Democrats are launching renewed negotiations on a smaller reconciliation tax and spending bill after progressives successfully scuttled a vote on a bipartisan infrastructure vote last week.
Democratic leadership scrambled for over a week to negotiate an agreement with Democratic moderates on a framework for reconciliation that would provide progressives enough assurance to approve the infrastructure bill. Progressives fear that they will lose any leverage to force an agreement with moderates on reconciliation if the bipartisan infrastructure passes first.
By Friday evening it became clear that the infrastructure could not clear the House, and President Joe Biden delivered sobering news to both factions of Democrats in a closed-door caucus meeting. He made clear to moderates that the infrastructure would not be enacted until an agreement is reached is reconciliation. And he told progressives that they would have to accept a reconciliation bill significantly smaller than the current $3.5 trillion proposal.
Democrats then quickly enacted 30-day extension of transportation funding (the infrastructure bill was meant to reauthorize funding after Sept. 30), setting a new soft deadline of Oct. 31, 2021, for Democrats to reach agreement on a reconciliation bill. Speaker Nancy Pelosi, D-Calif., similarly set an updated soft deadline of Oct. 31 for the House to pass the $1.2 trillion bipartisan infrastructure bill. This gives leadership less than a month to bridge major divides between moderates and progressives on the overall size and contents of the reconciliation bill.
Democratic leaders have offered moderates a bill in the range of $2.1 to 2.3 trillion, but this is still well above the stated current $1.5 trillion top line of Sen. Joe Machin, D-W.V. Manchin’s demands were revealed in a newly released agreement signed by him and Senate Majority Leader Chuck Schumer, D-N.Y., on July 28. The agreement appears to set out Manchin’s conditions for any reconciliation bill to secure his vote for the budget resolution that provided for reconciliation, including:
- A topline overall bill of just $1.5 trillion
- A 25% corporate rate
- A corporate domestic minimum tax of 15%
- An ordinary income rate of 39.6%
- A capital gains rate of 28% (the phrase “all in” appears to mean inclusive of 3.8% NII tax)
- Ending the capital gains treatment of carried interest
- Tax gap and IRS proposals
- Electric vehicle tax credits that must include hydrogen
- Oil and gas incentives that must be preserved if alternative energy provisions are extended
Sen. Kyrsten Sinema, D-Ariz., is also a key Democratic moderate in the Senate pushing for a smaller bill, but she has been less clear about her demands.
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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