EVERYONE WE TALKED WITH yesterday was stunned by Manchin’s deal with Senate Majority Leader Chuck Schumer, which contains several bombshells: the global minimum corporate tax has been dropped, funding for electric vehicles is back, the carried interest loophole finally may be killed, and there could be a new U.S. corporate minimum tax.
THE INITIAL REACTION from Democrats in Congress was to dive into the details and seek support from Sen. Kyrsten Sinema, the Arizona Democrat whose one vote could still kill the entire package. She doesn’t like taxes, and it’s unclear whether she will back higher rates for big corporations.
THIS WILL BE A FIGHT AMONG DEMOCRATS: The Republicans are remarkably unified — they will not support this bill in any shape or form. A major GOP sound bite in the fall election campaign will be to blast the idea of tax increases and more spending in the face of higher inflation and a potential recession.
CHANCES ARE A LITTLE OVER 50% that the measure will pass. Why isn’t this number higher? Schumer and Manchin cut the deal in secret, not informing most Senators, which means there are bruised egos from Democrats who had no input. This will make Nancy Pelosi’s task difficult when the Senate bill lands on the House floor after the August recess ends in early September.
SINCE FINAL ENACTMENT IS PERHAPS TWO MONTHS AWAY, there will be plenty of time to pick at specific provisions, many of which are quite controversial. An increase in the state and local tax deduction was omitted, angering House Democrats from wealthy states. And the global tax hike was omitted, a huge blow to Janet Yellen, whose tenure as Treasury Secretary may be fading.
THE MEASURE CONTAINS SPENDING PROVISIONS that Senate Democrats support, even though the environmental price tag of about $369 billion is far lower than the amount passed by the Senate in its $3 trillion bill last year.
NEVERTHELESS, THE BILL CONTAINS MORE CLIMATE FUNDING and tax incentives ever passed by Congress, which would cut U.S. carbon emissions by roughly 40% by 2030, according to a summary of the package.
A SWEETENER FOR MANCHIN: A separate provision addresses the permitting of energy infrastructure, potentially including natural gas pipelines, before the end of the fiscal year on Sept. 30. That could facilitate a project in which Manchin has taken a strong interest, the Mountain Valley Pipeline, which would transport Appalachian shale gas from West Virginia to Virginia.
THE BILL’S CENTERPIECE, in many respects, is the one issue that all Democrats support — the beginning of government negotiations on prescription drug prices, plus funding for Obamacare subsidies lasting through 2024. These provisions will be the engine pulling this train, and the ability to reduce drug costs would give Democrats an argument that they are fighting inflation.
THE CONTROVERSIES: A dramatic increase in IRS funding — nearly 50% — will increase audits and enrage the Wall Street Journal editorial page, but the tax collectors are working with antiquated computers and will get more money.
A MORE CONTROVERSIAL PROVISION, one that will energize Washington lobbyists, would impose a minimum tax on the so-called book income of large corporations like Amazon and FedEx, which earn more than $1 billion yet report far less to the IRS. They avoid the 21% federal tax by using tax credits and other maneuvers to reduce their exposure far below the 21% percent corporate income tax rate.
OUR INITIAL FOCUS is on what isn’t in the bill: there’s no tax hike on most corporations or individuals in general; there’s no tax hike on unrealized gains, there’s no global tax, and there’s nothing new on capital gains or estate taxes. It’s a bill the markets can live with.