Two Tracks Redux

McConnell throws the gauntlet as Dems close in on a party-line deal

After weeks of simmering practical and political tension, the collision course between the bipartisan China competition bill and Democrats’ effort to salvage Biden’s economic agenda came into full view on Thursday, as Republican Senate Leader Mitch McConnelldeclared flatly that “there will be no bipartisan USICA as long as Democrats are pursuing a partisan reconciliation bill.”

The USICA blowup stems from the convergence of three dynamics--House Democrats' decision to force a formal conference and their reluctance to drop certain progressive priorities they are seeking in the process; a looming July calendar crunch that has staff and stakeholders pushing hard to get a deal done before August recess; and an increasing recognition that Senator Joe Manchin (D-WV) is committed to reaching an agreement with Majority Leader Chuck Schumer (D-NY) on a stripped down bill comprised of clean energy incentives, health policy reforms, and deficit reduction measures.

The China competition effort had looked like a safe bet while BBB was down for the count, but bipartisan action in the summer of a heated midterm election is a tough sell for the out party even without the majority making a run at a trillion-dollar revenue increase. Substantive sticking points made the political decision fairly easy, and the revelation that Senate Democrats have a near term challenge in mustering 50 votes surely did not escape McConnell’s notice.

It should be said at the top that this move is unlikely to have any direct bearing on the odds of a reconciliation deal. Neither Manchin nor Sinema have an inordinate personal or political investment in the China bill, nor are they likely to appreciate a power play that links the two pieces of legislation any more than they did when Democrats did so on infrastructure. Abandoning reconciliation to save USICA is not a plausible outcome, nor a tenable position. At the same time, it doesn’t resolve any of the outstanding negotiating points. If Manchin is still not satisfied on EVs, or refundability, or ACA subsidies, he’s not going to suddenly roll over out of spite; and to the extent Sinema is still wary or might force overtime to sort out the revenue title, she’s not going to suddenly abandon those concerns over a single tweet.

On the other hand, McConnell throwing the gauntlet does leave Democrats with a choice for how they intend to handle the suddenly imperiled USICA/COMPETES package. In theory they could always add the desired components to a reconciliation package, given the significant slack under the FY22 budget resolution’s instructions. (Commerce, which has jurisdiction over most of the bill’s funding, is allocated $83 billion, more than enough for the $50 billion CHIPS Act centerpiece to boost domestic semiconductor manufacturing.) But given the abbreviated timeline, and the precariousness of the ongoing negotiations, the partisan route may prove too risky. It’s not clear how such an addition would be met by Manchin, whose general demand has been for a 2-to-1 revenue ratio for any outlays, and whose general, inflation-driven aversion to new spending is what brought us to this point.

A more elegant solution would be for the House to simply use the Rules Committee to discharge its conferees and reconsider the Senate’s amended version of the America COMPETES bill which substituted the USICA text. If that's too much for the narrow House majority to swallow, it would otherwise fall until later in the year, with the CHIPS funding in play to ride with NDAA or a government spending vehicle.

Regardless, the snag would seem to doom USICA itself as a viable vessel for directionally related tax policy items like R&D expensing, FABs Act incentives, or supply chain relief for automobile dealers, reinforcing the market for an end of year extenders-plus effort.

In terms of reconciliation proper, the biggest news of the weeks is the completion of the drug pricing title, which has now been dispatched to the parliamentarian. While this was never a real sticking point—indeed it's something Manchin suggested doing if they couldn't agree on anything else—it is an important component of the package politically and as a sizable pay-for. Look for other elements of the bill to head off for procedural vetting as soon they are completed.

Whether or not Democrats are ultimately able to beat the clock, they head into the July work period with a head of steam and one less legislative item competing for bandwidth and floor time. Look for Schumer to try and seal the deal with Manchin in the near future in order to have something to tell his caucus upon their return. With the Senate slated to be in for just four weeks before August break, there is little time to spare without cutting into recess or banking on a September buzzer-beater.

The upshot of this week is that it's time for everyone—not just readers of an obsessive weekly reconciliation update—to take this process seriously. The Republican Leader certainly does.

[This is an excerpt from the July 1 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.]