What a mess. Amid all the other Democratic burdens of this week—trying to pass the bipartisan infrastructure bill, considering the $3.5 trillion Build Back Better plan, keeping the government open on October 1, and maintaining the full faith and credit of the U.S. come the debt ceiling crisis on October 18, they’re now hurriedly considering a carbon tax. As a policy, the idea is commendable and is enjoying more receptivity than it has before, from people like Mitt Romney to various industry groups. It’s based on the idea that if you make carbon-based energy sources more expensive, you’ll speed the switch to renewables—like hiking tobacco levies to cut smoking. The problem is that a carbon tax has been an extremely tough sell for a generation, Romney aside. In 1993, the Clinton administration pursued a similar BTU tax, led by Al Gore, and was unsuccessful. Since then, Congresses have been too gun shy to take it seriously.
But now the carbon tax is back because it’s a revenue raiser, and Democrats are divided not only about how much to spend on Biden’s Build Back Better plan, but also about how to pay for it. A tax on top earners? Senator Kyrsten Sinema opposes that emphatically. A hike in corporate taxes? Senator Joe Manchin and Synema—“Manchema,” they’re called—are wary of that. Changing the way we tax inheritance of big estates? Many Democrats fear a rehash of the (false but fierce) “death tax” charge, especially when it comes to farms. To widen his options, Senate Majority Leader Chuck Schumer has asked Senator Ron Wyden, chair of the Senate Finance Committee, for a carbon tax proposal as a way of funding Build Back Better. On Tuesday, the Biden administration indicated that it was open to a carbon tax, although reportedly it’s skeptical. Synema went to the White House three times that day, according to some reports; whether it was about carbon isn’t clear. Maybe a carbon tax can appease her, galvanize fractured Democrats, and help the environment.
But I seriously doubt it.
Republicans will crush the Democrats over a carbon tax; the GOP will go bonkers over a tax that hits families who earn under $400,000—a red line that Biden has said he would not cross. Inflation is soaring. Who wants to campaign on intentionally raising prices? Technically, the tax is on energy companies, but it’s almost sure to be passed on to consumers. Even if the tax comes with all kinds of fancy rebates and credits to ease the pain for the middle class, as is being discussed, this’ll be a tough sell even to congressional Democrats who are predisposed to like the idea, let alone voters. Manchin (D–Coal Country) has already expressed strong doubts about supporting a carbon tax, and with a 50-50 Senate, congressional Democrats have to have Manchin’s approval. (The ever-coy West Virginian hasn’t given the proposal a firm no, either.) So except for the fact that a carbon tax may not pass and is politically toxic, it’s great.
There is a better way. That’s for Democrats not to pay for everything in the Build Back Better plan. Democrats cling to the quaint notion that this bill should be paid for with tax increases, commonly called “pay-fors,” such as the ones that are in there now: raising income tax rates on the highest earners, raising corporate income rates, and hiking inheritance taxes for large estates. None of these are easy to pass. Even though higher taxes on the rich and corporations are individually popular, lobbyists are arrayed against each tax hike, and it has proved easy in the past to convince middle-income Americans that Democratic tax hikes will fall on them even if they won’t.
Democrats could have taken their cue from the GOP, which, with predictable regularity, cuts taxes without also cutting spending, through the use of shady accounting tricks. Donald Trump’s tax cuts ballooned the deficit, as did George W. Bush’s (admittedly aided by many Democratic votes). But when it’s the Democrats’ turn to run the fiscal show, they feel obliged to pay for things (not always, but generally).
They shouldn’t. The enormous income support programs that Democrats and Republicans passed under Trump were not paid for. The American Rescue Plan that passed earlier this year under the reconciliation process did not have pay-fors. The Trump 2017 tax cuts were passed through reconciliation without pay-fors. Congress long ago suspended the “Conrad rule,” named after former Democratic Senator Kent Conrad, a former chair of the Senate Budget Committee. The rule, enacted in 2007, required that reconciliation not add to the deficit. (Reconciliation, as you probably know, allows for a simple majority vote and thwarts the GOP’s promiscuous use of the filibuster, which, while always odious, was at least used sparingly for most of the country’s history rather than as an extra-constitutional method of installing a 60-vote threshold in the Senate.) The Conrad rule was scuttled in 2015, but the man himself wrote an op-ed this summer pleading to Congress to abide by the measure. Other budget-slashing mechanisms, like the infamous sequestration of the Obama years and the PAYGO law of 2010, can probably be dodged.
So while it would be complex, tricky, and require unanimity, Democrats could, technically, pass Build Back Better without paying for it. But it won’t happen. Too many Democrats would oppose it, not wanting to be seen as spendthrifts. Plus, Pelosi, Schumer, and the White House are now invested in saying the bill is paid for and thus won’t contribute to inflation. It’d be hard to go back on that. But the mere fact that they not only show fiscal restraint but also won’t even consider jettisoning it, even when Republicans feel no such compunction, is telling: Democrats are operating in a different universe than the norm-breaking Republicans, and it hamstrings them, forcing them forever into hiking taxes.
In an ideal world, Democrats would at least consider abandoning the Build Back Better pay-fors. Why go through the political torment of raising a few trillion in taxes when it’s unlikely to have a significant impact on the country’s debt outlook? It is already north of 100 percent of the gross domestic product—long considered a danger zone by both fiscal hawks and mainstream economists. We’ve had a real-time experiment in high deficits since the turn of the century, and so far, it hasn’t doomed the economy. That doesn’t mean it won’t, of course, or that we can print money ad infinitum the way Modern Monetary Theorists sometimes seem to suggest. Still, the past 20 years of wars, pandemics, and financial crises have shown that deficit spending isn’t the job killer or inflation driver that Democrats thought it was in the 1990s, when Bill Clinton hiked taxes, balanced the budget, and adhered to the warnings of Robert Rubin and others not to spook the bond markets.
Sure, Democrats consider the pay-fors to be good in and of themselves, not just as a means to an end. Taxing the rich eases inequality a bit anyway. A carbon tax can help with global warming. The corporate tax rate could be an important stick or carrot to cajole companies to pay their workers more—an idea this magazine has championed. All these pay-fors are worthy ideas and worth revisiting on their own merits. But not now. If Democrats could bust their own mental blocks about fiscal rectitude they could grease the path for this bill.
If Democrats won’t reconsider pay-fors for Build Back Better, they should and likely will trim the spending so they can pass something and live to fight another day, sparing themselves as much jousting as possible over what to spend and how much to tax. As my colleague Anne Kim pointed out, if Democrats operate under the mind-set that they’re going to lose Congress next year, it can become a self-serving prophecy. Progressives in the party favor higher spending than the moderates because they believe in it (with considerable justification). They draw two political conclusions from enacting a big bill. One is optimistic: A huge bill will create huge political benefits; thankful voters will cheer Democrats, helping the party to maintain control of both chambers. More often, progressives use a bleak logic to argue for the biggest bill possible: Get what you can now, because the GOP Dark Ages will soon be here, led by Speaker Kevin McCarthy and Majority Leader Mitch McConnell.
But that’s not how it works in real life. Both scenarios are dubious. Passing monumental legislation doesn’t guarantee voter applause. In 1965, Lyndon B. Johnson signed Medicare, and Democrats were crushed in the 1966 midterms. By Election Day 2010, Obama had passed the Affordable Care Act and saved the economy through myriad programs, including mortgage relief, and Democrats still got killed. Passing the entire $3.5 trillion package may or may not buoy Democrats in 2022. As for securing progressive gains . . . oh, please. Most could be undone should there be a GOP trifecta in 2024. Without one last-minute vote switch by John McCain, there’d be no Obamacare. The same thing could happen to Build Back Better.
The passage of a smaller package doesn’t guarantee a good midterm result for Democrats either, of course. But a smaller package—between, say, $1.5 and $2 trillion—can pass, unlike the full version, which is doomed, and there would still be a lot to brag about.
I’m not saying the Democrats should become cynics like McConnell and eject their conscience. They’ll likely have to raise the debt ceiling and keep the government open on party-line votes. Good. Someone has to be the adult. But on the Build Back Better bill, they should reconsider the pay-fors. They can be like Ferris Bueller, and take a day off. It won’t kill them.
