Options to Pay For the American Jobs Plan
President Biden's American Jobs Plan would cost about $2.65 trillion over the next decade. By our estimates – and before considering pay-fors – this would be enough to increase debt as a share of Gross Domestic Product (GDP) by 8 percent after a decade. The President's plan includes a number of offsetting tax increases that would fully cover the cost of his plan over 15 years, including a higher corporate income tax rate, stronger minimum taxes on global and domestic corporate income, and other corporate tax increases. President Biden's proposed offsets deserve serious consideration. However, we estimate that they would fall roughly $900 billion short of covering the plan’s full cost over the traditional ten-year budget window, and some supporters of new infrastructure spending have raised concerns about some of the proposed offsets.
Fortunately, there is no shortage of alternative options available to supplement or replace the President's proposed offsets, if needed. We recently hosted a panel of experts to discuss many of these options. Some of the possibilities include raising taxes on wealthy individuals to remain generally with President Biden's promise to not increase taxes on those earning less than $400,000 per year, enacting infrastructure-related revenue sources or user fees, or reducing spending. Policymakers could also reduce the size of the package itself, which is quite large in size and scope relative to previous infrastructure proposals. For instance, the final Obama budget proposed less than $300 billion in infrastructure spending.
Policymakers should work to assure that the proposed package is fully offset over the traditional ten-year budget window, and at the very least, should not scale back any of the President’s proposed offsets without offering their own replacements.
Raise Revenue from High Earners
Instead of or in addition to raising taxes on corporations, policymakers could increase taxes on high-earning households. During the 2020 presidential campaign, President Biden proposed a number of policies to do so, including restoring the top individual income tax rate to 39.6 percent, phasing out business income deductions, taxing capital gains as ordinary income and at death for millionaires, and restoring the estate tax to 2009 levels. Additional options to reduce the tax gap, close various loopholes, further raise rates, and/or limit tax expenditures that mainly benefit high earners could generate further revenue. Policymakers could also work to close the more than $500 billion tax gap by increasing funding and authority for the Internal Revenue Service (IRS), improving information reporting and withholding, increasing accountability among preparers and tax lawyers, and closing various loopholes that encourage evasion.
Illustrative Options to Raise Taxes on Higher Earners
| Policy | 10-Year Savings* |
|---|---|
| Tax capital gains and dividends as ordinary income above $1 million and tax unrealized capital gains at death | $430 billion |
| Limit tax benefit of itemized deductions to 28 percent of value above $400,000 of income | $270 billion |
| Restore estate tax to 2009 levels | $250 billion |
| Impose a 5 percent "millionaire tax" | $250 billion |
| Phase out state and local tax (SALT) deduction above $400,000 of income | $200 billion |
| Phase out qualified business income deduction above $400,000 of income | $145 billion |
| Restore top individual income tax rate to 39.6 percent on income above $400,000 | $110 billion |
| End the double-deduction for donation of stock and appreciated assets | $100 billion |
| Reduce the tax gap by better funding the IRS and enacting policy reforms | $100 billion |
| Restore limitation on itemized deductions above $400,000 | $50 billion |
| End special treatment for "like-kind" exchanges | $40 billion |
| Reform tax treatment of derivatives and life insurance | $30 billion |
| Reduce the mortgage interest deduction cap from $750,000 to $500,000 | $25 billion |
| Eliminate tax preferences for Private Activity Bonds | $20 billion |
| Close carried interest loophole | $15 billion |
Sources: Congressional Budget Office, Joint Committee on Taxation, Penn Wharton Budget Model, Tax Policy Center, and CRFB calculations.
*Ten-year savings are calculated over the 2022-2031 budget window.
Raise Infrastructure-Related Revenue
As another addition or alternative, policymakers could increase infrastructure-specific taxes or impose new ones. The most straightforward option would be to raise the current 18.4 cents-per-gallon gas tax and 24.4 cents-per-gallon tax on diesel fuel. An arguably more sustainable alternative would be to impose a Vehicle Miles Traveled (VMT) fee - either on commercial trucks alone or on all vehicles. Other ideas such as a tax on freight or a light-duty vehicle sales tax would also reflect the "user pays" principle to fund transportation infrastructure. Given the focus on addressing climate change in the infrastructure package, policymakers could also consider taxes to help stem carbon emissions -- for example a carbon tax or tax on oil.
Illustrative Options to Impose or Raise Infrastructure-Related Taxes
| Policy | 10-Year Savings* |
|---|---|
| Impose a $25 per-metric-ton carbon tax | $1.1 trillion |
| Increase gas and diesel tax rates by 35 cents and index to inflation | $520 billion |
| Impose a freight tax of 30 cents per-mile for trucks and 12 cents per-mile for rail | $360 billion |
| Impose a 10 cent per-mile vehicle miles traveled (VMT) on commercial trucks only | $320 billion |
| Impose a $10 per-barrel oil tax | $300 billion |
| Impose a 5 percent light-duty vehicle sales tax | $200 billion |
| Impose a 1 cent per-mile VMT on all vehicles | $150 billion |
Sources: Congressional Budget Office and CRFB calculations.
*Ten-year savings are calculated over the 2022-2031 budget window.
Enact Spending Reductions
Rather than focusing on new revenue alone, policymakers could also consider spending reductions to fund new initiatives - effectively reallocating spending from some areas of the budget to others. One place to start might be to extend discretionary budget caps, which are slated to expire at the end of this fiscal year. There are also numerous options to reduce federal health spending, including options put forward by our Health Savers Initiative and numerous proposals to secure Medicare. Other options range from reforming federal student loan programs to modifying federal worker retirement benefits to reducing farm subsidies. Policymakers could also use the more accurate chained CPI to measure inflation on the spending side, just as the federal government already utilizes for the tax code.
Illustrative Options to Reduce Federal Spending
| Policy | 10-Year Savings* |
|---|---|
| Enact one-year discretionary spending freeze | $265 billion |
| Enact two-year discretionary spending freeze | $500 billion |
| Enact five-year discretionary spending freeze | $1.05 trillion |
| Cap discretionary spending growth at 1 percent annually for five years | $565 billion |
| Cap discretionary spending growth at 1 percent annually for ten years | $775 billion |
| Increase Medicare premiums to 35 percent of costs | $515 billion |
| Freeze thresholds and increase Medicare premiums for high earners | $50 to $100 billion |
| Limit drug prices through negotiation and at a cap of 120 percent of international average | $350 billion |
| End state Medicaid provider tax loophole | $500 billion |
| Measure inflation using the Chained-Consumer Price Index (Chained-CPI) | $275 billion |
| Reduce excessive Medicare Advantage payments | $90 to $355 billion |
| Equalize Medicare payments regardless of site-of-care | $110 to $265 billion |
| Reform federal student loan programs | Up to $130 billion |
| Increase federal worker retirement contributions | Up to $130 billion |
| Reduce drug prices by reforming Medicare Part D and capping drug price growth | $120 billion |
| Reduce and reform Medicare post-acute care payments | $90 billion |
| Reduce Crop Insurance Program subsidies | $30 billion |
Sources: Congressional Budget Office, Senate Finance Committee, and CRFB calculations.
*Ten-year savings are calculated over the 2022-2031 budget window.
Reduce the Size of the American Jobs Plan
The American Jobs Plan includes a total of $2.65 trillion of new spending and tax cuts, mostly over eight years. If all of these funds went to actual infrastructure-related projects (they don’t), it would be equivalent to quadrupling infrastructure spending over those eight years relative to current law. As a percent of ten-year GDP, the American Jobs Plan is nearly 14 times as large as former President Donald Trump’s largest proposed infrastructure plan, eight times as large as former President Barack Obama’s biggest proposed infrastructure plan, and over six times bigger than Hillary Clinton’s proposal from her 2016 campaign plan. It's also over two times as large as the Federal-Aid Highway Act of 1956, which essentially established the current interstate highway system.
How Much Larger is the American Jobs Plan Than Past Plans?
| Plan | Size of Plan (% of 10-Year GDP) | Times As Large* |
|---|---|---|
| American Jobs Plan | 0.95% | - |
| Federal-Aid Highway Act of 1956 | 0.45% | 2.1x |
| Clinton 2016 Campaign Proposal | 0.16% | 6.1x |
| Obama Fiscal Year 2017 Budget | 0.12% | 8.0x |
| Trump Fiscal Year 2022 Budget | 0.07% | 13.8x |
Sources: Congressional Budget Office, Office of Management and Budget, and CRFB calculations.
*Shows how much larger the size of the American Jobs Plan is compared to that of past infrastructure and clean energy plans, as measured as a percent of ten-year GDP over the ten-year budget window during which the plans were either proposed or enacted.
If policymakers do not think this very large package is worth its cost, they should find ways to scale it down and focus on the most important components, only pursuing those areas of spending that are worth paying for.
See our summary table of the American Jobs Plan here.
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It is admirable that President Biden has proposed offsets for his American Jobs Plan, and Congress must follow suit. If lawmakers do not like the specific offsets President Biden has proposed, then they will need to either offer alternatives or reduce the size of the package to what they are willing to pay for. As we outline above, there are many options for alternative pay-fors. For additional ways to pay for infrastructure, check out our panel discussion on paying for infrastructure.
