Sen. Joe Manchin, D-W.V., signaled his opposition to the sweeping Democratic reconciliation bill on Dec. 19, likely dooming the $1.5 trillion tax title and forcing Democrats to reassess their options for moving tax and spending priorities in smaller pieces.
After months of contentious negotiations, Manchin stated unequivocally that he could not support the $1.9 trillion iteration of President Joe Biden’s Build Back Better plan currently under consideration in the Senate. “I’ve tried everything humanly possible,” Manchin said. “I can’t get there.”
With only 50 votes in the Senate, Democrats cannot pass a bill without Manchin’s vote (assuming unanimous Republican opposition). Manchin’s comments did not appear designed to force further concessions toward an eventual compromise—instead they appear designed to end negotiations on this version of the bill altogether. The White House slammed Manchin’s move, calling it an “inexplicable reversal” and “a breach of his commitment to the president.”
Democrats are now expected to pivot in an effort to salvage some of their most important tax and spending priorities. A reset in negotiations could see Democrats try and regroup on much different bill in both size and scope. Manchin in a radio interview outlined the type of package he could accept, saying he still supported tax changes to ensure “everybody paid their fair share, the ultra-super wealthy and the corporations that weren’t paying anything.” Upcoming deadlines could still force action on items such as the child tax credit, research and experimental (R&E) expense amortization, and international reform.
While the full $1.5 trillion package of proposed tax increases appears dead at its current scale, specific revenue raisers could be picked up to pay for other priorities as part of a smaller package. The international tax changes may have the most traction. The proposed changes to the deduction for foreign derived intangible income (FDII), the tax on global intangible low tax income (GILTI) and the base erosion and anti-abuse tax (BEAT) are needed to bring the U.S. in line with the global minimum tax agreement brokered by the Biden administration. International tax reform could also raise significant revenue to pay for other tax and spending initiatives.
Democrats will be under pressure to quickly find new ways to address their most pressing tax priorities, including:
- Extending the enhanced child tax credit
- Postponing amortization of R&E expenditures
- Extending and enhancing energy tax incentives and other expiring provisions
- Addressing the cap on the state and local tax (SALT) deduction
The enhanced child tax credit is perhaps Democrats’ most urgent priority. Democratic lawmakers had been hoping to enact an extension by Dec. 28 so the IRS could make the next monthly advance payment on Jan. 15. Democrats would need to act quickly in the new year to extend the credit to avoid a prolonged interruption in the advance payments. This provision is expensive, however, and could require revenue offsets.
Democrats will also be under pressure to delay the five-year amortization of R&E expenditures that is currently scheduled to become effective beginning in 2022. The reconciliation bill would have postponed its implementation until 2026. Although lawmakers could retroactively provide relief any time in 2022, businesses have been pressing for a fix before first quarter estimated tax payments are due on April 15. Republicans generally support relief in this area, but could demand concessions as part of any bipartisan agreement. Republicans have called for delaying an unfavorable 2022 change in the Section 163(j) interest deduction that will add amortization and depreciation to the calculation.
Democrats will likely be eager to salvage as much of their $300 billion package of alternative energy credit enhancements and extensions as possible, but there will be significant hurdles. This would require significant revenue offsets. Without action, many popular “green” incentives and other “extender” provisions will expire at the end of 2021, including:
- Alternative fuel credits
- Alternative fuel refueling property credits
- Section 45 production tax credit
- Section 25C energy-efficient home improvement credit
- Section 45L energy-efficient new homes credit
- Mine rescue team training credit
- Three-year depreciation for racehorses
- Deduction for mortgage insurance premiums
- Indian employment maintenance track credit
- Accelerated depreciation for Indian reservation business property
- Increased limit on rum excise tax cover for Puerto Rico and the Virgin Islands
- American Samoa economic development credit
The SALT cap is also sure to remain a major source of contention. There are several House Democrats who have threatened not to support any bill that doesn’t include SALT cap relief, but progressives may be loath to accept a provision benefiting high-income taxpayers on a smaller bill where their own priorities have been gutted.
In addition, Democrats have limited procedural options for repackaging their tax and spending priorities. The reconciliation instructions under the current budget are flexible enough to use on a much smaller bill, but can generally only be used once. If they use those instructions on a limited bill, they could generally only use reconciliation one more time before the next election by writing a new budget resolution in the spring. This restriction makes a piecemeal approach difficult. Democrats may try to avoid a series of smaller stand-alone bills in which they would need at least 10 Republican votes in the Senate.
Manchin provided some insight on the type of package he could accept, but there are many aspects that would alienate progressive Democrats. Manchin said they had a chance to “fix the tax code to make it fair and equitable” and it should be achievable given the unanimous opposition to the 2017 tax cuts. Be also demanded means testing and work requirements for the child tax credits, and has significant issues with the drug pricing proposal. Importantly, he also criticized the reconciliation process itself.
There may be opportunities for bipartisanship, but they would require major concessions from Democrats. Republicans could support priorities such as postponing R&E amortization, extending expiring provisions, or even the enhanced child credit. But Republicans would have significant demands of their own, and would likely only support much more modest extensions of energy incentives.
Next stepsThe outlook remains fluid. Democrats now appear very unlikely to pass the type of massive tax title originally envisioned, but specific provisions may still find new life. Dissention and infighting will make progress difficult. Democratic leadership will be regrouping to determine a strategy in the coming weeks, and the outlook will become clearer in January. Taxpayers should continue monitor legislative developments closely.
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
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