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Democrats plan a spending blowout, but hurdles remain

They have hinted that tax increases will be delayed until later this year at the earliest, helping buoy investor optimism

ANALYSIS — Georgia Democrats’ stunning victories in two Senate runoffs immediately reset this year’s policymaking landscape, with higher stock prices, interest rates and inflation expectations signaling anticipation of a spending blowout.

Top Democrats are prepping trillions of dollars more to goose disposable income and help the unemployed; relieve state and local government budgets; hypercharge the vaccine rollout; build out clean energy, housing, broadband, water and transportation infrastructure; subsidize paid leave and child care; and more.

Meanwhile, Democrats have hinted that tax increases will be delayed until later this year at the earliest, helping buoy investor optimism even amid a violent mob riot at the Capitol that left five people dead.

“[President-elect] Joe Biden and his team are not going to raise taxes on anyone until the economy is fully recovered, or at least more stable,” said Russ Sullivan, a former staff director for Senate Finance Committee Democrats who worked closely with the Obama-Biden administration on stimulus, health care and tax legislation.

Sullivan, who leads the tax policy group at law firm Brownstein Hyatt Farber Schreck, also doesn’t think tax increases will be retroactive to the start of the year. “Never in my 18 years on the Hill did we do a retroactive tax increase,” he said.

Biden said Friday that he wants swift action on an economic aid package he’ll unveil on Jan. 14, including additional $1,400-per-person checks on top of the $600 that started going out last week. The price tag for this initial request alone, encompassing everything from funds for schools to reopen safely to financial aid for renters behind on their payments, will be “in the trillions of dollars,” Biden said.

Even if all 48 Democrats and two independents who caucus with them remained united, which isn’t a sure thing, such a package would require 10 Republican votes. But shoveling trillions of dollars more out the door right after $900 billion last month would be a tough sell for the GOP.

Budget reconciliation

Invoking the “nuclear option” to eliminate the 60-vote threshold to end debate seems unlikely. That leaves the budget reconciliation process to pass big-ticket Democratic priorities with a simple majority.

They can use the powerful tool twice this year because Congress never adopted a fiscal 2021 budget blueprint last year, leaving it available until the end of September. That’s the playbook Republicans used in 2017 first for their failed effort to repeal the 2010 health care law and then their successful tax code overhaul. But it’s a slower and far more cumbersome process.

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When Congress adopts a budget resolution — no small feat in its own right, given intraparty divisions and all-night Senate “vote-a-ramas” — the document directs committees to draft legislation hitting budgetary targets. If it’s a deficit cut, they have to produce a minimum level of savings; if it’s a deficit increase, they can lose that amount and no more. The provisions are then bundled together into a filibuster-proof package.

But expectations should be tempered because of the “Byrd rule,” named for its author, former Sen. Robert C. Byrd, D-W.Va.

Short-circuiting the Senate’s cherished right to debate was too much for then-Minority Leader Byrd, who drafted the original rule in 1985. The idea was to limit reconciliation to matters affecting federal spending or taxes, lest lawmakers load up each reconciliation bill with leftovers that couldn’t get through “regular order.”

The Byrd rule prohibits items that don’t have deficit impacts within the budget’s time horizon or that increase deficits outside that time frame; cause a committee to miss its budget target; are in the jurisdiction of a different committee; or produce changes in spending or revenue that are “merely incidental” to the goals of the provision.

An example of the latter might be a nationwide abortion ban, longtime Senate Democratic aide Bill Dauster explains in his annotated explanation of the Byrd rule. While that sweeping change might reduce spending on the margins, the intent behind it clearly wouldn’t be saving money.

The “merely incidental” language requires “the exercise of judgment,” Dauster wrote. “The Parliamentarian has not laid down any bright-line test to aid that judgment, and reserves the right to consider each individual case on its merits.”

Still, it’s difficult to imagine a Senate parliamentarian deeming business liability protections sought by Republicans, which would have a small impact on federal court-filing fees, as passing the Byrd test. The same goes for Democrats’ push to raise the federal minimum wage to $15 an hour, though that would affect some spending on federal worker pay.

Incoming Senate Budget Chairman Bernie Sanders, I-Vt., has suggested the vice president, as the Senate’s presiding officer, could simply brush aside parliamentary concerns. But Republicans considered that during the 2017 health care debate and opted against it for fear of a slippery slope toward turning the Senate into something more like the House, with majority rule and limited minority rights.

‘Byrd droppings’

According to the Congressional Research Service, of 72 Byrd rule points of order since 1985, 62 have been sustained. When faced with motions to waive the rule, which requires 60 votes, senators have rejected 50 out of 59 such attempts. That’s not counting provisions scrubbed from a reconciliation bill in consultation with the parliamentarian before it gets to the floor, known as a “Byrd bath.” 

“Byrd droppings,” or items that fall out of a bill, can be tiny, like when Sanders struck the 2017 GOP tax bill’s moniker, “Tax Cuts and Jobs Act,” from the text. Still, that fix along with two other small ones resulted in the measure having to go back to the House for a do-over vote — never a welcome prospect when margins are slim.

Droppings could also be quite large. Out of a $1.5 trillion House-passed infrastructure package last summer, over $1 trillion probably wouldn’t pass the Byrd test.

That includes authorizations for passenger rail, schools, hospitals and other projects funded separately through appropriations, and spending on highways, bridges, transit and airports financed by trust funds with an oddball, hybrid budgetary treatment. Hundreds of pages of regulatory changes, from an Amtrak vaping ban to increased highway weight limits for electric and natural gas-powered trucks, also would likely be tossed out.

Provisions that likely would be allowed from that bill, like mandatory broadband and water projects spending, clean energy and housing tax credits and infrastructure bond financing, either couldn’t be made permanent or would have to be offset in order to avoid long-term deficit increases.

Including discretionary spending under appropriators’ purview in reconciliation has been done before, such as $1 billion for low-income home heating and cooling subsidies in a 2006 deficit reduction law, but it’s typically frowned on.

Dauster wrote in 1993 that the parliamentarian “casts a particularly suspicious eye on language that makes appropriations” and “appears to view these events as strong indicia that the language attempts to do something that the drafters [of the 1974 budget law] did not contemplate Congress would do in the fast-track reconciliation process.”

Byrd at the time was Senate Appropriations chairman and a zealous guardian of his panel’s jurisdiction.

“Appropriators would go crazy” if discretionary spending were converted to mandatory spending on a large scale under reconciliation, says G. William Hoagland, a former top Senate GOP budget aide.

Even when done outside of reconciliation, such a move raises jurisdictional issues. After $150 billion for state and local aid was designated as mandatory spending in a $2 trillion relief package last March, House Democrats made sure to classify the funds as discretionary in two subsequent aid bills that passed in that chamber but didn’t become law. 

All this bodes ill for the state and local fiscal relief, education and vaccine distribution funds and other spending Democrats want to enact early on. Discretionary funds totaled over $1 trillion in both versions of House Democrats’ pandemic relief bills last year.

There’s nothing in the budget statutes that say appropriations can’t be included in reconciliation. Richard Kogan of the left-leaning Center on Budget and Policy Priorities, who helped draft relevant sections of the law as a House Democratic budget aide, said he thinks Democrats are on firm procedural ground if they go that route. However, there are practical considerations that make it difficult.

Inserting appropriations would require an “emergency” designation to get around this year’s spending cap, but such a designation would be a “Byrdable” offense because it doesn’t by itself affect spending levels. If Democrats can’t get 60 Senate votes to waive that point of order, it would trigger across-the-board cuts to discretionary funds that breach the cap as soon as July 15.

If they decide to trample on appropriators’ jurisdiction and put the money into other committees’ submissions, it would violate pay-as-you-go rules for mandatory spending without offsets. That would trigger across-the-board cuts by early 2022 to entitlement programs like farm subsidies and Medicare, unless Hill leaders can round up 60 Senate votes for separate legislation to eliminate that requirement.

‘New sheriffs in town’

Meanwhile, Biden’s proposed $4 trillion in tax increases on corporations and households earning more than $400,000 are, in most cases, among the few certainties that can pass the Byrd test and offset the new spending.

Wall Street firms have been reassuring clients that only a “fraction” of Biden’s tax plans will make it through the closely divided Congress. It’s true, for instance, that a nearly $1 trillion payroll tax increase wouldn’t be allowed in reconciliation because of a separate Byrd rule prohibition on Social Security changes.

But it’s not clear they heard incoming Senate Finance Chairman Ron Wyden’s comments after the runoffs about “new sheriffs in town” and ending the “sweetheart deals” that marked the Trump administration. The Oregon Democrat’s plan to tax unrealized capital gains would sock it to the wealthiest like never before, raising as much as $2 trillion by itself.

Tesla founder Elon Musk’s reported $150 billion gain on paper over the past year, which has made him the world’s richest man, might have cost him about $60 billion in taxes if Wyden’s plan had been in place. Amazon’s Jeff Bezos, now No. 2, could have to fork over $30 billion, not counting tax owed on the $10 billion worth of shares he sold last year.

Biden’s proposals look vanilla by comparison, which may be the idea. And if a “fraction” of that can pay for what’s left of an infrastructure package after Byrd gets through with it, the positive market reaction so far to Democrats’ takeover will look prescient.

Paul M. Krawzak contributed to this report.

Peter Cohn edits CQ Roll Call’s budget, tax and appropriations coverage.

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