Build Back Never

Curtains for the Chuck and Joe Show

Reconciliation talks were thrown into turmoil late this week, imperiling the effort's clean energy tax core, and leaving unanswered questions as to how and whether Democrats might proceed. With just three weeks left before August recess, Majority Leader Chuck Schumer (D-NY) made a full court press to move forward with a broad-based climate, health, and deficit reduction package by the end of the work period, a move Senator Joe Manchin (D-WV) rejected. Manchin indicated a willingness to proceed with a limited number of items that have been agreed to, such as drug pricing reform and ACA subsidies, but that an agreement on clean energy incentives and tax increases would have to wait, citing a September timetable. Manchin's stance leaves leadership with a nominal choice between pursuing a narrow bill that would address a serious near-term political problem or holding out for climate policy contingent on his terms. 

Schumer's fury over Manchin's posture was evident, with his team immediately sourcing a barrage of pieces blasting Manchin for walking away from the negotiating table and reneging on their understanding. Charges of bad faith followed from colleagues in both chambers as Democrats vented while considering what to do next. Reports played up the many concessions Schumer is said to have offered, ranging from dropping the electric vehicle (EV) tax provisions altogether, to striking the direct pay option for renewable energy incentives, to supporting permitting reform and drilling efforts outside of the reconciliation process.

For his part, Manchin took to the airwaves Friday morning, joining his favorite local radio host Hoppy Kercheval to provide his version of events to the folks back home. In measured terms--a stark contrast to the December falling out with the President and his staff--Manchin insisted that he had not walked away from anything, that he still desired to reach a broader deal on energy, and that he merely wanted more data to confirm that inflation is receding before committing to a deal of this magnitude. And while he spilled the details of their private conversation, seeking to blame Schumer's "political deadline" for the blow-up, he seemed to leave the door open to resuming talks.

But a late-breaking statement from President Biden promised executive action on climate, urging congressional Democrats to push forward with the drug pricing and ACA subsidy bill before the August recess, effectively writing Manchin off, and likely dooming any hope of resuscitating the broader negotiation.

This was not how this week was supposed to go for Senate leadership. Coming off a stretch punctuated by the smooth release of the plan's first major component, and a so-far-so-good trial balloon of a significant pay-for, there was a growing sense that the piecemeal rollout strategy would continue to build momentum. Hill chatter suggested further revenue items would be forthcoming by the end of the week, and, among the most optimistic players, perhaps even an agreement on the energy title.

None of it was to be.

There were challenges from the beginning, starting with Leader Schumer being sidelined with COVID, another reminder of Democrats' shaky grasp on functional control of the floor. Schumer soldiered on, virtually and via his trademark flip phone, taking pains to keep things on track, and meeting with Manchin on Monday afternoon. Manchin's first public statements on the heels of that meeting amounted to foreshadowing, telling reporters that he didn't know if they could reach a deal by August recess, pointing to the true deadline of September 30th, and saying he didn't need a deal before then.

By Tuesday, the conversation turned to the proposed 3.8 percent tax increase on active pass-through owners, billed to Manchin as closing a loophole, but which prompted a letter signed by 192 business groups representing industries around the country. Outside groups hit the West Virginia airwaves seeking to appeal to his constituents. Republicans fanned the flames, citing the response on the floor and calling out Manchin specifically. And with rogue House moderates pitching a package without tax hikes, in a bid to elevate their SALT concerns, suddenly Democrats in both chambers were expressing various levels of election-year revenue anxiety.

The Wednesday morning release of the CPI print--with a 9.1 percent headline number, the worst in over 40 years--seems to have been the coup de grâce. Manchin's office weighed in on the release for the first time since April, signaling his thinly veiled doubts in ominous terms: "No matter what spending aspirations some in Congress may have, it is clear to anyone who visits a grocery store or a gas station that we cannot add any more fuel to this inflation fire." He spent the rest of the day giving similar quotes to reporters, and notably backing away from the idea of increasing taxes on businesses, citing economic concerns.

The worse-than-expected number came at a critical moment in the negotiations, at once validating Manchin's long-standing priors with regard to inflation and offering him a pretext to drag out negotiations further, if not an offramp to walk away altogether. Schumer's aggressive timeline made it all too easy.

In the end, the apparent demise of the climate title (and the tax increases needed to fund it) may have been overdetermined; a late but furious push by small business groups against the proposed 3.8 percent tax increase on pass-through owner-operators; a devastatingly high CPI print that went to the heart of the Senator's inflation fears; an asymmetrical sense of urgency as leaders sought to wrap up the entire process during the current work period. But at the end of day, the talks were plagued by the same dynamics that had scotched previous negotiations--an abiding lack of trust that was often mutual, and a political will that simply never materialized.

With 76 days before the September 30th deadline, and an uncertain whip count for a skinny, health-centric bill, there may still be a few twists and turns for reconciliation; but for now, the Joe and Chuck Show seems to have been put on hiatus, with hopes of significant clean energy tax activity defaulting to the lame duck session.

[This is an excerpt from the July 15 PRG weekly reconciliation update. Read the rest of my firm’s reconciliation updates here. And if you like my “Bottom Line” analysis, check out my moderated discussion with my colleague Yasmin Nelson, who pens “The Breakdown” newsletter. Watch on Youtube or listen wherever you get your podcast.]