House sends reconciliation bill to divided Senate


The House passed the Democratic reconciliation bill by a 220-213 vote on Nov. 19, sending the bill to the Senate for a potential showdown with key moderate Democrats.

The House passage represents a significant step toward potential enactment. Moderate and progressive House Democrats finally united behind the massive bill, which includes nearly $1.5 trillion in tax increases and more than $500 billion in tax cuts. Only one Democrat voted against the bill (Rep. Jared Golden, D-Maine), as House moderates backed the bill despite Congressional Budget Office (CBO) estimates showing the bill would increase the deficit by roughly $160 billion.

Still, the bill faces significant hurdles. The House passed the bill knowing the legislation will not pass the Senate in its current form—a major shift in strategy for House Speaker Nancy Pelosi, D-Calif. Pelosi had previously insisted that the House would not vote on a bill until agreement had been reached with the Senate on a final version.

The House move puts pressure on the Senate to act—and to justify any changes made to the bill. But the move also cedes leverage to key holdouts Sens. Joe Manchin, D-W.V., and Kyrsten Sinema, D-Ariz. Sinema and Manchin gained leverage last week when President Joe Biden signed into law a bipartisan infrastructure bill that progressives had been holding hostage to pressure Senate moderates to move on the reconciliation bill.


Manchin has raised many potential issues with the current reconciliation bill, including the impact to the deficit, paid leave provisions, drug pricing proposals, and the electrical vehicle credit. Manchin has also expressed significant concerns with inflation, and he could use the recent bad numbers on inflation to push for shrinking the bill significantly, pause consideration of the bill, or kill the bill altogether.

The cost of the package could also be a major issue for both Manchin and Sinema. CBO estimated the bill would raise $1.269 trillion in revenue and spend $1.636 for a topline increase in the deficit of $367 billion. This top-line number, however, does not include an estimated $207 billion in revenue from an $80 billion increase in IRS funding, which CBO can’t include per budget rules. This revenue brings the true top-line number to $160 billion in deficit increases.


Grant Thornton Insight:

Many Democrats, including the White House, are arguing the package is entirely paid for despite the CBO score. The administration believes it can raise roughly $400 billion in revenue from increased IRS funding for enforcement. These arguments may not sway moderates like Manchin and Sinema. Additional tax increases could be proposed to make up the shortfall, or moderates could push to shrink the overall spending or tax cut package.


There is still controversy over several elements of the tax title. Major provisions include (see our story “Democrats tweak tax bill for House vote” for a full analysis):

  • Imposing a 15% minimum book tax on corporations with more than $1 billion in net financial statement income
  • Creating a 1% excise tax on stock buybacks by publicly traded companies
  • Raising the rate on global intangible low-taxed (GILTI) income to 15%, imposing it on a country-by-country basis, and reducing the exemption from a return on tangible property
  • Reducing the deduction for foreign derived intangible income (FDII)
  • Enhancing the base-erosion and anti-abuse tax (BEAT)
  • Imposing a new interest limit based on share of a global group’s total interest
  • Implementing significant additional international reform
  • Imposing a 5% surtax on adjusted gross income exceeding $10 million, with an additional 3% tax on AGI exceeding $25 million
  • Expanding the 3.8% tax on net investment income (NII)
  • Enhancing renewable energy incentives in a $300 billion package

The minimum tax on financial statement income has come under fierce criticism both for its potential administrability issues, and for its impact on alternative energy incentives, pension plans, accelerated depreciation, and other popular tax benefits. It would be difficult for lawmakers to remove this provision without adding back a corporate rate cut to fill the $300 billion revenue hole unless the overall bill shrinks.

Democrats are also still negotiating relief from the cap on state and local tax deductions. The current bill would raise the cap to $80,000 but extend it beyond its current expiration in 2026 through 2031 (lowering the cap back to $10,000 in 2031). Many House progressives want to instead remove the cap, but only for taxpayers with income under a threshold in the potential range of $400,000 to $550,000. Similarly, Senate Budget Committee Chair Bernie Sanders, I-Vt., and Senate Finance Committee member Robert Menendez, D-N.J., have proposed repealing the SALT cap for families making $400,000 or less, while making the current $10,000 cap permanent above that threshold.

Senate negotiations over the bill should begin immediately. Senate Majority Leader Chuck Schumer, D-N.Y., recently indicated that they aim to pass the bill before Christmas.


Next steps


The bill is simultaneously moving closer to a potential date of passage while, at the same time, the chances of overall failure appear to be increasing. The bill is unlikely to pass in its current form, but it is by no means dead. Taxpayers should examine the provisions in detail to determine the potential effect. Pre-emptive planning may still be beneficial in some situations. Reverse tax planning could still offer rate arbitrage for some pass-throughs whose owners would pay the adjusted gross income (AGI) surtax, controlled foreign corporations for multinationals who will pay GILTI, and investors who may face the AGI surtax. C corporations not facing the minimum tax would generally not appear to benefit from income acceleration unless the corporate rate increase is resurrected. Taxpayers should continue to monitor the legislative process closely.






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