Special Reconciliation Edition 

In an unexpected statement last Wednesday, Sen. Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) jointly announced that they had reached a preliminary agreement on a roughly $750 billion budget reconciliation framework. This news came as a surprise to lawmakers on both sides of the aisle who had largely assumed that plans to advance a larger bill had been halted to allow for the expedited passage of a pared-back, health care-only package. This new proposal, the Inflation Reduction Act (IRA), would raise approximately $740 billion in revenue through tax increases to fund new domestic investments and a $330 billion reduction to the federal deficit. President Joe Biden has signaled his renewed support for the agreement.    Included on the spending side is nearly $370 billion in funding for energy and climate initiatives. This investment seeks to accomplish the dual objectives of reducing domestic carbon emissions by at least 40% over the next decade and limiting U.S. reliance on foreign sources of energy. To accomplish both the climate and energy security goals, the bill would greatly expand current tax incentives for investment in renewable technologies, while simultaneously mandating the federal sale of several new offshore oil leases. The bill also contains other spending priorities that were embraced in the health care-only reconciliation discussions, including drug pricing reform and a three-year extension to the enhanced Affordable Care Act subsidies.    To fund this significant investment in health care, energy/climate and deficit reduction, the IRA includes several new tax proposals aimed at eliminating perceived corporate loopholes. The largest revenue raiser in the bill is a previously proposed book minimum tax (BMT). The BMT would require that corporations reporting over $1 billion in annual income to their shareholders pay taxes equal to at least 15% of their annual gross financial statement income. The bill would also bolster the restrictions on carried interest by generally increasing the required holding period to qualify for the capital gains rate and eliminating certain tax preferences. Though not officially scored as a revenue raiser, the bill would also increase funding of the Internal Revenue Service, potentially reducing the deficit by increasing taxpayer compliance.   While Manchin and Schumer insist the bill would not raise taxes on individuals making less than $400,000, opponents of the bill argue that these tax increases will exacerbate inflation and limit economic growth in key sectors. In particular, some Republicans have pointed to a recent report from the Joint Committee on Taxation (JCT) that estimates that the BMT will disproportionately affect manufacturing industries.   The complete preliminary revenue estimates for the tax portion of the bill were released by the JCT last weekend. The Congressional Budget Office has not yet finished scoring the non-tax sections of the bill.   For Brownstein’s full analysis of the tax provisions in the IRA, click here.    For Brownstein’s full analysis of both the tax and non-tax energy provisions in the IRA, click here.  

POTENTIAL TIMELINE

Yesterday, Schumer confirmed his intent to condense traditional reconciliation procedures to allow for floor consideration before the Senate begins its August recess at the end of this week. With several outstanding steps, this timeline may prove challenging.   Schumer’s first legislative hurdle will be gaining the full support of Sen. Kyrsten Sinema (D-AZ), who was reportedly not briefed on the agreement before it was released to the public last week. Sinema was heavily engaged in tax discussions late last year but has not yet commented on the new Manchin-Schumer agreement. She could insist on the elimination of the carried interest limitations and the inclusion of significant carveouts in the proposed BMT, amongst other changes. Last Sunday, Manchin appeared on several news programs to request Sinema’s support, assuring viewers that the tax provisions in the bill would close corporate loopholes without increasing taxes on individuals.     Assuming Schumer can incorporate Sinema’s requests without losing the support of Manchin or the other 47 Democratic senators, the Senate parliamentarian will then need to weigh in on several items within the bill. Procedurally, each item in a reconciliation bill must pass the “Byrd Rule,” meaning that it must have a non-incidental budgetary effect, among other requirements. Traditionally, this so-called “Byrd Bath” process takes about two weeks to complete during which each party receives time with the parliamentarian behind closed doors to discuss potential Byrd Rule violations and make adjustments to the bill as necessary. Reportedly, the parliamentarian has almost completed the review of the health care sections, leaving only the energy, climate and tax provisions. If Democrats proceed along this path, the Senate will likely not take up the bill until the end of the week of Aug. 8 or the beginning of the following week.        Despite this, Schumer has indicated that he plans to circumvent the remainder of the “Byrd Bath” process to bring the bill directly to the Senate floor later this week. If this occurs, Republicans will likely raise their challenges on the floor, and the parliamentarian will issue immediate rulings. While this path would expedite the process, it leaves Democrats vulnerable to having significant portions of their bill stripped out on the floor, forcing them to make last-minute adjustments through the amendments process. The domestic-content requirements in the energy provisions and the excise tax “penalties” in the drug pricing section have already been identified as potentially violating the Byrd Rule. If Democrats proceed along this riskier path, the Senate could potentially pass the bill as early as this weekend.    Regardless of which route is taken, Democrats will be forced to contend with the “vote-a-rama” process in which senators can offer an unlimited number of amendments to the bill. Senate Republicans will almost certainly introduce spending provisions to force moderate Democrats to take tough votes on their legislative priorities. To make matters worse for Schumer, Sinema has indicated that she is willing to vote for Republican amendments that she agrees with, potentially reducing the deficit reduction reserve that Manchin has insisted on.   COVID-19 also remains a concern for the chamber. Sen. John Cornyn (R-TX) was the latest member to test positive. If more follow, this could further delay the process.        If Democrats can successfully navigate passage in the Senate, House Speaker Nancy Pelosi (D-CA) would likely call her members back for a special session to consider the bill. Passage in the House is all but guaranteed as members that formerly objected to various provisions in the bill have retracted their statements. This includes Rep. Josh Gottheimer (D-NJ), who previously objected to the exclusion of the repeal of the state and local tax deduction cap.