Key reconciliation holdout Sen. Joe Manchin, D-W.V., last week for the second time ended negotiations over a broad reconciliation agreement that would have used tax increases for fund deficit reduction and energy tax credits and other climate initiatives.
Manchin initially walked away from talks in December, dooming the first Democratic attempt at the president’s Build Back Better agenda. Since then, Senate Majority Leader Schumer, D-N.Y., had been doggedly negotiating with Manchin to salvage key pieces in a smaller version that Manchin could accept. Manchin, however, last week informed leadership that he could currently only support a narrow package that uses drug pricing reform to extend healthcare subsidies.
Manchin left open the possibility of addressing a broader tax and climate package after the August recess. On a West Virginia radio show, he said he told Schumer: "Chuck, can we just wait until the inflation decisions come out in July and then make a decision” and “come back the first of September and pass this legislation if it’s a good piece of legislation.” But it is difficult to see how a how such a deal could come together by the Sept. 30 reconciliation deadline. The reconciliation process requires significant time for drafting language, obtaining revenue scores, clearing Parliamentarian review, and working through Senate floor procedures. More importantly, it is unclear what economics news or Democratic efforts could actually get Manchin to “yes.”
Manchin has repeatedly resisted efforts to pin him to a final deal, and has recently signaled reluctance with positions he previously supported, such as tax increases on businesses and high-income taxpayers. Democrats appeared to reach a minor breakthrough when Schumer announced he had the support of all 50 Senate Democrats on a proposal to expand the 3.8% tax on net investment income (NII) under Section 1411. Manchin immediately began expressing reservations with the potential impact on businesses and inflation, calling it “very concerning” and saying the proposal needs “a little more scrubbing.”
He also seemed to shift his overall position on tax increases, drawing a line between general tax increases and closing loopholes: “I don’t think we should be raising taxes, but the bottom line is, there are loopholes that can be closed,” Manchin said. While he said he still agrees with the 15% global minimum tax on principle, he now has concerns about adopting it. “I’ve got to be careful corporations aren’t basically stymied to where they won’t invest,” he said.
Democratic leadership now must decide whether to continue pressing Manchin him after months of fruitless negotiations or move forward now with a slimmed-down package focused on healthcare. It is unclear whether the NII proposal could still be included in such a package. The administration released a statement encouraging Congress to pass the narrower healthcare reconciliation bill before the August recess, proposing executive action on climate change. Budget rules likely make it impractical for Democrats to pass a slimmer healthcare reconciliation bill now and a second broader reconciliation bill in September.
Even if Democrats put the narrow bill on hold and Schumer could somehow resurrect a broader deal with Manchin in September, there are potential issues looming with the rest of the caucus. Sen. Kyrsten Sinema, D-Ariz., largely accepted the revenue raisers in the House-passed version of BBB last year, but she has grown more wary of inflation and the economic climate since. She has been particularly averse to raising taxes on businesses, which could threaten many revenue raisers, including the expansion of the tax in NII.
Other moderate Democrats like Sen. Jon Tester, D-Mont., have not gone as far as opposing a potential reconciliation bill, but still may be reluctant to raise taxes. Tester recently noted, “the bottom line is that no, taxes are never a winner. We need to be very careful.”
Democratic moderates in the House have also signaled reluctance over a potential agreement. Rep. Josh Gottheimer, D-N.J., and several other members reiterated their pledge to oppose any bill without relief from the $10,000 cap on the deduction for state and local tax. Manchin has publicly opposed SALT cap relief, noting that “SALT’s not been in the talks at all—in the talks I’ve been in.” But Gottheimer and his supporters have some leverage. Democrats can only lose four votes in the House and still pass a bill without Republican support.
Gottheimer also signaled an aversion to tax increases, saying he was preparing an offer that would eschew any tax increases in favor of raising revenue solely from IRS enforcement increases. The Congressional Budget Office, however, ruled that proposed enforcement funding would only raise net revenue of approximately $120 billion.
The failure of a reconciliation tax bill would leave many tax priorities unfinished, including:
- Retroactively reinstating expensing of research and experimentation costs under Section 174
- Reversing an unfavorable change to the limit on interest deductions under Section 163(j)
- Extending 100% bonus depreciation past 2022
- Extending energy credits and other expiring tax provisions
- Enacting a package of retirement incentives
The best hope for many of these priorities would be in a bipartisan year-end extenders package after the November elections. Without reconciliation, lawmakers would also have to grapple with potential U.S. implementation of the Pillar 1 and Pillar 2 in 2023.
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