Legislation

Some earning under $400,000 would see tax burden increase under Manchin-Schumer bill

Democrats’ Inflation Reduction Act would decrease the after-tax income of some earning below $400,000, according to a new analysis from Congress’s tax scorekeeper.

Most people would see little change to their tax burden, and the legislation does not include direct tax increases on lower-income households. But President Joe Biden campaigned on the promise of not increasing taxes on anyone earning over $400,000, and Republicans contend the bill violates the pledge. The legislation is set for a vote in the House Friday.

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An analysis by the nonpartisan Joint Committee on Taxation found that 37.4% of those earning between $100,000 and $200,000 would see their tax burden tick up, although for about 28% in that earnings range the increase would only be between $100 and $500.

That number increases for those earning between $200,000 and $500,000. Nearly three-quarters of earners in that bracket would have their after-tax income decrease as a result of the Democratic reconciliation legislation, the analysis found. About 30% of those in the income bracket would have their burden increase by more than $500 in 2023.

“These tax hikes on working families do not include the bill’s superfund or methane taxes on American energy, which disproportionately harm middle- and lower-income households through higher prices at the pump and bigger utility bills,” Republicans on the House Ways and Means Committee said in a news release.

While the bill includes no direct tax increases for individual filers, the JCT numbers in part show the projected effects of increasing corporate taxes, which would hit lower-income earners by reducing the value of stocks they might own in retirement accounts or reducing their wages.

Republicans have also pointed out that some high earners would end up seeing their after-tax income increase. The JCT analysis found that 19.4% of taxpayers earning over $1 million annually would see their tax burden decrease, while about 78% of those earning in excess of that amount would have a bigger tax burden.

Still, in another analysis released this week, the JCT found that tax brackets under $200,000 would have overall decreases in their tax burdens, while those making between $200,000 and $500,000 would see tax burdens slightly increase.

In total, the JCT concluded that the Democratic legislation would have little effect on the majority of filers’ tax burdens because most returns would have tax changes of less than $100 next year.

The legislation’s passage in the Senate was a big victory for the Biden administration and came after centrist Sen. Kyrsten Sinema (D-AZ) exacted some concessions related to the changes to the tax code. The legislation is intended to be a watered-down version of Biden’s proposed “Build Back Better” legislation, which failed after not getting support from centrist Sen. Joe Manchin (D-WV).

Manchin was the driving force behind the Inflation Reduction Act, but to get Sinema’s support, Democratic leadership agreed to abandon a plan to raise taxes on carried interest, a form of income earned by private equity fund managers that is subject to a lower tax rate.

Another concession that Sinema got was exempting a feature of the tax code that allows businesses to write off investments quickly from the portion of the bill that would apply a minimum tax to the income of corporations.

The legislation includes a minimum 15% tax on the adjusted financial statement incomes of big corporations, known as “book income.” In other words, the companies would have to calculate their taxable income twice — once using the tax code and applying a 21% rate and a second time using financial accounting and applying a 15% rate.

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To make up for the revenue losses from paring back provisions in the book tax and slashing carried interest changes, Sinema and Democratic leaders agreed to impose a 1% excise tax on stock buybacks.

Also included is a plan to bolster IRS tax enforcement, which the Congressional Budget Office projected will bring in $124 billion in increased revenue.


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