan would add tens of billions more.
Colleges have needed a course-correction for decades, and new federal subsidies will continue to enable general fiscal maladministration, avoiding necessary structural reforms, and changes at the university level that would actually reduce college costs.
For example, from 2001 to 2011, the number of non-teaching employees and administrators increased 50% faster than teaching faculty. Non-instructional staff now accounts for more than half of university payroll costs.
Ever-increasing college costs fueled in part by federal subsidies have muddied colleges’ value proposition. Across the country, tuition and fees for in-state students attending four-year universities have nearly tripled in real terms since 1990. Since 1970, inflation-adjusted tuition rates have quintupled at both public and private colleges.
Federal subsidies have increased dramatically, with spending on student loans rising 328 percent over the last 30 years, from $20.4 billion during the 1989-90 school year to $87.5 billion during the 2019-20 school year. As University of Ohio economist Richard Vedder explains:
[I]t takes more resources today to educate a postsecondary student than a generation ago… Relative to other sectors of the economy, universities are becoming less efficient, less productive, and, consequently, more costly.
This spending package, by adding another $40 billion in federal subsidies, will only continue this trend, fueling increases in higher education costs while shifting more of the burden onto taxpayers.
– Lindsey Burke is the director of The Heritage Foundation’s Center for Education Policy and the Mark A. Kolokotrones fellow in Education
Housing
President Joe Biden’s newest big government socialism framework makes no mention of repealing the cap on the deduction for state and local taxes—popularly known as “SALT.”
An important reform included in the Tax Cuts and Jobs Act was to cap the SALT deduction at $10,000. The SALT deduction subsidizes high taxes imposed by state and local governments. The primary beneficiary of the SALT deduction is high-income taxpayers in high-tax states. Prior to the cap being put in place, the average millionaire from New York or California deducted more than $450,000 per year of SALT, while the average Texas millionaire only deducted about $50,000 resulting in a federal tax liability nearly $180,000 higher than their high-tax state counterparts.
Restoring subsidies for high income taxpayers in high tax states has been a priority for some blue-state lawmakers that have said “No SALT, no deal”. There have been reports that Speaker Nancy Pelosi, D-Calif., and Rep, Richard Neal, D-Mass., chairman of the Ways and Means Committee, “have given NJ/NY Democrats assurance it will be in bill.”
Instead of this harmful proposal, Congress should finish the job and repeal the SALT deduction.
– Matthew Dickerson is the director of The Heritage Foundation’s Grover M. Hermann Center for the Federal Budget
Immigration
The Biden administration has turned the U.S. immigration system into immigration chaos, and now the left wants American taxpayers to pay for it. The Democrats will continue to try to ram through amnesty using budget tricks. This will effectively reward illegal immigrants and will fuel the surge we are seeing play out every day at our southern border.
The Biden administration has itself to blame for inflating the backlog of immigration benefit applications. When they continue to add hundreds of thousands of illegal aliens to the application line, those who followed the law and apply for legitimate benefits are forced to wait years longer to have their application adjudicated.
What’s more, immigration benefits are fee-based. This is sound fiscal policy as applicants, not taxpayers, should pay for their own benefit application. To force U.S. taxpayers to pay for the Biden administration’s own backlog punishes Americans, fails to hold the administration accountable for their open border policies, and hurts lawful immigrants, their family members, and employers.
“Expanding legal representation” is a euphemism for taxpayer-funded attorneys for deportable aliens. Aliens already have a right to counsel in (civil) immigration proceedings, but at no expense to the government. The left has sought to chip away at this sound fiscal policy for decades, starting with illegal alien minors.
Requiring taxpayers to fund attorneys would be a fiscal bottomless pit, given the unknown millions of illegal aliens already in the country, plus the unending flow of illegal aliens currently crossing the border, plus the years’ long immigration court backlogs.
Furthermore, it would treat deportable aliens better than U.S. citizens, who do not have a right to taxpayer-funded attorneys in civil proceedings.
The left continues to ruin our asylum system while calling it “efficient and humane.” Asylum is intended to protect those who suffered or have a well-founded fear of persecution based on their race, religion, nationality, political opinion, or membership in a particular social group. Yet the left shoe horns in general violence, crime, and climate change into membership in a particular social group and labels them asylees.
Those conditions do not meet the definition for asylum and such applicants are not eligible. Watering down asylum to declare every applicant eligible hurts those who truly faced or fear real persecution. This is chaotic and inhumane.
– Lora Ries is the director of The Heritage Foundation’s Center for Technology Policy and a senior research fellow focused on homeland security at Heritage’s Davis Institute for National Security and Foreign Policy
Pre-K and Child Care
The framework includes $400 billion in new spending for universal pre-K and large child care subsidies that cap parents’ child care costs at 7% of families’ income for those earning up to 250% of the state median income (topping out at $429,000 for a family of four in D.C.). Both programs would initially be funded for six years.
Instead of reducing child care costs, expanding options, and helping more parents achieve the child care they desire, the proposals would drastically increase costs and restrict options to government-controlled providers.
A whole host of government dictates—such as requiring subsidized providers to pay “living wages” ($27 per hour for a single mom in Mississippi and $39 in Boston) and that all Pre-K workers have a bachelor’s degree (despite zero evidence that such degrees make someone a better caretaker)—would easily drive up costs by 50% or more.
And at the same time, the proposal would limit access to child care. In Chicago, the roll-out of universal pre-K is “strangling private day care,” as most parents send children to the government program, even if it doesn’t meet their needs. New Jersey’s “model” pre-K program has an accountability crisis and is wrought with political favoritism.
The proposed federal subsidies would likely be out-of-reach to faith-based providers, because in declaring them recipients of federal funds, it would compromise their ability to run their programs and hire workers according to their beliefs.
Pushing children into government-controlled, center-based child care that’s been shown to have negative impacts on kids’ and families’ long-term outcomes is not a sound “investment.”
In fact, the preeminent author of studies upon which these proposal are based, James Heckman, said, “I have never supported universal pre-school… Public preschool programs can potentially compensate for the home environments of disadvantaged children. No public preschool program can provide the environments and the parental love and care of a functioning family and the lifetime benefits that ensue.” He estimated that parental care has “rates of return of more like 30 or 40%.”
While this proposal provides nothing to the majority of disproportionately low-income parents who prefer family-based care, it would provide $30,000 in child care subsidies to a couple with $344,000 income and two children living in D.C.
If policymakers really want to help families in need, they should expand choices for existing child care funds, including allowing parents to use the roughly $10,000 per child worth of ineffective Head Start spending at a provider of their choice.
– Lindsey Burke and Rachel Greszler, a research fellow focusing on economics, the budget, and entitlements at The Heritage Foundation
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