The Senate passed a bill to bolster semiconductor production and expand science and technology research in the US (see below) and failed to pass a bill that would improve health care benefits for veterans suffering illness from burn pit smoke. The House passed the semiconductor and technology bill following Senate passage of the measure.
The Senate will vote on a resolution expressing US support for Finland and Sweden to join NATO (see below) and likely will vote on the veterans’ health care bill again. It will also vote on a revised Build Back Better bill (BBB) (the bill has been renamed to Inflation Reduction Act, but we will refer to it as BBB to try to avoid confusion). The House plans to be out of session until the week of September 12 but will return to Washington to vote on the BBB bill if the Senate passes it.
US Technology and Semiconductor Bill Done.
As expected, the Senate passed legislation to expand US semiconductor production and enhance science and technology research. The bill had the support of 47 Democrats and 17 Republicans, making it a rare bipartisan win in the Senate. The House considered the bill almost immediately and also approved it. The bill has gone through various iterations over the last year, and bipartisan negotiations ultimately led to a more scaled back measure. Over $50 billion will be spent in creating and expanding semiconductor production plants throughout the US, which will trigger intense competition among states for these facilities. Universities meanwhile will compete for much of the approximately $200 billion in the bill for research. President Biden and Democratic leaders on Capitol Hill will hail the bill as a major bipartisan win and cite it as evidence that Democrats can pass major (and bipartisan) legislation, but it will take years to accurately assess the bill’s impact on US competitiveness.
Research and Development Tax (R&D) Credit.
One notable omission from the semiconductor bill was an extension of the R&D tax credit. Backed by a strong business lobby, a bipartisan group of lawmakers pushed for inclusion of a provision to allow R&D expenses by businesses to be deducted in the year incurred instead of being amortized over several years. Such a change would be impactful to defense, tech, pharmaceutical and other companies. Many progressive Democrats didn’t want to give a tax break to businesses without also having tax increases on corporations or a fully refundable child care tax credit. While the effort failed this week, we think it will have a decent shot at passage in December when lawmakers will look to extend other tax provisions expiring at year’s end.
A New Version of Build Back Better.
The mercurial Senator Joe Manchin (D-WV) struck a new budget deal with Senate Majority Leader Chuck Schumer (D-NY). This one is noticeably more expansive than their agreement from two weeks ago, which focused largely on prescription drug reforms and an expansion of Obamacare subsidies. The new deal includes various climate-related provisions, a new minimum tax on certain US businesses and increased funding for the IRS. The revised bill has triggered strong opposition from the corporate sector and could still be revised or defeated if a single Democratic Senator objects to any provision (all 50 Democratic Senators will need to support the bill for it to pass). At this point, we think that all 50 Senate Democrats will be on board and that the bill will pass the Senate next week or weekend. A Senate vote could be further delayed by Covid (four Senators are recovering from Covid this week, while another is recovering from hip surgery). The passage of this bill, which includes climate and Obamacare provisions that appeal to Democratic base voters, would be a big victory for Democrats in advance of the mid-term elections.
The news of a larger than expected deal on BBB, which broke Wednesday afternoon, surprised almost everyone in Washington, including lawmakers. One glaring omission from the latest version is the lack of state and local tax (SALT) relief. Democratic lawmakers from high-tax states (particularly New York and New Jersey) promised last year to oppose any BBB legislation that didn’t provide relief from the current $10,000 cap on the state and local tax deductions. In addition to its lack of SALT relief, the new BBB proposal makes changes to the tax treatment of carried interest, which Senator Kyrsten Sinema (D-AZ) has opposed. Support for the Manchin-engineered compromise on BBB is holding today, but the next few days may bring more surprises as Democratic lawmakers assess the new bill and hear from affected constituents back home.
BBB Tax Increase on Businesses.
The latest proposal includes two new major sources of revenue. The first is a new corporate book minimum tax, which is estimated to raise $313 billion. Under this proposal, companies that have over $1 billion in annual profits would need to pay at least 15% in taxes as a percentage of their net income (in their financial statements). Some companies currently have lower rates based upon their net income due to the differences in determination of profits under accounting rules and IRS tax rules. Companies impacted by this tax include a wide range of companies, though many are in manufacturing, telecommunications and pharmaceuticals. The proposal also raises an estimated $124 billion in revenue from additional IRS enforcement. This translates to more audits aimed at high income earners. Higher scrutiny of some in this group would likely begin next year for 2022 tax returns but ramp up over the next decade as personnel and systems are put in place, assuming the bill becomes law.
With 40 states having legalized cannabis in some form, a group of Senate Democrats have written legislation that would decriminalize cannabis at the federal level and also subject it to regulation and taxation. The proposal was subject to a Senate hearing this week. The House has passed its own version of this legislation. However, the decriminalization bill is a nonstarter in the Senate where it faces opposition from Republicans and a few Democrats. There is bipartisan support for a more targeted measure called the Secure and Fair Enforcement Banking Act (the “SAFE Banking Act”), which would provide a legal safe harbor for banks and other financial institutions to serve covered cannabis businesses. This bill has passed the House on multiple occasions on a broad bipartisan basis. The champion of this bill, Congressman Ed Perlmutter (D-CO), has attached this bill to bigger legislative packages, but time and again it has been stripped from the final versions of these bills. This is because Senate Democrats have been reluctant to take up the SAFE Banking Act without also advancing criminal justice reforms and other provisions Republicans find objectionable. This dynamic still appears to hold, meaning the SAFE Banking Act continues to face long odds for passage out of the Senate as part of any must-pass legislation.
House Speaker Nancy Pelosi’s (D-CA) possible trip to Taiwan has generated a new headache in the increasingly aggravated bilateral relationship with China. Presidents Biden and Xi spoke this week for the first time on a variety of issues, but we understand that the Speaker’s potential visit dominated the conversation. The call was initially supposed to cover possible relief from tariffs that each side imposed on the other during the Trump administration, but that issue was sidelined at the last minute. Other issues – Russia’s invasion of Ukraine, climate change and supply chains – were also given less attention given the passions over the Taiwan issue. The call didn’t seem to accomplish much other than allowing each president to clearly lay out their views on Taiwan. Will Speaker Pelosi visit Taiwan? How can she not in view of the issued threats? Our guess is that she will commit to a visit, but not next month as she had planned.
The Senate is expected to soon pass a resolution expressing support for Finland and Sweden to join the North Atlantic Treaty Organization (NATO). Senate Majority Leader Schumer and Senate Minority Leader Mitch McConnell (R-KY) both have expressed support for this increase in NATO membership. There appears to be enough bipartisan support in the Senate for the resolution to pass. Senate action actually is a pre-requisite for the Biden administration to give official US support for NATO expansion. Each of the 30 NATO members must also approve any additional members. With Turkey’s agreement (after it initially opposed) and the formal invitation from NATO to join, there is a clear pathway for Finland and Sweden to join NATO. With the public focused on other issues, this Senate measure has flown beneath the radar, though we expect a vote on it next week.
The Final Word
The Final Word
NYC Mayoral Curse.
With former New York Mayor Bill de Blasio dropping out of the Democratic primary for New York’s’ 10th congressional district, he has ensured the continuation of a seemingly unlikely political tradition – the inability of the mayor of New York to win another elective office after leaving the mayor’s office. An elected mayor of New York has not won election to another office since the 19th century. John Hoffman, who was Mayor from 1866-1868, remains the last NYC mayor to be elected to higher office (he was elected governor, serving from 1869-72). The lack of electoral success does not appear to be due to a lack of political ambition, as evidenced by the presidential bids of the last three mayors of our most populous city. Current New York City Mayor Eric Adams (D), considered a rising star within the Democratic Party, no doubt has begun planning his next steps, and he’ll have to overcome history to succeed.