Hurry Up and Wait

From rumor mill hijinks to resolving loose ends

The DC rumor mill went into overdrive last weekend, backfilling a palpable sense of optimism and momentum surrounding reconciliation talks with any shred of information people could get their hands on. In one amusing instance, an unverified document making its way from Capitol Hill to K Street set the consultant class abuzz as the terms of a purported deal,  until it landed in the inbox of its original author, Beacon Policy Advisors’ Ben Koltun, who had drafted it based on publicly available information back in mid-March. (Parenthetically, as I said on this week’s Talking Taxes in a Truck podcast, Ben has been prescient policy voice throughout this process and you should follow him on twitter, @ben_koltun.)

The episode was yet another reminder that no one knows exactly what’s going on inside the reconciliation conclave, and those who do aren’t talking. Take the information you’re hearing through the grapevine with a heap of salt. Which isn’t to say there’s nothing happening behind the scenes. Senator Joe Manchin (D-WV) and Majority Leader Chuck Schumer (D-NY) continue to meet, and by all accounts to talk seriously about the details of these proposals. The relative silence is unambiguously a good thing, as Manchin generally only speaks to reporters on this topic to administer a cold shower.

So, if we know the broad contours of what’s possible, if not assured, what is the holdup, and what do we think might be left to hash out?

Chicken vs. Egg

Part of the challenge, especially at this juncture, is the level of granularity at which you might strike an agreement. Ordinarily you might commit to an outline or framework before drilling down and haggling over minor provisions. But Manchin (and Sinema) famously resisted Biden’s first stab at such a proposal, remaining silent rather than expressing public support as anticipated. A framework, in essence, amounts to what they’ll tolerate, but not what they’ll commit to—they want to see the fine print. Broadly speaking, the categories in play here remain fairly straightforward, even if they overlap: climate, health policy, deficit reduction, and tax reform. For his part, Manchin has expressed an openness to all of these things, while occasionally musing about focusing on just the deficit reduction and tax reform piece, a non-starter for Democrats. You can fairly infer this to mean that nothing is wrapped up until everything is wrapped up.

Striking the Right Balance

As a fossil-state senator, and Chair of the Energy and Natural Resources Committee, Manchin has always stressed the need to navigate the energy transition in a way that drives innovation but does not penalize or prematurely leave behind conventional energy sources or the communities they support. Since the February Ukraine invasion and the ensuing fallout in the global energy market, Manchin’s emphasis on ensuring domestic production and encouraging energy independence has made its way into virtually every comment regarding the climate elements of reconciliation. It’s not entirely clear what discrete concessions Manchin would want in this context, and many of the most obvious policy reforms he covets fall outside of the scope of reconciliation—a major impetus for his bipartisan energy talks—but the base package under consideration does contain significant incentives for conventional energy-adjacent projects, especially in is enhancement of the credit for carbon capture, utilization, and storage (CCUS) under Section 45Q, and a newly conceived production tax credit (PTC) for clean hydrogen. If there is to be a deal, there will need to be some nods to Manchin’s desired equity, and there is reason to think Democrats are prepared to do what it takes.

Refundability

From the beginning of BBB and its clean energy precursors, Democrats and renewable industry advocates have placed a premium on the need to make clean energy credits refundable, so that start-ups and other entities can utilize the incentives as intended without an income tax liability, or the need to find a joint venture partner with the appetite for such credits via the tax equity market.

Manchin has been cool to this idea, at least as it relates to what he sees as more mature technologies, though it would certainly help stakeholders involved in industries he cares about like carbon capture and clean hydrogen production. One potential way to split the baby, previously investigated by house tax writers, would be to offer direct payment with a haircut so that companies could elect the option that makes sense for the economics of their industry. (It should be noted that the direct pay proposal may also in some cases be subject to domestic content requirements that may be difficult to comply with given the global supply chain crunch.)

Electric Vehicles

Most of the attention surrounding electric vehicles and Manchin has focused on his vocal opposition to the proposed $4,500 bonus credit for consumer EVs. That element has been presumed dead by most reconciliation watchers from the beginning, and such a concession is more or less baked in. But Manchin has also expressed deeper concerns, not least a fundamental wariness of further subsidizing the technology when carmakers are already struggling to contend with existing demand, as well as the sourcing of EVs batteries and their components from China. Some of Manchin’s gripes have been anticipated—in the House, for instance, Democrats lowered the income threshold and the MSRP price cap for credit eligibility. But they’ll likely have to go beyond that to assuage his doubts.

Manchin does have some level of skin in the EV game, as a major constituent company in Toyota is about to hit the existing per-OEM cap absent congressional action, and the fuel cell EV (FCEV) credit they rely on for their Mirai model lapsed at the end of last year. Both would be addressed on a long-term basis under the House BBB clean energy tax title.

It’s important to remember that BBB did far more than uncap and overhaul the existing $7,500 EV tax credit—in addition to the bonus credits, it turned what is currently an income tax credit at filing time into what would function as a point of sale rebate at the dealership. It created a new credit for used EVs capped at $4,000, as well as a 30% credit for commercial electric vehicles such as those being used in fleets. And it boosted the maximum credit for alternative fuel vehicle refueling property from $30,000 to $100,000. At the end of the day, electrifying the mobility market and greening the fleet is a central priority for the Democratic climate agenda, and it is hard to imagine them leaving this entire category behind just for the sake of a deal. The question then is what a compromise would look like that both sides can live with.

ACA Subsidies

If climate is the crown jewel of a potential reconciliation deal, health policy is viewed by many Democrats as the most acute political necessity. The year-end expiration of premium subsidies under the American Rescue Plan is set to kick in at an inopportune time for the party. The idea of massive cost spikes driving widespread coverage loss in the lead-up to a fraught midterm is anathema to the party’s leaders, to say nothing of their vulnerable frontline members. While Manchin has been relatively quiet on the subject since expressing mild support in the past, his recent acknowledgement of the issue raised more questions than answers. The Senator told CNN, “I’ve heard people talking about that but I haven’t had any conversations on that.” Such coyness is to be expected from Manchin, but it is something to keep an eye on as a potential sticking point. A Manchin-supported “deal” without ACA premium support might be tough for the rest of the party to swallow.

Pay-Fors

One ongoing question has been whether Manchin, who has professed to support a straightforward rollback of the various rates under the Tax Cuts and Jobs Act (TCJA), would accept the more complex and attenuated revenue mechanisms designed around the concerns of Senator Kyrsten Sinema (D-AZ.) While the two approaches were always directionally compatible, the disconnect provided an offramp should Manchin ever desire one.

At this point it seems clear that pay-fors will not be a sticking point for Manchin, and that despite chatter surrounding late breaking ideas—a carbon border tariff, for instance—the pool of offsets is circumscribed by what was passed in the House Build Back Better Act(for more a closer look at potential pay-fors, see the May 27th update). And since the largest possible deal is likely to only require half the roughly $2 trillion raised under BBB, Democrats have significant flexibility for the mix of policies they choose. While the largest chunks of revenue are clear, the lower target means they could finesse, stagger, or otherwise water down the bite of these hikes while still reaping the necessary scores on paper. How the revenue side might come together will be largely up to Sen. Sinema.

With the beltway headlines dominated by a host of weighty issues ranging from January 6th hearings to runaway inflation to a potential gun law compromise, reconciliation talks will continue mostly out of sight and out of mind. And the China competitiveness bill that once seemed to be on the fast track is now stalled in conference, with Republicans warily eyeing a potential reconciliation reboot. But with just two weeks remaining before the Independence Day recess, Democrats have to answer as many of these questions as possible during this work period, with the hope of putting a package together when they return in July. While there are no firm deadlines beyond the underlying privilege of reconciliation which expires after September 30th, Senate Finance Committee Chairman Ron Wyden (D-OR) said out loud this week what most of us have been thinking—he wants “everything to be wrapped up… in the Senate” by August recess.

That’s an aggressive timeline, but one Democrats must shoot for to avoid a September scramble.

[This is an excerpt from the June 10 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.]