What’s Left After Joe Manchin Pulls the Plug On Tax and Spending Package?
Author: Greg Valliere
July 15, 2022
PULLING THE PLUG: The executioner, not surprisingly, was Sen. Joe Manchin, the
centrist Democrat who proclaimed this week that spending and tax proposals will have to wait until inflation subsides.
THE BIG MARKET IMPLICATION: Even though Manchin supports killing some of the Trump tax cuts, he won’t move on this any time soon. His Senate ally, Democrat Kirsten Sinema, also opposes tax hikes, so the Democrats are two votes short — which means investors won’t have to worry about changes to capital gains rates, the estate tax, the step-up basis, higher top rates or the global minimum tax.
IN FACT, WE THINK the threat of any significant tax hikes has subsided for years to
come, based on our belief that the House will flip back to the Republicans in the
Nov. 8 elections. The GOP will gain control for 2023-24, meaning tax hikes may be dead until later this decade.
SO — WHAT’S LEFT? Stunned Democrats, furious at Manchin, still want to pass something before the election. He supports Medicare drug price negotiations and an extension of Obamacare subsidies, two issues that poll very well for the Democrats.
THE ISSUE WILL BE whether Democratic activists, who will fail to win environmental provisions and other spending, are willing to take far less than half a loaf. They already have abandoned more child care, free pre-kindergarten and tax benefits to low-income Americans — and have given up on greener energy, electric vehicles, curbing carbon emissions, etc.
ONCE THE SHOCK OF THE MANCHIN MOVE SINKS IN, Democrats probably will accept drug price negotiations. This would empower Medicare to negotiate for the price of certain high-cost drugs, limit beneficiaries’ out-of-pocket costs to $2,000 a year and extend premium and copayment assistance to some lower-income seniors. The lower drug costs potentially could fund an expansion of the Obamacare subsidies.
DRUG COMPANIES EMPLOY SOME OF THE BEST LOBBYISTS in Washington, and the industry will spend millions on TV ads that assert price controls will diminish pharmaceutical innovation.
THE INDUSTRY always wins this battle, but Democrats are willing to use the budget
reconciliation process to get drug price negotiations. At the least, the industry
faces headline risk for several weeks to come.
* * * * *
WE REITERATE YESTERDAY’S PREDICTION that Fed Chairman Jerome Powell is leaning toward a 75 basis point rate hike later this month, not a 100 basis point blockbuster. Powell has prepared the markets for 75, and undoubtedly must be worrying that chances of a recession would increase if he hikes rates by 100 basis points.
WITH OIL AND GASOLINE LEADING THE WAY, a case can be made that inflation data will look better in the next couple of months, so we’ll stick with our prediction of a 75 basis point hike from the FOMC and a hawkish Powell press conference on July 27.
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