Does the Inflation Reduction Act violate Biden’s $400,000 tax pledge? Expect ‘a different answer depending on who you ask,’ says analyst

Senate Democrats’ package of climate change, health-care, drug pricing and tax measures unveiled last week has proponents and opponents debating whether the legislation violates a pledge President Joe Biden has made since his presidential campaign, to not raise taxes on households with incomes below $400,000 a year.

The answer isn’t quite as simple as it seems. 

“The fun part about this is, you can get a different answer depending on who you ask,” said John Buhl, an analyst at the Tax Policy Center. 

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The White House has used $400,000 as a rough dividing line for the wealthy relative to middle and lower earners. That income threshold equates to about the top 1% to 2% of American taxpayers. 

The new bill, the Inflation Reduction Act, doesn’t directly raise taxes on households below that line, according to tax experts. In other words, the legislation wouldn’t trigger an increase on taxpayers’ annual tax returns if their income is below $400,000, experts said. 

But some aspects of the legislation may have adverse downstream effects — a sort of indirect taxation, experts said. This “indirect” element is where opponents seem to have directed their ire. 

The legislation — brokered by Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-W.Va., who’d been a key centrist holdout — would invest about $485 billion toward climate and health-care measures through 2031, according to a Congressional Budget Office analysis issued Wednesday.

Broadly, that spending would be in the form of tax breaks and rebates for households that buy electric vehicles and make their homes more energy-efficient, and a three-year extension of the current Affordable Care Act subsidies for health insurance.

The bill would also raise an estimated $790 billion via tax measures, reforms for prescription drug prices and a fee on methane emissions, according to the Congressional Budget Office. Taxes account for the bulk — $450 billion — of the revenue.

As a result of the policy, those with incomes below $200,000 would pay almost $17 billion in combined additional tax in 2023, according to a Joint Committee on Taxation analysis published July 29. That combined tax burden falls to about $2 billion by 2031, according to the JCT, an independent scorekeeper for Congress.   

“The Democrats’ approach to tax reform means increasing taxes on low- and middle-income Americans,” Sen. Mike Crapo, R-Idaho, ranking member of the Finance Committee, said of the analysis.  

“The selective presentation by some of the distributional effects of this bill neglects benefits to middle-class families from reducing deficits, from bringing down prescription drug prices and from more affordable energy,” a group of five former Treasury secretaries from both Democratic and Republican administrations wrote Wednesday. 

The $64 billion of total Affordable Care Act subsidies alone would “be more than enough to counter net tax increases below $400,000 in the JCT study,” according to the Committee for a Responsible Federal Budget, which also estimates Americans would save $300 billion on costs and premiums for prescription drugs.

The combined policies would offer a net tax cut for Americans by 2027, the group said. 

Further, setting a minimum corporate tax rate shouldn’t be viewed as an “extra” tax, but a “reclaiming of revenue lost to tax avoidance and provisions benefitting the most affluent,” argued the former Treasury secretaries. They are Timothy Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin and Lawrence Summers. 

There are additional wrinkles to consider, though, according to Buhl of the Tax Policy Center. 

For example, to what extent do companies pass on their tax bills to workers versus shareholders? Economists differ on this point, Buhl said. And what about companies with a lot of excess cash on hand? Might that cash buffer lead a company not to levy an indirect tax on its workers? 

“You could end up going down these rabbit holes forever,” Buhl said. “It’s just one of the fun parts of tax pledges,” he added.