Delay of budget bill changes offers potential tax increase reprieve

WASHINGTON — Some of the biggest new taxes in House Democrats' $2.2 trillion budget reconciliation bill could be delayed or even scrapped as deliberations on the package slip into next year and pressure to cut spending persists, likely leaving room for fewer offsets.

Sen. Joe Manchin III'S announcement Sunday that he opposes the package as-is means the bill will likely take longer to finish and see major changes to spending on social safety net and climate provisions if lawmakers hope the salvage the measure. The West Virginia Democrat's demands could leave lawmakers with $250 billion or more in room to delay, loosen or drop tax increases in the bill.

The House-passed version of the filibuster-proof bill included more than $2 trillion in offsets, according to the Joint Committee on Taxation and Congressional Budget Office.

That figure includes $1.5 trillion in tax increases on businesses and individuals, and a little over $200 billion in extra revenue generated from more funding for steppedup IRS tax enforcement. The remainder comes from nearly $300 billion in savings from reining in prescription drug costs.

Manchin has said he won't support more than $1.75 trillion in spending, which would leave Democrats room to scrap about $250 billion in offsets. Manchin backs the prescription drug savings but has expressed concerns about keeping the U.S. tax code competitive internationally, suggesting there may be room to trim some of the tax increases that party leaders won't need if they trim the bill's overall cost.

Some of the biggest taxes would kick in right away on Jan. 1, 2022, under the bill. And now that passage is delayed until sometime next year, that would mean the type of retroactive tax increases that policymakers typically frown on.

Delaying those taxes to 2023 — including a new “surcharge” on multimillionaires' income and a new tax on owners of “pass-through” businesses, including partnerships and S corporations — could cost somewhere in the $100 billion ballpark. Even then, lawmakers would still be flush with cash to lighten the reconciliation bill's tax load.

Dean Zerbe of tax consulting firm Alliantgroup said he expects a bigger lobbying push from companies in the new year because of that potential. Zerbe, a former Republican Senate Finance Committee aide, said he'd expect efforts to focus on carve-outs from the bill's 15 percent minimum tax on corporate income reported to shareholders or dropping it entirely, along with delaying higher taxes on multinationals' foreign earnings set for 2023.

While it would be manageable to have tax increases take effect in the 2022 tax year if the bill becomes law in January, retroactive hikes would get more difficult as the year wears on and especially if it slips into the spring, according to tax experts.