This Week:

The Senate approved a resolution expressing US support for Finland and Sweden to join NATO, passed a bill to improve health care benefits for veterans suffering illnesses from burn pit smoke (see below) and approved several of President Biden’s judicial nominees. It will work 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) this weekend (see below), though a final vote could slip into next week. The House was out of session.

Next Week:

The Senate will likely vote on a revised BBB bill if it is not able to complete its work over the weekend. The House is out of session but will return to Washington to vote on the BBB bill after the Senate passes it.

The Lead

Build Back Smaller.

After a long journey with many twists and turns, Senate Democrats are on the cusp of passing a reconciliation package that reflects the surprise agreement struck last week between Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV). Although much smaller in size and scope than President Biden’s Build Back Better (BBB) plan, this bill is still significant, spanning healthcare (prescription drug reforms and an extension of Obamacare subsidies), tax (a new corporate book minimum tax and increased IRS enforcement) and climate/clean energy. Senate Democrats hope to pass the bill as early as this weekend, though it still faces hurdles that put its timing and its contents in flux. Democrats jumped the first hurdle after securing last night the support of Senator Kyrsten Sinema (D-AZ) on the condition of some changes to the bill. But the Senate parliamentarian still needs to complete her extensive and time-consuming review of the bill. And before a final vote, Senators will have to endure a marathon “vote-a-rama” session of votes on various amendments, many of which will be made by Republicans looking to strip provisions from the bill or otherwise create tough political votes for Democrats in an election year. We think Senate Democrats will be able to get this done by early next week, but nothing can be taken for granted in a 50-50 Senate.

Parliamentarian Power.

In order to try to pass the slimmer BBB legislation through a simple majority, Democrats need to adhere to the strict rules of reconciliation, as set out in the Congressional Budget Act of 1974. In particular, the provisions in a reconciliation bill must have a clear budgetary impact and must have a primary budgetary purpose. Particularly given that many policy proposals have at least some budgetary impact, these rules are subject to considerable interpretation by the Senate Parliamentarian, who is charged with making these calls. As part of the parliamentarian’s review, both sides make their case on whether specific provisions are eligible to remain in the overall package or not. The parliamentarian’s review can be time-consuming. For example, there have been a couple of weeks of back and forth on the prescription drug provision alone. This review has been a hold-up in not bringing the bill to the Senate floor earlier in the week. As part of this review, significant provisions in the bill may need to be modified or eliminated. Getting through this murky procedural gauntlet is one of the most important steps in a complicated reconciliation process.

Other Taxes?

Senator Sinema has been very focused on the tax aspects of a reconciliation bill for over a year now. We think Senator Sinema is supportive of increased funding for enforcement by the IRS (she supports enhancements to taxpayer compliance and was a driving force in last year’s bipartisan infrastructure bill that included a new cryptocurrency information reporting requirement). She supports the new 15% book minimum tax on corporations but has secured some changes that would lessen the severity of its potential impact on companies by still allowing certain tax breaks (like accelerated depreciation) to count for purposes of not being captured by the minimum tax. Reflecting her longstanding concerns about changes to the taxation of carried interest, Senator Sinema also was able to get the bill’s provision on that to be eliminated. To make up for the lost revenue from the carried interest provision, Democrats are looking to add a provision that would levy an 1% excise tax on share repurchases. This tax will receive significant pushback from businesses and likely will be a focus in the vote-a-rama, though we expect that it will stick in the bill.

Climate Focus.

We’ve had questions from colleagues and clients about what is in the climate/clean energy portion of the bill. It includes $369 billion of spending on climate, which is very substantial even if it is lower than the $550 billion that was in the House-passed bill. Much of that spending is in the form of tax credits and other incentives. Consumers would benefit from tax credits for purchasing electric vehicles and improving the energy efficiency of their homes. The bill includes tax credits for businesses for clean energy production as well as loans and grants to help utilities with respect to their clean energy transition. It also has a fee on emissions from methane, a provision that has been subject to scrutiny by the parliamentarian but is expected to stay in the bill. For his part, Senator Manchin also negotiated some other energy provisions, most notably one to allow drilling on federal lands and an easing of federal permitting restrictions on major energy projects (this latter provision reflects a “side deal” with Leader Schumer and is expected to be included in a funding package in the fall). In total, getting this climate agreement over the finish line would be a big boost for a Biden administration that has made ambitious commitments on carbon emissions reductions and that recently suffered a major setback from a Supreme Court decision that hemmed in its regulatory authority in this and likely other areas.

Other Issues

Pelosi, US, China and Taiwan.

House Speaker Nancy Pelosi (D-CA) completed her controversial visit to Taiwan this week and, in the process, helped to push US-China relations to a new level of intensity and discord. China has begun to retaliate through a series of threatening military activities and various economic penalties against Taiwan. China also has indicated that it will impose some form of sanctions against Speaker Pelosi and that it is cancelling discussions with the US on climate, defense coordination and other issues. It will follow up with more in the upcoming days, weeks and months, which will force the US to respond in its own ways. This bilateral relationship has seemingly worsened nearly every day over the past five years, and it’s hard to envision how it will get better anytime soon. On the US side, one byproduct of the Speaker’s visit may be the development of a future US-Taiwan free trade agreement. Beyond that, the visit makes the Biden administration’s job of managing relations with China more difficult, particularly given the domestic politics of each country only reinforces the animosities. Beyond China’s ongoing retaliatory measures, the next significant milestone in the increasingly fragile relationship likely will be in November when Presidents Biden and Xi may meet in person at the G20 meetings in Indonesia. Perhaps tensions can be dialed back through bilateral discussions between the two leaders, but we are not counting on this to happen. 

Help for Vets.

The Senate this week passed legislation expanding health care and benefits to veterans who were exposed to toxic substances during deployments to Iraq and Afghanistan. Over 3.5 million veterans had this exposure through burn pits, which were used by the military to dispose of waste. The burn pits released toxins because medical waste, chemicals, jet fuel, paint and plastic were among the substances that were burned. The bill would cost $280 billion over 10 years and would be the largest expansion of veterans’ benefits since 1991 when care was expanded for Vietnam War veterans who had been exposed to herbicides. The House and Senate initially passed the bill in June, but it was sent back to the Senate for another vote for procedural reasons. Initially thought to be a quick vote in the Senate, the bill was held up by Senate Republicans due to their concerns about how to pay for the benefits. After weeks of delay, the Senate ultimately was able to pass the bill and President Biden is expected to sign it into law on Monday.

Student Loans.

The current moratorium on payments and interest accrual on federal student loans is set to expire at the end of August. The Biden administration has prolonged this moratorium a number of times. Given that the current deadline is just two months before the mid-term election, we expect the administration to extend the current moratorium, probably until the end of the year. Additionally, we are closely watching for an announcement on student loan forgiveness. Currently, we are expecting $10,000 in forgiveness for those with less than $150,000 in income, though the exact details on this remain fluid. A lawsuit challenging the administration’s legal authority to do this would be likely and could at least delay the timing of any loan forgiveness. Regardless of what happens on forgiveness, we expect borrowers to have a few more months of reprieve from making payments on federal student loans.

The Final Word

The Roe Effect.

Going into the midterm elections, one big question is what the impact will be of the Supreme Court’s decision to overturn Roe v Wade at the end of June. On the one hand, the party in power typically suffers losses in the midterm elections and the general political environment has mostly been trending against Democrats. On the other, the Supreme Court’s decision could at least partially counter those two factors. Polls conducted since then have shown that the majority of the public disapproves of the Supreme Court’s decision, and that there has been a rise in Democratic enthusiasm. On Tuesday, voters in Kansas, a state that Trump won with 56% of the vote, rejected an amendment to the Kansas constitution that would remove protections for abortion rights. Perhaps most notable, the amendment failed by a wide 18% margin (59% No and 41% Yes). The vote also had high turnout (nearly double the vote level from the 2018 primaries). And it revealed strong support for abortion rights in suburban areas where the amendment was opposed by a more than two to one ratio. While this vote is not necessarily indicative of November’s election (where it will be mostly candidates on the ballot rather than a single issue), it does suggest that the issue of abortion rights will be a key issue and motivating factor for many in November.