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
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
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
For Brownstein’s full analysis of the tax provisions
in the IRA, click
For Brownstein’s full analysis of both the tax and
non-tax energy provisions in the IRA, click
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
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
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