Reconciliation Bill Evolves; Tax Rate Increases Less Likely

Reconciliation Bill Evolves; Tax Rate Increases Less Likely

“At this time, there are not enough votes to pass a corporate tax rate increase,” writes Raymond James Washington Policy Analyst Ed Mills.

An elimination of tax rate increases for corporations and individuals, as well as the shortening and dropping of several social spending priorities, led the updates on reconciliation negotiations confirmed by President Biden during Thursday’s town hall event. Overall, we view some of these developments as market positives, especially as they likely reduce the overall tax increases. We also see the topline spending level as under pressure given the shrinking tax options available for Democrats given opposition to tax rate changes by Sen. Kirsten Sinema (D-AZ). International taxes, IRS enforcement and surtaxes on the highest earners could still be on the table. The push against changing tax rates heightens the risk of other proposals entering the mix. President Biden also provided new insight into his views on filibuster reform, which previews more intense pressure on the filibuster in 2022 – a development which could expand the Democratic agenda in 2022 and elevate market risk, if pursued.

State of the reconciliation package

President Biden confirmed that opposition to tax rate increases by Sen. Kirsten Sinema (D-AZ) limits the ability of Democrats to pass a corporate rate increase as part of the reconciliation package, and reports indicate Sinema’s rate opposition extends to capital gains/top income. At this time, there are not enough votes to pass a corporate tax rate increase, and individual rate changes may also face an uphill battle, but this is less clear. More robust changes to international taxes, a buyback tax, a corporate minimum tax and a “billionaire’s tax” are rising on the list. Tuition-free community college ($45 billion) and the Clean Electricity Performance Program (CEPP – $150 billion) are in discussion to be cut from the reconciliation bill entirely. Although the CEPP as originally proposed is likely to be left out, Biden suggested lawmakers are working on other clean energy provision alternatives that could see support from Sen. Joe Manchin (D-WV), who opposed the CEPP. Biden also confirmed a shortening of the paid family leave program from 12 weeks to 4 weeks (to approximately $165 billion).

These adjustments come as both Sinema and Manchin are now more directly involved in negotiations with the White House and notably their House counterparts. Sinema met with Chair of the House Ways and Means Committee Richard Neal (D-MA) on Thursday, at which tightening of international corporate taxes was a topic of discussion. Sinema expressed support for clean energy provisions, highlighting the divergence between her positions and Sen. Manchin’s (as Manchin has broadly publicly supported adjustments to tax rate changes).

Revenue measures, top-line figure and reaction

This dynamic broadly shifts the focus to other revenue raising measures in order to cover the top line, which expands the potential list of considerations for a final bill. Economic growth projections as part of dynamic scoring and changes to the timeline of tax changes could also be part of the calculation. Overall, with fewer tax options available, the top line should now also be viewed as under pressure, likely continuing momentum toward a package under $2 trillion. This dynamic can broadly be thought of as moderates reasserting their influence on the legislative process, and the response from progressive lawmakers should be watched in the days ahead.

Next steps

Democrats are invested in positive headlines heading into the November 2 election in VA. The near-term hope by Democrats is that a framework can be reached, allowing them to move to a vote on the bipartisan infrastructure bill, potentially before reconciliation. The reality is that while this is trending in a positive direction, there are still a lot of details to be sorted out. The President is likely the only individual in the Democratic Party that can provide political cover to each of the varying faction. The only real deadline is the debt limit (approximately December 3) and the end-of-year recess, which serve as the real deadlines.