The Democrats’ ambitious policy proposals are making their way through the complicated reconciliation process, but the rhetoric about the numbers and the economic effects of the package needs a dose of reality.
The package passed by the House Ways and Means Committee will not pay $ 3.5 trillion in new spending, break the promise not to raise taxes for Nevadans earning less than $ 400,000, and hurt the state and citizens. national economies.
Lawmakers could improve the situation in three ways.
Number one, they should be honest with the Nevadans about the cost. The tax increases approved so far amount to about $ 2 trillion over a decade, which does not fully pay for $ 3.5 trillion in new spending. Some lawmakers predict they could raise an additional $ 700 billion through “health care savings,” but even then there would still be billions of dollars missing to fully pay for their plan.
Perhaps worse, President Joe Biden has asserted that a fully paid plan will come at no cost. Those drafting the bill must provide an honest account of how much they will raise in taxes and how much they expect to borrow to pay off the plan in full.
Second, lawmakers must drop the topic of discussion and recognize that their $ 2,000 billion new tax proposals will create a burden on Nevadans earning less than $ 400,000.
For example, nearly $ 100 billion of the $ 2 trillion in tax increases come from a proposal to increase taxes on certain tobacco products and nicotine. The vast majority of smokers have lower incomes, and tobacco is one of the few products whose consumption increases as income decreases. Nationally today, a pack-a-day smoker who earns $ 15,000 a year pays nearly 10 percent of his income in tobacco taxes. The proposed increase brings that figure to 12%, clearly in violation of the commitment not to raise taxes for people earning less than $ 400,000.
Likewise, the proposal to increase corporate income tax would directly and indirectly weigh on workers earning less than $ 400,000. Directly, the burden falls on people who own shares in companies, which many Nevadans do through their retirement accounts. Indirectly, over time, the corporate tax burden falls on workers in the form of lower wages, as lower investment slows productivity growth and wage growth.
Rather than making unrealistic promises, lawmakers should explain why they think their new spending is worth the cost of higher taxes.
And this is where the biggest problem lies. Honest accounting becomes difficult when the types of tax increases proposed by lawmakers are among the most damaging to economic growth. Thus, the third improvement would be for lawmakers to replace their nefarious proposals with less damaging tax increases, such as consumption taxes and generalized user fees, so that the benefits of the new spending are not outweighed by the new spending. disadvantages of the new tax increases.
At the Tax Foundation, we estimated that the Build Back Better Act as proposed by the House Ways and Means Committee would reduce the size of the economy by almost 1% in the long run – in today’s dollars, that equates to to about $ 332 billion in lost production. each year, in large part due to increased corporate taxes which reduce the incentives for the private sector to invest.
In addition, we estimate that the plan would eliminate 303,000 full-time equivalent jobs in the United States and reduce the after-tax incomes of the richest 80% of taxpayers in the long run.
This is particularly problematic as states like Nevada enter a period of economic recovery with hopes of renewed investment and opportunity after being hit hard by the pandemic-induced slowdown.
Infrastructure is important. But funding new spending with economically damaging tax increases – and warding off the cost and effects of those tax increases – isn’t a way to build back better.
Erica York is an economist at the Tax Foundation, a non-partisan think tank in Washington, DC