In a major legislative breakthrough last week, Senators Schumer and Manchin announced an agreement to revise the Democratic Budget Reconciliation Bill. This is the legislation that started life as the $3T Build Back Better bill, then morphed into a healthcare package that only dealt with Medicare prescription drugs and Obamacare premium subsidies. But on Thursday Schumer and Manchin agreed to a new deal that adds energy and tax provisions that will bring the bill in at $700B.
The new version of Reconciliation will be dubbed the “Inflation Reduction Act of 2022” because of corporate tax increases included in the package. The centerpiece of the tax provisions are a 15% minimum tax rate for corporations with income over $1B and new limits on the carried interest provision that impacts the tax rate for partners and managers of private equity and hedge fund firms. Together these provisions are reported to bring in enough new revenue to make the bill revenue positive over a ten year period.
The bill will have $350B in tax benefits for renewable energy ranging from tax credits for the purchase of electric vehicles (EV), to programs to reduce methane and tax provisions that encourage manufacturing plants to install clean energy power sources. The legislation also provides incentives to accelerate the US production of solar panels, wind turbines and batteries.
The key to getting Senator Manchin’s final approval was a commitment he got from Biden, Schumer and Pelosi to support legislation that expedites the approval process for energy projects both fossil and renewables. While environmentalists may be skeptical of the fossil component many are concerned about the long permitting process to get clean energy technology built. The war in Ukraine and the global reliance on Russian energy has broadened support for US development of all energy resources.
While there is much optimism, the deal is not done; there are several potential hurdles to be overcome. Importantly, while under the Budget Reconciliation rules the bill can’t be filibustered by Republicans, in a 50/50 Senate every Democratic Senator must be present to vote. In the last few weeks we have seen Senators out with Covid, and Senator Leahy of Vermont out after he broke his hip. Leahy’s office has said he will be able to vote this week, and Covid is a day by day issue.
Another potential obstacle is Senator Sinema who has stood in the way of some Democratic initiatives. One question for the Arizona Senator is whether or not she can accept the 15% minimum tax on large corporations. As Senator Manchin has said the corporate tax rate is 21% and a provision requiring 15% shouldn’t be viewed as a tax increase. We should know early in the week if Senator Sinema in on board.
The other unknown is if any changes will need to be made to meet the arcane Senate rules on Reconciliation. Under the so-called Byrd Rule only items that specifically impact the budget can be in a Reconciliation Bill. The Senate Parliamentarian is the ultimate arbiter of the rule. Assuming these hurdles are cleared in the next few days, the Senate will act on the bill at the end of the week; but the process could spill over to next week.
Once the Senate approves the legislation it will need to go to the House where Speaker Pelosi only has a four vote majority. There is much that progressive Democrats wanted in the bill that was not included, but the gain on clean energy should get them on board. A second potential issue is the failure of the Schumer/Manchin deal to address the limit on state and local taxes (SALT). The Trump tax bill placed a $10,000 cap to SALT deductions and several Democratic Representatives from high tax states have threatened to oppose any Reconciliation Bill that didn’t have a SALT provision.
The House has started their August break but the Speaker has said that she will call the House back in two weeks if the Senate passes the deal.
Below is a chart that was prepared by the non-partisan Committee for a Responsible Federal Budget based on information they had seen as of last Friday. As I have discussed, between getting all 50 Democratic Senators on board and approval by the Senate Parliamentarian of the Byrd Rule provisions could change; but this gives a broad overview of the proposed legislation.
As expected the Fed last week increased rates by 75bps. At his press conference after the meeting Chair Powell was purposely evasive about future policy making his core point that future action would be data driven. The Fed, like most of DC, will take August off and the next FOMC meeting won’t be until September 20/21. As the Chair pointed out this gives the Committee two months of data to analyze before the next rate action. Both sides of the rate decision could take comfort in the ambiguity of Powell’s statement; though most believed that he was opening the door for a rate increase of less than 75bps.