Democratic House and Senate leaders recently announced that they’ve devised a framework that will significantly help to pay for the proposed $3.5 trillion human infrastructure bill, which is part of President Biden’s Build Back Better agenda. Here’s what’s included in the bill and how leaders plan to pay for it.

What’s Included in the $3.5 Trillion Proposal?

Often referred to as an investment in human infrastructure, this proposal is ambitious and far-reaching. It aims to address the following areas:

• 1.8 trillion for the Finance Committee. Funding would go toward investments in working families, the elderly, and the environment. It includes a tax cut for Americans making less than $400,000 per year, and ensuring the wealthy and corporations pay their “fair share” of taxes.
• $726 billion for the Committee on Health, Education, Labor and Pensions. Funding would address universal pre-K for 3- and 4-year-old children, childcare for working families, tuition-free community college, funding for historically black colleges and universities, and an expansion of the Pell Grant for higher education.
• $332 billion for the Banking Committee. Funding would include investments in public housing, the Housing Trust Fund, housing affordability, and equity and community land trusts.
• $198 billion for the Energy and Public Works Committee. Funding would help develop clean energy.
• $135 billion for the Committee on Agriculture, Nutrition and Forestry. Funding would be used to address forest fires, reduce carbon emissions, and address drought concerns.
• $107 billion for the Judiciary Committee. Funding would help to establish “lawful permanent status for qualified immigrants” as well as border security measures.
• $83 billion for the Commerce Committee. Funding would go toward investments in technology, transportation, research, manufacturing, and economic development. It would provide financing for coastal resiliency, healthy oceans investments, including the National Oceans and Coastal Security Fund and the National Science Foundation research and technology directorate.
• $67 billion for the Environment and Public Works Committee. Funding would allow for low-income solar and other climate-friendly technologies.
• $37 billion for the Committee on Homeland Security and Governmental Affairs Committee (HSGAC). Funding would electrify the federal vehicle fleet (including USPS and non-USPS), electrify and rehab federal buildings, improve cybersecurity infrastructure, and invest in border management and green-materials procurement.
• $25 billion for the Small Business Committee. Funding would provide for small business access to credit, investment, and markets.
• $20.5 billion for the Indian Affairs Committee. Funding would address Native American health programs and facilities; education programs and facilities; housing, energy, and climate programs; Native language programs, and the Native Civilian Climate Corps.
• $18 billion for the Veterans Affairs Committee. Funding would upgrade veteran facilities.

How Will This Legislation Be Funded?

The House Ways and Means Committee proposed tax hikes to pay for the bill, including major modifications to the estate tax, capital gains taxes, and the methods by which retirement accounts are taxed. Though nothing is close to being set in stone, under this draft legislation, the corporate tax rate would increase to 26.5% from 21%, the top capital gains tax rate would increase to 25% from 20%, and the estate tax would return to pre-Trump levels. Additionally, Roth IRA conversions, including backdoor Roth IRAs, would be barred for high earners.

The Effect on High Earners and Estates

By now we’ve all heard the claim that if your annual income is less than $400,00, you won’t be affected by the tax proposals for this legislation, and that’s true—to an extent. In most cases, married couples who earn less than $450,000 in income (less than $400,000 for singles) won’t be affected. However, beneficiaries of trusts and estates, which could include special needs children, would be hit with the new top income tax rate of 39.6% at just $12,500 of income. An additional proposal is to block after-tax contributions to workplace retirement plans, no matter your income level.

The Effect on Income Taxes

In addition to the capital gains rate hike noted earlier, it’s been proposed to increase the top individual rate to 39.6% from 37% for married couples who earn over $450,000 and singles who earn over $400,000. Additionally, it’s been proposed to expand the net investment income tax, which is imposed on married couples earning more than $250,000 ($200,000 for singles).

The Effect on Estate Taxes

The estate and gift tax exemptions, currently at $11.7 million per person, would drop back to $5 million (plus inflation adjustments), so this tax would affect more American families. However, one proposal would benefit both farmers and family businesses: they would receive a special valuation reduction of $11.7 million for qualified real property used on the farm or in business.

The Effect on Retirement Accounts

It’s been proposed to eliminate Roth conversions for IRAs and workplace plans for married couples who earn above $450,000 and singles who earn above $400,000, though this wouldn’t be effective until after tax year 2031. And as mentioned earlier, employee after-tax contributions to workplace retirement accounts would be prohibited after December 31, 2021.