You Can't Always Get What You Want

At long last, Dems take the win

Just over one year to the day after the Senate kicked off an epic reconciliation process with the adoption of the FY22 budget resolution, the House sent the rechristened Inflation Reduction Act* to President Biden’s desk, with Democrats voting unanimously to concur in the Senate Amendment over party-line GOP opposition. The bill will provide roughly $369 billion in energy-related tax incentives and spending over the next decade, extend Affordable Care Act premium subsidies through 2025, and provide $80 billion to the Internal Revenue Service to improve compliance and enforcement. In addition to anticipated “tax gap” revenue, the package is financed by a new 15 percent minimum tax calculated against the book income of larger corporations, a new one percent excise tax on corporate stock buybacks, a two-year extension of existing limitations on excess business losses, and comprehensive drug pricing reforms, with the balance put toward deficit reduction.

While the bill bears little resemblance to the sweeping, transformative social spending proposal envisioned by President Biden in his first 100 days and comes in an order of magnitude smaller than what Congress afforded themselves under the budgetary instruction, Democrats nonetheless managed to salvage a core plank of the original plan—clean energy incentives—which stayed largely intact amid the otherwise precipitous legislative triage.

The counter-intuitive triumph of reconciliation as a climate policy vehicle in a process dictated almost entirely by the senior Senator from West Virginia is a testament to Democratic tax-writers like Senate Finance Chairman Ron Wyden (D-OR) who took Manchin’s stated positions and his “innovation not elimination” worldview seriously and literally. Dating back to the House Build Back Better bill, the green energy title was conspicuously tailored to Manchin’s preference for carrots over sticks and included key incentives for fossil-adjacent technologies like carbon capture and hydrogen. This deference to Manchin’s philosophical and jurisdictional prerogatives was a critical part of the effort’s success and made energy the default centerpiece of the package as trillions of dollars in other spending fell by the wayside.

The single biggest hurdle throughout this process—far more than any substantive or ideological disagreement—had been a lack of intraparty trust, an acute problem that only worsened as time wore on and frustrations grew. It informed the initial commitment of Speaker Nancy Pelosi (D-CA) to rebuff the bipartisan infrastructure bill unless and until the reconciliation package had passed the Senate; it manifested in House moderates’ demand for a certain infrastructure date before they would support the requisite budget resolution, as well as progressives’ repeated stonewalling of such a vote; it endured for months in the face of unmistakable (if hardly explicit) signals from the President, and was momentarily elided only by a crushing loss in the first major election of the Biden era. It finally reached its nadir with the December collapse of Manchin's talks with the White House, a bitterly personal spat that played out on cable news and, though blamed on staff, ended Biden's direct involvement with the process, marking the nominal death of the Build Back Better Act.

As we anticipated in this space, however, the public demise of "Build Back Better" proper opened the door for Manchin to support reconciliation in another form. And while it played out quite slowly over the course of nearly eight months, it was the unique, sometimes rocky relationship between Manchin and Senate Majority Leader Chuck Schumer (D-NY) that willed this process back to life, ultimately more than once, overcoming an abundance of skepticism and scar tissue at both ends of Pennsylvania Avenue.

In the end, Democrats chose to take the win, and however gratuitous the political pain endured in the interim, they are billing their victory in superlative terms as the largest climate investment of all time. Passage of IRA adds an exclamation point to the sudden burst of congressional productivity, adding to a narrative drumbeat that has markedly shifted in the party's favor in recent weeks, albeit from a meager baseline. And while the bill is not without ripe fodder—Republicans are already having a field day with the notion of 87,000 new IRS employees harassing middle class taxpayers—the dramatic paring of the scope and scale of the old BBB leaves the GOP with far less to shoot at on the campaign trail.

As Republicans learned with the passage of the Tax Cuts and Jobs Act heading into a bumpy 2018 cycle, when it comes to rallying the base, success is better than failure and futility. But at the end of the day, the political implications are incidental. Indeed, the historical likelihood that the President’s party will lose the House is precisely what drove the majority’s urgency to act in both instances. Democrats realized this was their last best chance to pass whatever policies they could find consensus on, certainly during the Biden administration, perhaps for the next decade. You win elections to achieve power, and while in power you do what you can, while you can. Beyond that you have to be willing to let the chips fall where they may. At best, the long tail of IRA may be redemption of the Biden legacy; not with a mishmash of new spending programs in a pale imitation of FDR, but with a discrete set of policies that fulfill a generational goal of the progressive movement despite negotiating the narrowest Congressional margin in modern history.

Ultimately that is the proper frame for this legislation—not judged against the bloated post-ARP expectations of Summer 2021, or even the heady days following the Georgia run-off victories, but compared to what the President-elect and his party thought possible that first Wednesday in November as the surprisingly tepid election results came in. On its own terms, to paraphrase a certain former Vice President, this is a big freaking deal.

Exit Questions:

What can we expect in terms of implementation?

• With a host of new incentives and a reformed regime for the old ones, taxpayer questions already abound. Guidance is called for throughout the statute to sort out anticipated ambiguities and interpretations, in some cases stipulating tight timelines. The bill appropriates $80 billion to fund a beleaguered IRS that has been stretched to its limits—these new resources will be needed to bring clarity to over 700 pages of statutory complexity in the coming months and years.

What will happen to the permitting sidecar?

• It has been overshadowed by the news around IRA itself, but much of Manchin’s desire for fossil parity in his negotiation was not achievable in the context of reconciliation, meaning he had to settle for promises from leadership. Among other considerations, Schumer and Pelosi committed to moving permitting reform before the September 30 end of the fiscal year. Of course, that would require significant GOP support materializing over the next 6 weeks for a legislative product we haven’t even seen yet. While Republicans would support permitting reform in the abstract, the devil is in the details. And no matter how good the deal might be, its association with a Manchin-Schumer-Pelosi IRA deal stands to poison the well. Republicans are keenly aware that anything they would be inclined to support now would stand to improve with more leverage in the new Congress.

What is the outlook for tax policy in the lame duck and beyond?

• It’s hard to overstate the degree of interparty angst in the wake of the CHIPs/reconciliation rope-a-dope. The GOP’s hard line against efforts to reboot BBB has delayed any bipartisan negotiations on an eventual government funding deal, one that would be necessary to carry anything of note. An otherwise-clean CR is unlikely to prove a suitable vehicle for substantial legislation of any sort to hitch a ride. At the end of the day, beyond spite, the lame duck calculation will come down to whether the outcome of the election creates a significant advantage for either party in the new Congress. If the GOP cavalry is coming in in a big way, Republicans have less incentive to cooperate; but if House gains are muted and/or the Senate remains in Democratic hands, striking a year-end deal may make sense, particularly with several temporary TCJA policies (R&D, 163(j), 100% bonus depreciation) hanging in the balance. The secondary tax implications of IRA are two-fold: creating the likely need for a corrections bill (technical and otherwise) at some point in the future; and syncing up the ACA premium subsidies with the broader fiscal cliff shaping up at the end of 2025, when the TCJA individual title is poised to expire.

[This is an excerpt from the August 12 PRG weekly reconciliation update. Read the rest of my firm’s reconciliation updates here. While you’re at it, check out this week’s episode of The Lobby Shop, where I give you everything you need to know about the reconciliation state of play in 15 minutes.]