Road to $3.5 Trillion Reconciliation Measure
Hurdles ahead, but go-it-alone Dems want it bad
The go-it-alone approach to reaching full-Democratic acceptance of a $3.5 trillion human infrastructure package is laced with hurdles, but enough funding for centrist and other Democrats on the sidelines could be enough to get the biggest spending package since the New Deal approved, despite others saying the end zone is hard to reach. Some of the key issues:
Timing: Final vote expected this fall. Senate Majority Leader Chuck Schumer (D-N.Y.) has said he wants all 50 Democrats to reach an agreement on the outline by Wednesday, July 21, a timeline many predict will be extended.
Budget resolution first: Democrats must agree on how to divvy the $3.5 trillion in a budget resolution that will set the policy parameters for the broader package — numbers will be filled out by congressional committees. (This is in addition to the $600 billion or so in net spending in the bipartisan infrastructure framework.) Key centrist Democrats, including Sens. Joe Manchin (D-W.Va.) and John Tester (D-Mont.), have indicated that they’re not planning to prevent a budget resolution from moving forward. But centrists are trying to shape the contents of a spending bill.
Perspective: The $4.1 trillion would be the largest spending increase in U.S. history and would lift federal spending as a share of GDP to more than 25% from the modern normal of 20% to 21%.
Text: Lawmakers have yet to release the text of a budget resolution or specific spending language for the follow-on program spending. Turning the initial $3.5 trillion agreement between members of the Budget Committee into legislation that earns the support of all 50 members of the Senate Democratic caucus is “going to be probably the hardest thing legislatively the Senate has done,” said Sen. Mark Warner (D-Va.), a key Democratic negotiator on both the physical and human infrastructure measures. “None of these things ever happen on a straight line,” Warner said. “I’ve never been in one of these deals that didn’t have hiccups, or near-death experiences.”
Reconciliation strategy: Democrats plan to pass the $3.5 trillion package through a process tied to the budget, which allows them to pass legislation with a simple majority, rather than the 60 votes most bills need — that is called reconciliation. Reconciliation bars opponents from using the filibuster on a limited number of budget proposals that have significant fiscal impact. The Senate parliamentarian has the authority to interpret the rules on which measures qualify to be allowed under reconciliation, and which don't.
Special rules of reconciliation: Legislation considered under the budget reconciliation process is subject to special rules. Each provision must have an impact on the federal budget, and those impacts can’t be “merely incidental” to the non-budgetary aspects of the provisions. The Senate parliamentarian, Elizabeth MacDonough, will determine whether provisions meet the rules. Provisions that don’t follow the rules would likely be removed from the legislation. Possible items that could end up being ruled in violation include immigration-related provisions, a clean energy standard and pro-worker incentives and penalties. Earlier this year, MacDonough determined that a minimum-wage increase did not comply with the budget rules, resulting in the wage hike being left out of the final version of Biden’s coronavirus relief measure, now law.
Go-it-alone approach: Democrats can’t afford a single defection in the evenly divided Senate, since Republicans are expected to oppose the budget package. And, House Speaker Nancy Pelosi (D-Calif.) has said she won’t bring up the bipartisan infrastructure bill until the broader budget package has passed the Senate.
Pay-fors: Democrats say costs will be paid for with tax increases and other sources of revenue, adding some constraints to the process, especially as some early pay-for involving the Internal Revenue Service (IRS) have come under attack and other reasons which mean other places must be found to come up with the around $100 billion for the IRS-aborted initiative. Sen. Rob Portman (R-Ohio) said July 18 that are ditching plans to strengthen enforcement at the Internal Revenue Service to help pay for the physical infrastructure measure. However, Portman said, “One reason it's not part of the proposal is that we did have pushback. Another reason is that we found out that the Democrats were going to put a proposal into the reconciliation package, which was not just similar to the one we had but with a lot more IRS enforcement.” The draft for the proposal suggested an additional $100 billion could be collected by the IRS over the next decade by increasing enforcement to ensure the government is accurately collecting taxpayer portions.
— Democrats have sparred over whether to allow negotiations for all drugs in Medicare or limit it to specific, high-cost drugs. There are potential cost savings: Drug-pricing negotiation would reduce federal spending by $456 billion, based on a federal estimate of drug-pricing legislation introduced in 2019.
— Tax increases: Democrats want to offset eight years of spending with 15 years of spending with 15 years of tax increases. Which taxes would increase, and by how much? Democrats want to pay for much of their package via tax increases on corporations and high-income households and have said they won’t raise taxes on families making under $400,000 annually. Sen. Manchin, a key moderate, said he would prefer to increase the corporate tax rate from 21% to 25%, rather than to Biden’s proposed rate of 28%. The White House is also seeking to raise the top capital gains rate to 39.6% from 20% and uniformly apply an additional 3.8% surtax to bring it to a total 43.4% — many investors who would be subject to the proposal live in places like California and New York City, where the combined federal, state and local tax rates would reach 56% and 58%, respectively. Some Democrats support a 28% top capital gains rate and have reservations about President Biden’s plan to tax unrealized gains at death. The total federal, state and local income taxes paid by corporations and shareholders on corporate income would be as much as 75% under the Biden proposals. And, all this is before inflation.
— Ag carveout? Democratic lawmakers who focus on agriculture issues have raised concerns about Biden’s proposal to tax capital gains at death. The budget deal seeks to acknowledge those concerns by calling for a budget resolution to bar tax increases on small businesses and family farms. Still others say any such carveout may be difficult to actually implement.
— Polluter import fees. Senate Democrats want to impose a “polluter import fee” on exporters of carbon-intensive goods, a controversial measure that could if it is included be negative to some sectors like agriculture that import major products like fertilizer and the steel and aluminum used to make farm machinery. The ag sector could also face counterretaliation on U.S. farm exports by importing countries impacted by any carbon tax. "At a time when we are focused on modernizing infrastructure so as to reduce carbon, we want to make sure that foreign countries aren’t undermining our workers and manufacturers,” said Senate Finance Committee Chairman Ron Wyden (D-Ore.). But tax and climate policy experts questioned lawmakers pursuing a tax on imports without strong climate policies when the U.S. doesn’t have a federal carbon price. Nat Keohane, president of the Center for Climate and Energy Solutions, said that a border carbon measure needs to be paired with domestic policies that are designed to achieve Biden’s emission reduction goals. Democrats have not proposed a carbon pricing system in their budget deal. Other questions lawmakers face include which goods from which countries would be subject to the tax and what the rate would be. Also, Democrats could face criticisms that their proposal would violate Biden’s pledge to not raise taxes on families making under $400,000 per year, depending on the design of the tax. Wyden said he’s committed to ensuring that a polluter import tax doesn’t violate Biden’s promise. “I will make sure as chairman of the Senate Finance Committee that no carbon policy hits working people and working families,” he said. (Some say that sounds like a rebate system would be needed.)
— Accounting techniques that most call phony to get around the rules of budget reconciliation. Republicans note how Democrats made ObamaCare look budget neutral in 2010 by claiming a gov’t takeover of student loans was a money raiser, but student debt is now a trillion-dollar loser.
Core of the package: Universal prekindergarten, two years of free community college, extending the expanded child tax credit and creating a paid family and medical leave program, and more. By design, spending on these programs will start small, but grow into huge expenditures and thus will be politically difficult if not impossible to reform or repeal. Therefore, many say these will really be entitlement programs.
Details on some possible spending include:
Medicare: Most significant changes to Medicare since its inception more than 50 years ago. New benefits and lower drug prices for many of the 60 million people in the health program, as well as for people with commercial health insurance plans. Could empower the federal government to negotiate for drug prices in Medicare and add new benefits such as dental, vision and hearing to the program. Cost is an issue because Medicare trustees saying maybe by 2026 there won’t be any money left with the existing program.
Cost of expanding Medicare: Legislation introduced in 2019 to provide dental, vision and hearing coverage under the Medicare program would raise spending by about $358 billion over 2020 to 2029, based on projections at the time from the Congressional Budget Office.
Expanded tax credits: The $1.9 trillion coronavirus relief law that Biden signed in March included one-year expansions of the earned income tax credit, the child tax credit and the child and dependent care tax credit. Democrats especially focus on the child tax credit expansion, under which monthly payments recently started. Democrats want to make the expansions of all three credits permanent but doing so would be expensive. Duration of extensions of the expanded credits will depend on the cost and input from relevant congressional committees.
Other tax breaks wanted include federally subsidized Build America Bonds, which lower the cost of state and local borrowing for infrastructure projects; plus an expansion of the New Markets Tax Credit, which encourages investments in low-income areas; and tax subsidies for affordable housing.
Free school meals for all. Dems, especially those on the far left, support free meals in every public school, including breakfast, lunch, dinner and snacks for all kids, no matter their family income. Advocacy groups are on board, including the School Nutrition Association and the National Education Association, the largest teachers union in the country.
Energy: The bill is expected to include broad tax credits for clean energy investments. The package is crafted to meet President Biden’s major climate pledges, including creation of a clean-energy standard, which Biden has promised to help eliminate emissions from U.S. power generation by 2035. The standard subject to change would treat natural gas as a clean source of energy provided it is paired with equipment to capture, use or sequester the carbon dioxide produced when gas is burned.
Sen. Manchin, chair of the Energy Committee, wants an $8 billion tax credit that would attract clean energy manufacturing and recycling companies to areas with significant unemployment. The credit, dubbed 48C after its place in the tax code, would give $4 billion to areas where a coal mine or power plant has recently shuttered. Another key Manchin priority is preserving the nation’s fleet of nuclear power plants. He included a nuclear credit program worth $1.2 billion a year in a recent bill. He also wants to extend fees that feed an abandoned mine cleanup fund, as well as protect health and pension benefits for miners.
The Democratic plan calls for paying money to utilities that make a fast transition to cleaner fuels — and levying financial penalties for those that move slowly. Others include tariffs on imports based on their production’s greenhouse-gas emissions and creating first-of-their-kind fines on oil-and-gas producers for leaking greenhouse gases into the atmosphere from their wells, pipes and tanks. Wind- and solar-power developers and other clean-tech businesses would get a big increase in tax credits for new wind- and solar-power units. Some Dems are pushing tax credits to entice consumers into using electric vehicles.
The plan includes major tax incentives for clean energy and low-emissions vehicles. Biden and others have at times pegged such a program at $300 billion. The measure also includes a new standard for reductions of methane, a powerful greenhouse gas.
Polluter import fees. As noted in the pay-for section, some of the provisions to encourage emissions reductions could also be used to pay for the plan, a requirement under reconciliation. The tariffs are likely to raise money from foreign aluminum and steel, like a first-of-its-kind levy on imports from high-emitting countries the European Union proposed last Wednesday. Unlike the Europeans, who outlined their plan in a 291-page document, Democrats released no details about their tax proposal. Calling it simply a “polluter import fee,” the framework does not explain what would be taxed, at what rate or how much revenue it would expect to generate.
Meanwhile, if lawmakers fail to deliver, the administration is prepared to act on its own, President Joe Biden’s climate chief told Bloomberg. A clean-electricity mandate is critical for catalyzing emissions reductions, White House National Climate Adviser Gina McCarthy said during a taped discussion for the Bloomberg Sustainable Business Summit. But she refused to say the requirement is a must-have ingredient in a broad tax-and-spending bill meant to build on a bipartisan infrastructure package. “We have lots of regulatory authority that we intend to use regardless, and we will move forward with those efforts to try to tackle the climate crisis,” McCarthy said.
Conservation funding. Senate Agriculture Chair Debbie Stabenow (D-Mich.) wants more money for climate-friendly farm practices, including conservation programs. Biden’s infrastructure blueprint called for $1 billion over five years to help the agriculture industry shift toward net-zero greenhouse gas emissions. But Stabenow called that “woefully inadequate.” Republicans on the Ag panel say any increase should be part of Congress’ next farm bil. Stabenow wants to include $50 billion in new conservation funding over 10 years. “We have a once-in-a-decade opportunity to expand these programs and build farm bill baseline at the same time,” Stabenow said at a Farm Journal Foundation webinar. A coalition that includes several major environmental groups and a few farm groups, including the National Farmers Union and National Sustainable Agriculture Coalition, signed a letter to congressional leaders that calls for spending $200 billion on "farm bill conservation, research, renewable energy, energy efficiency, forestry, and regional food system and supply chain resilience programs, and should be in addition to the agriculture, forestry, and rural-related elements already contained in the President’s American Jobs Plan."
Immigration reform: Democrats want to include a pathway to citizenship for recipients of the Deferred Action for Childhood Arrivals (DACA) program, also known as Dreamers, as well as immigrants with temporary protected status and those who are essential employees like farm workers. House Budget Chair John Yarmuth (D-Ky.) thinks the policies can't be included in a reconciliation package, due to the special budget rules previously mentioned.
Digital/broadband: Democrats want to free local governments to own and operate their own internet networks. More than a third of states currently outlaw the practice. Democrats have agreed to stick the proposed $65 billion in broadband funding in the bipartisan framework with Republicans via the physical infrastructure measure. Some Republicans oppose overriding the state broadband restrictions. The House Agriculture Committee recently approved a bill to provide $43 billion over eight years to bring broadband service to many families and businesses that lack access now.
Transportation projects. Some transportation items that do not make it in the bipartisan infrastructure package could be included in the Democrats’ partisan package, perhaps items like electric vehicle charging and provisions for subways and trains.
Worker protections. Organized labor wants to make it easier for workers to form unions and extend collective bargaining rights to independent contractors. Democrats also want to pass comprehensive paid family leave policies, a priority for Biden and a goal supporters say is especially pressing given the dropoff in women in the workforce during the pandemic. But even if Congress boosts funding for paid leave policies, employer requirements are not expected to gain status under budget reconciliation rules.
Another possible spending area that faces additional hurdles includes state and local tax deductions or SALT. One idea: Repeal the SALT cap for those making $400,000 or less per year, supported by Senate Budget Committee Chairman Bernie Sanders (I-Vt.). This would provide $120 billion in state and local tax relief over the next five years. The current cap on SALT deductions limits the amount of state and local or property taxes that can be subtracted from federal returns to $10,000.
