Joe Manchin Pulled The Plug On Tax Increases. What Happens Next?

Conservative Democrat Joe Manchin (D-WV) may have effectively sealed the fate of President Biden’s tax agenda when he said he now opposes any tax increases, new social spending, or climate change initiatives. Manchin may have doomed those tax changes not only for now but for at least another three years.

To be sure, Manchin left the door open a crack. After he sees updated inflation data in mid-August, the West Virginian suggested, he might be open to a more modest tax and climate bill. But few Democrats expect that to happen.  

Instead, Manchin’s thumbs-down, and the unified opposition of all Senate Republicans, leaves behind a long list a policy casualties including:

• Biden’s major tax increases on corporations and high-income individuals
• A big boost in funding for the Internal Revenue Service
• An attempt by progressives to revive at least part of a 2021 expansion of the Child Tax Credit.
• An ambitious move to synch the US system of taxing multinational corporations with a major tax reform plan developed by the Organisation of Economic Co-operation and Development (OECD).
• Efforts to restore tax incentives for research and capital investment that were included in the 2017 Tax Cuts and Jobs Act (TCJA) but expired at the end of 2021.

Vanishingly small

The highly-uncertain political and economic environment makes predictions difficult. But two possible outcomes are that Republicans will win control of at least one House of Congress in November and economic growth will slow or even stall as the Federal Reserve continues its aggressive battle against inflation.

If both come to pass, the chances of any tax increases become vanishingly small. Indeed, if the economy falls into recession or even slows sharply, the talk in Congress could well pivot from corporate tax increases to corporate tax cuts.

After all, tax cut supporters already are arguing that if inflation is due in part to goods shortages, why would Congress raise taxes on producers, a step that could raise their costs and reduce their incentive to invest? The argument may be flawed, since inflation largely is being driven by excess demand. Still, that claim will be politically attractive to those predisposed to cutting taxes in any economy.   

And that debate could likely continue well into the 2024 election cycle.

Cracking pillars

The international tax debate may be affected as well. Biden already was struggling to win congressional approval of several tax changes that would bring the US into closer alignment with the OECD model. That chore now has gotten even more difficult.

According to published reports, Republican operatives have worked closely with Hungary in that nation’s efforts to slow the European Union’s acceptance of a new system for taxing multinational corporations. And Manchin himself told a West Virginia radio station last week,  “We’re not going to go down that path overseas right now because the rest of the countries won’t follow, and we’ll put all of our international companies in jeopardy, which harms the American economy.”

Manchin’s analysis seems off base: A number of countries may adopt the changes before the US and some US companies could well benefit from the agreement. But his views are widely held among Republicans and even some other Democrats. Without Manchin’s support and absent a major tax bill to ride on, those reforms likely will stall for some time to come.  

Some prospects remain

Tax policy won’t disappear, of course. If Republicans win control of both houses of Congress, and can do a better job managing Senate rules than Democrats did, we could see a GOP tax cut bill in 2023 or 2024.

Presidential candidates may debate tax policy in the 2024 campaign, though if Donald Trump runs again, policy of any kind is unlikely to get much attention. Lawmakers will have no choice but to confront the scheduled 2025 expiration of all major individual income tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA). Inaction on that front is unimaginable since it would result in a massive across-the-board tax increase. And the international issues will not go away.

And we may even see some tax initiatives in the near future, though they likely will be modest. For example, there appears to be broad bipartisan support for a retirement savings bill that is slowly working its way through Congress. There always are relatively minor expiring tax provisions that must be attended to. Lawmakers might restore those corporate expensing rules that are popular on both sides of the aisle

In the longer term, major structural tax and fiscal issues, as well as an accelerating climate crisis, can’t be ignored. Quiet efforts to address those issues will continue, perhaps with increasing urgency.

But unless Democrats somehow retain control of the House and increase their majority in the Senate, Manchin may have killed Biden’s tax agenda, not only for now, but for the foreseeable future.