Breaking Down the Proposals in the President's FY 2022 Budget
Last week, the Biden Administration released its first full budget, laying out its proposals for Fiscal Year (FY) 2022 and the subsequent decade. The President’s budget proposes about $5 trillion in new spending and tax breaks, reflecting the previously proposed American Jobs Plan, American Families Plan, and nondefense discretionary spending increases. These provisions would be partially offset with nearly $3.6 trillion in new revenue and over $200 billion in budget cuts and savings. The resulting net deficit increase would also cause interest costs to rise by $163 billion.
Below, we break down the major proposals in the President’s budget.
Policies in the President's FY 2022 Budget Proposal
|Policy||2022-2031 Cost/Savings (-)|
|Enact American Jobs Plan Spending and Tax Breaks||$2,624 billion|
|Invest in transportation infrastructure||$596 billion|
|Invest in broadband, electrical grid, and clean drinking water||$309 billion|
|Invest in housing, schools, child care facilities, VA hospitals, and federal buildings||$326 billion|
|Improve access to long-term care||$400 billion|
|Invest in domestic manufacturing and workforce development||$386 billion|
|Increase research and development spending||$180 billion|
|Expand tax breaks for clean energy, housing, and infrastructure||$428 billion|
|Enact American Families Plan Spending and Tax Breaks||$1,743 billion|
|Extend American Rescue Plan Child Tax Credit (CTC) expansions and make CTC fully refundable||$449 billion|
|Extend American Rescue Plan Affordable Care Act premium tax credit expansions||$163 billion|
|Offer free universal pre-K for all three- and four-year-olds||$165 billion|
|Offer tuition-free two-year community college||$88 billion|
|Increase Pell Grants and other higher education spending||$184 billion|
|Establish a new child care program||$225 billion|
|Create a national paid family and medical leave program||$225 billion|
|Make American Rescue Plan Earned Income Tax Credit and child care credit expansions permanent||$187 billion|
|Increase other spending and tax breaks||$57 billion|
|Increase Nondefense Discretionary Spending*||$600 billion|
|Raise Corporate Taxes (American Jobs Plan)||-$2,095 billion|
|Increase the corporate income tax rate from 21 percent to 28 percent||-$858 billion|
|Increase global minimum tax rate and disallow exemption for normal returns of investment||-$534 billion|
|Replace base erosion tax with restrictions on deductions for low-tax affiliates and corporate inversions||-$390 billion|
|Enact 15 percent minimum tax on corporate book income||-$148 billion|
|Increase fossil fuel related taxes||-$147 billion|
|Other tax increases||-$19 billion|
|Increase Taxes on High-Income Households (American Families Plan)||-$755 billion|
|Raise top individual income tax rate to from 37 percent to 39.6 percent||-$132 billion|
|Tax capital gains and dividends as ordinary income and at death for those with income over $1 million||-$323 billion|
|Rationalize Net Investment Income and self-employment taxes||-$237 billion|
|Other tax increases||-$64 billion|
|Close the Tax Gap (American Families Plan)||-$711 billion|
|Increase Internal Revenue Service funding for tax enforcement^||-$239 billion|
|Increase financial account reporting and other tax compliance measures||-$473 billion|
|Spending Reductions||-$214 billion|
|Limit the growth of defense spending||-$169 billion|
|Strengthen program integrity for Social Security, health care, and Unemployment Insurance^||-$45 billion|
|Net Interest||$163 billion|
|Total, Policy Changes in the FY 2022 Budget||$1,355 billion|
Sources: Office of Management and Budget and CRFB calculations.
Numbers may not sum due to rounding.
* Excludes program integrity spending and includes reclassifications to mandatory spending.
^ Savings net of new spending.
Enact American Jobs Plan Spending and Tax Breaks ($2.6 trillion). The President’s budget includes new and expanded details of the American Jobs Plan. Specifically, it outlines nearly $600 billion in spending to expand transportation infrastructure. This includes funding for building and repairing bridges, highways, roads, and main streets in critical need of repair; improving road safety; modernizing public transit; bringing bus and rail service to additional communities and neighborhoods; and passenger and freight rail. The budget would accelerate adoption of Electric Vehicles (EVs) by funding financial incentives like consumer point of sale rebates and tax credits for American made EVs, as well as help finance the development of a national network of EV chargers through grants and incentive programs for states, localities, and the private sector. The budget also includes funding to improve ports, airways, and airports, and for improving infrastructure resilience by safeguarding critical infrastructure and services.
The budget includes $111 billion to upgrade and modernize drinking water, wastewater, and stormwater systems; $100 billion to expand access to 100 percent high-speed broadband; and $98 billion for clean energy block grants, investments in new fuel sources like hydrogen and new technologies like carbon capture and sequestration, reclaiming of abandoned mines and wells, and creating a Civilian Climate Corps.
In addition, the budget includes funding to upgrade and build new public schools, improve child care facilities, and modernize Veterans Affairs (VA) hospitals and federal buildings. It would produce, preserve, and retrofit more than one million affordable, energy-efficient homes; build and rehabilitate more than 500,000 homes for low- and middle-income homebuyers; improve the public housing system; eliminate zoning and harmful land use policies; and establish a Clean Energy and Sustainability Accelerator.
Beyond core infrastructure spending, the President’s budget would strengthen manufacturing supply chains for critical goods, create a Critical Supply Chain Resilience Fund, provide incentives for semiconductor manufacturing and research, and procure advanced nuclear power and low-carbon materials. It would also expand U.S. manufacturing of goods through regional innovation hubs, a community revitalization fund, and improved access to capital for domestic manufacturers. The budget would support small business manufacturing through the Small Business Administration (SBA) and increase the capacity of workforce development and worker protection systems. The budget proposes a significant investment in research and development for solutions and technologies to address climate change, innovation and job creation, and new technologies such as artificial intelligence. Finally, the budget would dedicate $400 billion to expand Medicaid home and community-based care services and strengthen the home care workforce.
On the tax side, the President’s budget would expand tax breaks for clean energy, housing, and infrastructure. This includes tax incentives for renewable and alternative energy sources, energy efficiency upgrades, and sustainable aviation fuel. The budget would establish tax credits for heavy- and medium-duty zero emission vehicles and advanced energy manufacturing, create a Neighborhood Homes Investment Tax Credit to encourage building homes, and provide federally subsidized state and local bonds for infrastructure projects. Furthermore, the budget would expand the Low-Income Housing Tax Credit, as well as expand and make permanent the New Markets Tax Credit.
Enact American Families Plan Spending and Tax Breaks ($1.7 trillion). The President’s budget includes new and expanded details of the American Families Plan. To support child care and education, the budget proposes offering a federal paid leave program, providing universal access to affordable child care, working with states to provide free pre-kindergarten to all three- and four-year olds, offering tuition-free two-year community college, expanding Pell grants, and providing tuition subsidies for those enrolled in Historically Black Colleges and Universities (HBCUs), Tribal Colleges and Universities (TCUs), and Minority Serving Institutions (MSIs). The budget would also expand summer Electronic Benefit Transfers (EBTs) to all eligible children nationwide and free school meals for children in the most impoverished communities. In addition, the budget would make permanent the two-year increase in Affordable Care Act (ACA) premium subsidies included in the American Rescue Plan.
On the tax side, the President’s budget would extend temporary expansions of several tax credits in the American Rescue Plan. This includes making the Child Tax Credit (CTC) fully refundable and increasing the credit from $2,000 to $3,000 (or $3,600 for children under age 6) through 2025, permanently expanding the Earned Income Tax Credit (EITC) to childless workers, and permanently increasing the maximum Child and Dependent Care Tax Credit (CDCTC) amount from $2,100 to $8,000, covering 50 percent of eligible expenses instead of 35 percent.
Increase Nondefense Discretionary Spending ($600 billion). The President's budget would increase nondefense discretionary (NDD) spending by 16 percent between FY 2021 and 2022, including large increases in funding for the Departments of Education, Commerce, Health and Human Services (HHS), as well as the Environmental Protection Agency. Beyond 2022, the budget proposes spending growth of roughly 2.2 percent per year – just slightly below the Office of Management and Budget's (OMB) baseline. As a result, total NDD spending would be $615 billion higher over the next decade than under OMB’s baseline. After accounting for reclassifications of NDD spending to mandatory spending and increased funding for program integrity, the President’s budget would increase overall NDD spending by $600 billion over ten years.
Raise Corporate Taxes ($2.1 trillion). The President’s budget would increase corporate taxes in a number of ways, largely reflecting proposals previously put forward in the American Jobs Plan. Most significantly, the budget would raise the corporate income tax rate from 21 percent to 28 percent, halfway to the pre-Tax Cuts and Jobs Act (TCJA) rate of 35 percent. It would also establish a 21 percent minimum tax (up from 10.5 percent today) on foreign-earned Global Intangible Low-Based Taxed Income (GILTI), eliminate the exemption for normal returns of investment, and establish a 15 percent minimum tax on “book” profits – or shareholder-reported profits – for large corporations. Furthermore, the budget would replace the TCJA’s Base Erosion Anti-Abuse Tax, which limits the ability of multinational corporations to shift profits away from the U.S. by making payments to their affiliates in low-tax countries deductible, with the more restrictive Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) rule that would deny multinational corporations U.S. tax deductions tied to payments made to affiliates in low-tax countries. It would also eliminate a number of tax preferences for fossil fuels, modify rules governing treatment of income related to foreign oil and oil extraction, and reinstate Superfund excise taxes.
Increase Taxes on High-Income Households ($755 billion). The President’s budget would increase a number of taxes on high-income households, reflecting proposals put forward in the American Families Plan. First, the budget would increase the top individual income tax rate from 37 percent to 39.6 percent – its rate prior to enactment of the TCJA. The budget proposes taxing long-term capital gains and dividends at the ordinary income income tax rate of 39.6 percent for households earning more than $1 million per year (as opposed to the current law preferential rate of 20 percent), eliminating the stepped-up basis for capital gains at death for higher earners, and repealing “like-kind exchange” rules that allow real estate investors to avoid paying capital gains taxes. It would also rationalize the Net Investment Income Tax (NIIT) and Self-Employment Contributions Act (SECA) tax so that all pass-through business income of high-income households is subject to either the 3.8 percent NIIT or the equivalent SECA tax. Lastly, the budget would make permanent the limit on excess business losses for non-corporate taxpayers, which currently stands at $250,000 ($500,000 for couples).
Reduce the Tax Gap ($711 billion). The President’s budget proposes several reforms to reduce the tax gap – the difference between the total amount of taxes owed and the amount of taxes actually collected each year – which are consistent with proposals in the American Families Plan. The budget estimates it would raise over $300 billion in gross revenue by providing the Internal Revenue Service (IRS) with nearly $80 billion additional funding over the course of a decade to increase oversight of high-income and corporate tax returns. In addition, the budget would require financial institutions to report annual deposits and withdrawals from bank accounts, which they estimate would reduce the tax gap by another $460 billion through higher voluntary compliance rates. The budget also includes several smaller reforms meant to improve tax compliance, such as regulation of paid tax preparers.
Spending Reductions ($214 billion). The President’s budget would reduce defense discretionary spending by $169 billion relative to current law, mainly by limiting growth of defense spending to 1 percent per year beyond 2027 (spending would grow by 1.6 percent in 2022 and 2.2 percent per year from 2023 to 2026). In addition, the budget proposes funding and strengthening program integrity measures for Social Security, health care programs, and unemployment insurance, which is estimated to cost $28 billion but ultimately generate $45 billion in gross savings.
Net Interest ($163 billion). The President’s budget would increase deficits by $1.4 trillion over the next ten years, pushing the national debt to 117 percent of Gross Domestic Product (GDP) by the end of FY 2031. As a result of this higher debt, interest payments would be $163 billion higher over the next decade relative to OMB’s baseline.
While we are pleased that President Biden has put forward a comprehensive proposal to offset new spending priorities over time and reduce deficits in future decades, the budget adds too much to the debt over the next ten years. The $3.8 trillion of offsets in the budget would only cover about three-quarters of the cost of new spending and tax breaks over a decade, resulting in nearly $1.4 trillion of additional debt. The President should push for incremental or comprehensive legislation that not only fully pays for his agenda but also lowers health care costs, secures trust funds, controls existing spending, and raises new revenue to help close structural deficits.