Washington Weekly: Democrats and Budget Reconciliation Bill

U.S. Office of Public Policy, 29 October 2021

This Week:

The Senate approved a slew of executive and judicial branch nominations. The House passed a family violence prevention bill and a short-term extension of highway funding when Democrats were unable to come to agreement on passing a large infrastructure investment bill (see below).

Next Week:

Senate and House Democrats will continue to focus on finalizing provisions to be included in the comprehensive budget reconciliation bill (see below).

The Leads

Democrats and Budget Reconciliation Bill.

The Biden administration yesterday released an outline of a large spending and tax plan(PDF, 235 KB) that Democrats hope to pass through the budget reconciliation process in the coming weeks. Under the plan, Democrats have pared back the spending on social programs and environmental initiatives from $3.5 trillion to $1.75 trillion. The tax provisions are significantly different than those in a draft bill developed by House Democrats in September. Capital gains tax increases, lower exemptions for the estate tax and an increase in the corporate rate were among the high-profile items left out, while some newer provisions impacting businesses and individuals with very high incomes were added. It is not clear whether this scaled-back bill will be accepted by all Democrats given that a progressive faction of House Democrats is angry that the new plan leaves out many of their spending priorities. Democrats ultimately will have to choose whether to accept half of a loaf or risk getting nothing.

So, Now What?

House and Senate Democrats will continue to develop legislative text that is consistent with the outline. There will be a lot of additional drama as Democrats haggle over the specific details. This process will require time and patience to work itself out. Every Democrat in the House and Senate knows that he or she has significant leverage over the content of the bill, so some conflict over the remaining details will be inevitable. While we fully expect there to be further tension among Democratic factions in the House and Senate, we still believe there is a pretty good chance that a final bill will emerge and pass close to Thanksgiving.

The Search for Revenue.

This week has been a rollercoaster in the tax world. To address the concerns raised by one key Senate Democrat, increases to the corporate tax rate, individual rates and capital gains taxes have all been sidelined. With the elimination of these provisions, Democrats were left scrambling for other ways of trying to pay for the spending in the reconciliation bill. This led them to consider such ideas as a tax on unrealized gains for “billionaires” and a requirement for financial institutions to report client account information to the IRS. However, these items also were left out of the President’s outline because they were considered either too complicated or too controversial. Among the proposals that were included are new surtaxes on high-income households and a minimum tax on corporations with profits over $1 billion. Democrats will continue to examine other revenue sources and may even bring back some ideas that were supposedly nixed. The situation is highly fluid and will remain so for weeks. We provide a rundown of some key issues below.

  • Capital Gains. As of today, an increase to the capital gains tax rate has been rejected by Senator Kyrsten Sinema (D-AZ) and is off the table. This is a major shift given that an increase to capital gains taxes has been a top priority for the overwhelming majority of Democrats. While we believe Senator Sinema’s position is likely to hold, an increase to the tax on capital gains cannot be entirely ruled out just yet.
  • Estate Taxes. A lowering of the estate tax exemption level also is currently off the table. This is a little less surprising, as we have noted previously that Senator Sinema and Senator Joe Manchin (D-WV) have voted in the past to repeal the estate tax entirely. The status of various House provisions on grantor trusts is less clear based on the outline.
  • Millionaires Surtax. The House proposal included a 3% surtax on income over $5 million. The current plan is to apply a 5% surtax on income above $10 million and an additional 3% surtax on income above $25 million. With the sidelining of the increase to individual rates, this new proposal is likely to be included in some form. The rejection of the “billionaires” tax on unrealized gains also will put further pressure on Democrats to include some version of the millionaires surtax.
  • Book Minimum Tax. An increase to the corporate tax rate also has been sidelined by Senator Sinema, but an alternative gaining momentum is a “Book Minimum Tax.” This tax would apply to a few hundred companies that report earnings over $1 billion and have a low effective tax rate when compared to their book earnings. These companies would be subject to a 15% tax on their book income, not their taxable income, which will lead to higher taxes for them.

Bipartisan Infrastructure Bill.

This bill is tied politically to the budget reconciliation bill, though they are two separate measures. The House will only pass the infrastructure bill (it has already passed the Senate) once Democrats in that chamber are unified behind the terms of the separate budget reconciliation bill. House Democratic leaders tried to pass the infrastructure bill last night. However, a group of House progressives signaled their opposition because they want to see more of the details of the budget reconciliation bill (beyond an outline) to ensure it contains provisions important to them. They are trying to use their leverage in the process to craft a final bill more to their liking, something that Senators Manchin and Sinema have been doing effectively as well. Final passage of the infrastructure bill will be a good sign that Democrats are in agreement on the budget reconciliation bill as well.

Other Issues

China Investment Restrictions.

A House Financial Services subcommittee this week held a hearing to consider a variety of issues relating to the risks to US investors from investing in Chinese companies. In response to a longstanding concern about US regulators’ access to the auditing papers of Chinese companies listed in the US, Congress passed legislation that became law late last year that directs the SEC to delist companies that fail to comply over a three-year period. SEC Chair Gary Gensler last month indicated that the SEC would announce which companies currently don’t comply and that those companies’ shares could be prohibited from US markets beginning in 2024. The Senate earlier this year passed a bill that could further compress the de-listing time period from three to two years. This proposal, which recently was endorsed by Chair Gensler, could pass the House before the end of the year. Taking a tougher stand with China is one of the few things that has strong bipartisan support in Congress.

China, Act Two.

A Senate committee will soon vote on the nomination of Nicholas Burns to serve as US Ambassador to China. Burns is a longtime US diplomat and will have bipartisan support. His approval is important because it will likely accelerate the formation of a “China policy” within the Biden administration. The administration has been slow to articulate a broad policy on China and has been waiting for Burns’ arrival in his post plus an agreement or understanding with allies about ways to address various issues with China. The upshot of Burns’ approval will be to expect decisions soon on issues like the US-China trade agreement (phase 1), trade in technology, and various national security issues that have produced tension in the bilateral relationship. Burns has significant experience as a diplomat and may help lower the temperature surrounding the relationship.

The Last Word

Virginia’s Next Governor.

With election day just four days away, the Virginia gubernational race between former governor Terry McAuliffe (D) and former Carlyle Group CEO Glenn Younkin (R) is a dead heat with recent polling showing the race within the margin of error. Nearly 700,000 people have already voted in the early voting period. Beyond being important to the residents of the commonwealth, the race also is receiving significant national media attention as a referendum on the Biden presidency. A McAuliffe loss, or even a narrow victory, in a state that Biden won by ten points in 2020 will be viewed with alarm by Democrats. This high-profile contest also will be an important testing ground for both parties in trying out specific political messages ahead of the 2022 midterm elections. Both of Virginia’s candidates have run primarily on personal or social issues to date, and it remains to be seen if these are issues that will resonate with voters and therefore drive voter turnout. While not a crystal ball, the Virginia election and others around the country will send important signals of what trends may be emerging for next year’s midterm elections.