Time to Land the Plane

Productive break belies stubborn sticking points

Heading into a critical work period following the Independence Day recess, Democrats are seeking to project momentum for their slimmed down reconciliation efforts, releasing the first tranche of legislative text for proposed drug pricing reforms, sending an additional $200 billion offset for parliamentary vetting, and building a narrative drumbeat in anticipation of Congress’ return.

As discussed in recent notes, this procedural scrutiny is an obligatory step, and given the time crunch, Democrats are wise to move on these components as soon as they are finalized. That said, despite the well-choreographed rollout, neither of these pieces are new--both having been plucked from the erstwhile House Build Back Better legislation--nor have they been among the points of contention that have stood in the way of a broader deal.

The drug pricing reform title, discussed last week, is a consensus element of the plan, and has been since Sen. Kyrsten Sinema (D-AZ) blessed a compromise last fall. It is at once a key offset and a policy and political end in its own right. (It could even serve as the core of a break-glass effort to utilize the reconciliation shell in the event that clean energy talks break down.)

The second piece, billed by Democrats and media accounts as the closing of a purported loophole in order to extend the solvency of Medicare--in effect, a 3.8 percent tax increase on owner-operators of pass-through businesses--is more complicated. Submitting a single pay-for to the parliamentarian would ordinarily be a curious step, but this one has abackstory. Despite being billed in the Internal Revenue Code as the “unearned income Medicare contribution,” the tax, commonly known as the Net Investment Income Tax (NIIT), does not actually fund the Medicare Trust Fund.

Thanks to a fluke of legislative (and political) history surrounding passage of the broader Affordable Care Act in 2010, the NIIT was enacted via the subsequent reconciliation sidecar rather than regular order, meaning its contents had to comply with the Byrd Rule, dooming intentions to steer the revenue to a specific account. The tax increase itself is clearly compliant with reconciliation, but the Medicare pretext is central to how this provision was sold to key Senators like Joe Manchin, and it provides political insulation from Republicans and small business stakeholders. Should the NIIT approach fail to satisfy the Parliamentarian, watch for Democrats to get creative in replicating this concept, even if it means using another mechanism.

Beyond these heralded procedural steps, the uptick in chatter owes more to commotion than motion, and despite the heightened sense of urgency, the disagreements discussed in this space a month ago remain operative. Manchin has not yielded on his aversion to electric vehicle incentives or direct pay, and Democrats have yet to find a suitable way to split the baby. Until those items are wrapped up, Manchin seems inclined to play coy on ACA premium support, a political necessity for the rest of the party. While the calendar crunch could lead one side or the other to blink--though there is reason to think it won’t be Manchin--eventually these issues must be resolved if a deal is to move forward.

And despite reports from leadership sources that an agreement could be announced as soon as next week, Manchin’s staff insists this is not the case:

“Suggestions that a reconciliation deal is close are false,” said Sam Runyon, a spokesman for Manchin, in a statement. “Senator Manchin still has serious unresolved concerns and there is a lot of work to be done before it’s conceivable that a deal can be reached he can sign onto.”

A colleague wryly noted that such public statements would be likely up until the moment that the terms of a deal hit our inbox, but the posturing is useful both in terms of setting immediate term expectations and reinforcing the idea that timing is primarily a function of Schumer and Democrats determining what they can live with and knowing when to take the win.

Upon their return, the Senate will be in session for four weeks of legislative work before they are slated to break for the balance of the summer. While the technical deadline for the Senate to utilize reconciliation privileges under the FY22 budget resolution is September 30th, as a practical matter they need to button things up during this work period to avoid a chaotic scramble; further delays would not only make such a timeline difficult, but it would also call into question the underlying political will necessary to get it done. The operative question facing Democrats continues to be not whether they can reach a deal with Manchin, but whether they can strike one in time for it to matter.

[This is an excerpt from the July 8 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.]