Chuck and Joe Strike Back

Reconciliation reboot lives, just don't call it BBB

In a legislative caper worthy of The Sting, with a plot twist straight out of The Usual Suspects, Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV) fooled the entirety of Washington this week, simultaneously freeing a fattened legislative hostage in the CHIPS+ bill, resuscitating seemingly forsaken elements of the Build Back Better agenda, and putting the largest climate package in history on the threshold of passage. 

Two weeks after broader reconciliation talks broke down over timing concerns, a week after Republicans let their guard down over the emerging "skinny" package, and mere hours after the CHIPS and Science Act passed the Senate with 17 GOP votes, Manchin and Schumer revealed precisely the sort of climate-centric agreement we might have expected before its apparent collapse, albeit rebranded as the "Inflation Reduction Act." In short, the proposal would use a minimum tax on the book income of certain larger corporations, curtailing of carried interest treatment, IRS enforcement (funded by $80 billion in new spending), and previously agreed to drug pricing reforms to finance $369 billion in clean energy investments and incentives, three years of ACA premium subsidies, and $300 billion in deficit reduction.

But Manchin's Eleven this was not. The rope-a-dope suckered Democrats and Republicans alike, at both ends of Pennsylvania Avenue, from the rank and file to the highest levels of leadership. Even the breakdown itself was a genuine setback, though in retrospect Manchin's calm and conciliatory reaction in the wake of Schumer's media offensive was a tell, and he ultimately had to yield on his insistence for more inflation data. Occam's Razor might suggest that Manchin overplayed his hand, was surprised by Schumer's reaction, and spent the intervening days seeking to get the deal back on the rails. Which is to say, the best way to understand the package the two men produced might be to forget the past two weeks ever happened.

The drama now enters the final act, with a number of questions unanswered, and several dynamics working against ambitious plans for swift passage.

Sinema

First, as we've long discussed, Schumer has exclusively been seeking a deal with Manchin, who, while pivotal, does not represent the 50th vote. All eyes now turn to Senator Kyrsten Sinema (D-AZ), who has been elusive about her intentions from the beginning, and exceedingly quiet since laying out her revenue-related redlines last fall. Sinema professed surprise at the deal, and her office has indicated that she will take her time in reviewing its contents while waiting for the parliamentarian to rule. [More on that later.]

On its face, this bill should be something she can support. Sinema is a former Green Party activist who supports the bill's climate priorities, and her stated concerns over raising rates on businesses have been generally respected, as reflected in the decision to drop expansion of the Net Investment Income Tax (NIIT). Perhaps more importantly, not supporting the bill would have existential implications for her political future. Sinema was already drawing fire from the progressive wing of the party for her commitment to the filibuster, sundry moderate stances, and aloofness on BBB; toppling a scaled down bill at this juncture would all but ensure a top tier primary challenge in 2024.

But Sinema is an enigmatic lawmaker who has cultivated a mavericky political persona, and when it comes to re-election in Arizona she has a very specific theory of the case. The ghost of John McCain, who famously blindsided Republican leaders by tanking Obamacare repeal efforts on the floor of the Senate, looms large. The ultimate question is whether she is looking for a reason to get to yes, or an excuse to get to no. If the goal is to support the bill while saving face, she could essentially name her price, at least within the broad structure of the bill.

Many have focused on the carried interest provision, which she has previously opposed, as a potential target of her ire, but the issue is politically fraught, whether as a singular legislative scalp, or an explicit rationale for voting no. (Manchin's decision to publicly declare this a redline suggests Democrats appreciate the double bind she faces.) At $14 billion, it also represents less than 2 percent of the bill's offsets, making it a dubious hill to die on. A riper target might be the minimum tax on corporations reporting more than $1 billion in "book income." As the single biggest pay-for in the bill, there is both a great deal of room to maneuver and perhaps score improvements that would be less punitive toward companies whose capital-heavy expenditures have reduced their effective tax rates. And if she were to choose to stick to her guns on opposing tax increases more broadly, there is suddenly a clear off-ramp in the form of a second consecutive quarter of economic contraction, traditionally a harbinger of recession.

While the developments of the past 48 hours are enough to chase anyone out of the prediction business, such a climactic step would register as a surprise. As is her tendency, Sinema is likely to keep her powder dry and wait for the process to play out before committing to anything.

Attendance

But Democrats have an arithmetic challenge even beyond any undecided members. An ongoing spate of COVID cases, along with the prolonged absence of Senator Patrick Leahy (D-VT), has prevented the caucus from mustering a full, 50-vote complement for the entire month of July. Though Leahy has been released from post-hip surgery rehab, the prospect of an all-night vote-a-rama experience is not a pleasant one. And while Majority Whip Dick Durbin (D-IL) is set to clear COVID protocols in time for next week, the only good news on this front is that a solid chunk of the caucus has very recent immunity. Health of the paper-thin majority remains perhaps the biggest X-factor, with greater tail risk the longer things stretch out.

Parliamentary Procedure

Even with enough Democratic bodies to head to the floor, the timing of the process remains at the mercy of Senate parliamentarian Elizabeth MacDonough and her pace in scrubbing the accumulating text, adjudicating arguments, and ultimately giving her blessing. The process has taken longer than expected at every turn dating back to last fall, and even the limited drug pricing package has stretched into the second week, with iterations ongoing. Now she has 725 new pages of multi-jurisdictional text, along with the apparent addition of an insulin pricing provision that may present Byrd questions. The minority has been given time to review the language, meaning she won't even begin the "Byrd Bath" for several more days.

[Caveat: as always, the majority can do anything it has the political will (or leadership gumption) to do, meaning they could choose to forego the parliamentarian's sign-off and go straight to the floor. Schumer controls the calendar, and as such can move whenever he wants to. This is a highly risky choice, as it carries with it privilege questions that could jeopardize the entire bill, but it is not without precedent.]

If all of these elements go smoothly, Democrats could move to a motion to proceed late next week. After 20 hours of debate, the Senate would move into the vote-a-rama.

Protecting the Product

Ideally Leader Schumer would have a blood oath from his entire caucus not only to vote for the bill, but to protect the entire package from any attempted GOP meddling. Under the reconciliation process, the minority may not filibuster the bill, but they may offer as many amendments as they wish on a rapid-fire basis, known as the vote-a-rama. While this process played out over the summer in the non-binding context of the budget resolution, these amendments amount to "live ammo" that will affect the underlying proposal.  They are not without restriction, however. First, they need to comply with the Byrd rule, like the bill itself, meaning that they must score, and cannot be merely incidental to their budgetary impact. (Read: no tough immigration votes, e.g.)  Second, and importantly for Democrats, they must not violate a budget point of order, or else it will trigger a 60 vote threshold Republicans cannot hope to win, even with a rogue majority. This is most likely to factor into amendments that would tap the bill's deficit reduction funds, either by adding spending or by removing revenue provisions. (There is no such restriction on adding revenue/reducing the deficit, meaning taxes could be added with 50 votes but can only be stripped with 60.) Look for Republicans to craft rifle shot amendments aimed at winning Kyrsten Sinema's vote without running afoul of the other stipulations. Even if she votes to proceed, she may insist on keeping her options open to improve the bill and consider changes on their merits. And while Schumer has previously used "wraparound amendments" to negate any of the changes that were adopted in the vote-a-rama process, that too would need her support (among others.) This dynamic may test the traditional notion of legislative poison pills, as Democrats may have no choice but to swallow.

The House

The House has long been viewed as a potential stumbling block for any reconciliation legislation, with its disparate factions and sometimes contentious intra-caucus dynamics, but the reception of the Manchin-Schumer deal has been markedly positive, even among skeptics. After the experience of the past 18 months, and the near-death experience of the past two weeks, House progressives have come around to the idea that something is better than nothing. On the moderate side, Pelosi lost only one vote for the original BBB, and that was under the guise of opposing the SALT fix. And while such a fix has been ruled out of this bill by Manchin himself, its champions in the New York and New Jersey delegations have laid down their swords, indicating that they would support the package because it did not contain tax increases on individuals, a notable attenuation of their previous stance.

If and when the bill passes the Senate, it will achieve escape velocity, and the House is almost certain to follow. But the timing matters nonetheless--Pelosi currently has four votes to spare, a margin that will drop to three by August 9th. (With this in mind, the House is preparing to return in time to pass the bill that week, but it will depend on the previous time variables in the Senate.) If the process stretches into the third week of August, Republicans could net an additional seat in New York, trimming that cushion to just two. None of which is likely to jeopardize passage in the lower chamber, which still permits remote voting, but does add pressure to get it done and avoid any unforeseen headaches.

We'll know more in the days ahead, but if recent weeks have taught us anything it's that the writers may have more up their sleeves.

Remaining variables to swift, smooth passage:

-50 votes: Sinema (et al)

-Attendance: COVID, broader health challenges (Leahy)

-Procedural: Byrd bath timeline; advance clearance vs. live bath on floor (risky)

-Protecting the product: vote-a-rama poison pills; wraparound amendment(?)

-The House: Pelosi margin for error trimmed to 3 on August 9th, could fall to 2 by end of month; BUT only lost one vote on BBB, SALT caucus backing down

[This is an excerpt from the July 29 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 listenwherever you get your podcast.]