Resurrected budget package no slam dunk as negotiations heat up

The bill formerly known as ‘Build Back Better’ has a new lease on life, but Democrats have little time and big decisions to make

West Virginia Democratic Sen. Joe Manchin III is back at the negotiating table. (Tom Williams/CQ Roll Call)
West Virginia Democratic Sen. Joe Manchin III is back at the negotiating table. (Tom Williams/CQ Roll Call)
Posted June 6, 2022 at 7:30am

​Democrats face big obstacles and a deadline measured in weeks as they attempt to salvage a scaled-down tax, climate and health care package that could give them a boost ahead of the November elections.

Conversations are underway between Joe Manchin III, D-W.Va., and Senate Majority Leader Charles E. Schumer to negotiate a budget reconciliation bill, which would require only a simple majority for passage, that would meet Manchin’s demands without losing support from other Democrats.

But even if legislation is written to accommodate Manchin, Arizona Democrat Kyrsten Sinema remains a crucial question mark. The reconciliation bill would need the support of the entire Democratic caucus in the evenly divided Senate to pass with a tie-breaking assist from Vice President Kamala Harris.

Sinema and Manchin were holdouts to earlier versions of the reconciliation measure. She came to generally support the Senate framework, but only after her objections trimmed the bill from $3.5 trillion to $2 trillion and tax rate increases were replaced with other revenue raisers.

Sinema aides declined to comment. But sources speaking on condition of anonymity said the passage of time may not have increased Sinema’s fondness for the bill and she may have lingering concerns with some of the specific language.

Arizona Sen. Kyrsten Sinema arrives at the Capitol on May 19. (Tom Williams/CQ Roll Call file photo)

The slimmed-down measure under discussion would raise about $1 trillion in new tax revenue — down from roughly $1.5 trillion in the House-passed “Build Back Better” bill and a draft Senate Finance Committee amendment.

Corporate and international provisions raising roughly $800 billion, like a global minimum tax intended to cut down on overseas profit-shifting, are expected to remain the core, with a smattering of other provisions to make up the difference.

But the lower revenue target could give Democrats fiscal space to drop big-ticket provisions like a proposed “surtax” on multimillionaires and applying an existing investment income tax to profits earned by owners of “pass through” firms that don’t face corporate taxes. Those proposals, estimated to generate about $480 billion, have raised concerns in the small-business community.

New multiyear funding proposed for IRS tax enforcement could yield another $127 billion in net revenue for the package that isn’t counted in official Congressional Budget Office "scores," though lawmakers could still point to that money coming into the Treasury.

[Democratic divisions fester over 'Build Back Better']

Also in line with both earlier versions, the emerging framework would produce about $300 billion in savings from allowing Medicare to negotiate certain prescription drug prices and other cost-saving pharmaceutical provisions, according to congressional aides and others with knowledge of the discussions. 

Reining in drug prices has been a top priority for Manchin throughout the negotiations. "If we do nothing more this year, that's the one thing that must be done," Manchin said May 31 at an AARP West Virginia event.

Sinema last year helped negotiate the initial drug pricing framework that was included in the reconciliation bill. But it's not clear yet where Sinema might land on the specific language, and there's speculation she may have some concerns with the latest version.

It’s also uncertain whether the drug pricing provisions can pass the “Byrd rule” test, a multipart restriction that limits reconciliation bills to budget-related proposals in the Senate.

The content of reconciliation bills needs to be vetted with Senate Parliamentarian Elizabeth MacDonough, and it is difficult for a provision to survive without her approval. The review process began last year but has not yet concluded. 

Deficit reduction

Stressing the need to fight inflation, Manchin has insisted that half of any new tax revenue and budget savings be used to reduce the deficit. In theory, that means up to $700 billion or so could be available for spending and tax breaks if the package generates $1.3 trillion to $1.4 trillion in revenue and cost savings.

“Conversations around reconciliation are ongoing,” a Schumer spokesman said. “No numbers are set yet.”

Clean energy would be a major component of any deal. The Senate Finance draft has a $325 billion package of incentives to encourage renewable energy production and reduce carbon emissions, though that cost could come down slightly if Manchin successfully strips out bonus tax credits for purchases of electric vehicles built with union labor.

Senate Energy and Natural Resources Democrats, whom Manchin leads, produced a separate $45 billion reconciliation title that he may not want to see go to waste.

It would finance home energy efficiency equipment upgrades; loans and grants to develop new energy technologies and low-emission vehicles and retool older power plants, refineries, steel mills and more to reduce emissions and capture air pollutants; and new electric transmission lines and nuclear and fossil energy research. It would increase fees on oil and gas production that would partially be used to clean up abandoned mines and orphaned oil and gas wells, which is important for Manchin's home state and others.

Manchin aides didn't immediately provide a comment for this article.

No more 'cliffs'

Another Manchin condition is that the measure avoid any “cliffs” that sunset new programs early to keep the price tag down, something Manchin argues artificially hides the true costs since programs will prove too popular not to extend.

As a result, adding a permanent extension of expanded tax credits that make health insurance purchased on the 2010 health care law’s exchanges more affordable has become part of the conversation. That would cost around $220 billion, according to the CBO.

If the insurance subsidies are allowed to expire at the end of the year, the Department of Health and Human Services estimates 3 million out of almost 20 million insured in the individual market would lose coverage and another 9 million would see reductions in their premium tax credits. Democrats in both chambers, including those in tough races, are pressing to avoid that outcome.

There’s additional competition for limited dollars. The Biden administration and top Democrats like Senate Health, Education, Labor and Pensions Chair Patty Murray want to include subsidized child care in any reconciliation package, using high inflation in part to bolster their argument that it will help reduce costs for families.

Murray, D-Wash., and Sen. Tim Kaine, D-Va., have drafted a scaled-back child care proposal estimated to cost $150 billion to $200 billion, but Manchin’s insistence on permanency hurts that push. That’s because individual committees’ pieces can’t increase deficits beyond the 10-year budget window under the Byrd rule, and the HELP committee doesn’t have offsets available to keep that from happening.

Another provision, estimated at $209 billion to make permanent, would increase Medicaid funding for home and community-based care for the elderly and disabled as an alternative to institutional care. Since that proposal is under the Finance Committee’s jurisdiction, it would likely meet the Byrd test because of the “outyear” savings generated by the tax increases and prescription drug provisions, possibly giving it more life than the child care program.

In a May 24 memo to the Senate Democratic caucus, Bob Casey, D-Pa., wrote that without permanent home care funding, “states will need to reverse or significantly scale back the service expansions and workforce improvements they have achieved” through aid provided in last year’s pandemic relief law. On Friday, HHS extended availability of those funds for an extra year, through March 2025.

Closing the health insurance coverage gap in states that did not expand Medicaid, expanding the child tax credit and raising the $10,000 cap on state and local tax deductions also are priorities for Democrats whose votes will be needed.

In the event that Democrats can’t agree on a larger package, another option under discussion is to focus it solely on health care: combining the $300 billion in prescription drug savings with the $220 billion cost of making the health care insurance subsidies permanent.

Time crunch

All of these decisions need to be made in a relatively short period of time.

Democrats are facing a time crunch since the fiscal 2022 reconciliation instructions expire Sept. 30. After that, they'd need to adopt a new budget resolution in order to pass a filibuster-proof package.

Budget veterans say that, practically speaking, Democrats have until the end of July to pass a reconciliation bill. Congress will recess in August, and there are just a few weeks in September after Labor Day to pass must-pass legislation like stopgap funding to avoid a partial government shutdown.

Midterm election politics also risk derailing even a slimmed-down budget bill. Republicans are expected to offer amendments during the budget bill’s “vote-a-rama” in the Senate opposing tax increases, forcing Democrats to take politically difficult votes.

And the CBO handed Republicans a new talking point last month when the budget office estimated that tax revenue over the next 10 years will come in $3.4 trillion higher than the agency projected last year, without a single tax being raised in the intervening period. The agency said it couldn’t explain some of the uptick, but credited faster economic growth, wage increases and higher business profits with delivering much of the windfall.

Peter Cohn contributed to this report.