Democrats Will Get to Taxes and Health Care Soon Enough -- What It Will Mean for Your Pocketbook

In early January, a much-anticipated runoff election in Georgia answered the question of which political party would control the Senate for the next two years: Democrats Jon Ossoff and Raphael Warnock clinched the two seats up for grabs, delivering the Senate a 50-50 split between Democrats and Republicans. Vice President Kamala Harris casts tie-breaking votes on legislation, giving Democrats an ef­fective majority. Senate Majority Leader Chuck Schumer determines the schedule for votes on legislative proposals.

With President Joe Biden in the White House and a narrow Democratic majority in the Senate and House of Representatives, Democrats have a clearer path to enact their agenda. In the near term, Biden and Congress are expected to focus on urgent matters of the economy and the pandemic, such as stimulus aid for struggling Americans and coronavirus vaccine distribution. Infrastructure and climate change are top issues, too. And at some point, policymakers will likely tackle other reforms that hit your pocketbook, including taxes and health care.

But Democrats won’t enjoy smooth sailing all the way. Legislation requires a simple majority of votes to pass in the House, but most types of bills must gain 60 votes to make it through the Senate. (Legislation involving spending and revenue—including many tax proposals—may pass the Senate with 51 votes through a procedure known as budget reconciliation.) And with slim majorities in both chambers of Congress, Democrats may not be able to overcome divisions within the party on some progressive issues. Bipartisan support will play a role in the policies that come to fruition in the next couple of years.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Taxes. Tax relief may appear in a new round of stimulus legislation, says Garrett Watson, senior policy analyst for the Tax Foundation. That is expected to include expanding the child tax credit, which Biden has proposed temporarily increasing from a maximum of $2,000 per child to $3,600 per child age 5 or younger and $3,000 per child age 6 up to age 17 (for married couples with incomes of up to $400,000). That proposal has support among some Republican senators. Biden also wants to raise the limit of eli­gible child care expenses for the child and dependent care tax credit to $8,000 per child, or up to $16,000 for multiple kids. And he has proposed extending the earned income tax credit to workers 65 or older with no qualifying children (kids must live with you most of the year and fall within certain age groups to be eligible). The credit is currently available to low- and moderate-income workers. In 2021, it’s worth a maximum ranging from $543 for workers ages 25 to 64 with no qualifying children to $6,728 for families with three or more qualifying kids 18 or younger (or 23 or younger for children who are full-time students).

Further down the road, Democrats may pursue tax hikes for those with incomes higher than $400,000. But tax increases won’t likely materialize before the pandemic recedes and the economy stages a strong recovery. Restoring the top marginal income tax rate to 39.6%—up from the current 37% set by the 2017 Tax Cuts and Jobs Act—is one of the more likely possibilities, says Watson. Biden has also proposed capping itemized deductions to 28% of their value for high earners (no limit applies currently), taxing long-term capital gains at the ordinary top income tax rate (from the current maximum of 20%) for those with incomes higher than $1 million, and eliminating the step-up in basis for taxation of inherited stocks, mutual funds and other assets (currently, the cost basis is “stepped up” to the assets’ value at the date of the original owner’s death rather than the purchase date). But congressional Democrats must come to near-unanimous agreement to pass such measures if they gain no Republican support.

Health care. Moves that modify and protect the Affordable Care Act have the best shot of getting passed. Democrats are most likely to succeed at making changes in a few areas, says Cynthia Cox, vice president at the Kaiser Family Foundation. Those include increasing the income limits to qualify for subsidies that reduce premiums on health care plans through the exchanges, calculating those subsidies based on “gold” plans (which provide more-generous coverage than silver plans, the current basis), and making subsidies on exchange plans more widely available to those who have the option of getting insurance through their job (currently, you don’t qualify for a subsidy if an affordable job-based plan is available to you through your own employment or that of a spouse). Lawmakers may also try to nullify a case the Supreme Court heard last fall—which claims that the ACA became unconstitutional when the 2017 tax law lowered to zero the penalty for being uninsured—by reinstating a modest penalty. And there’s bipartisan interest in lowering prescription-drug prices.

Biden campaigned on offering a public health insurance option, which would be available alongside private and employer plans, and lowering the Medicare age of eligibility from 65 to 60. But those proposals face larger hurdles, including disagreement within the Democratic Party.

Biden by the numbers

Consider the estimated impact of Biden tax proposals on federal revenue over the next decade:

• Increase top tax rate to 39.6%: $148.1 billion
• Limit itemized deductions for high earners: $283.5 billion
• Expand child tax credit: –$105.5 billion*
• Expand child and dependent care credit: –$80.7 billion

*Reflects revenue change for 2021 only, based on potential expiration of the expanded credit

Source: Tax Foundation