For chips and budget packages, Democrats face choices

Combining semiconductor industry incentives with a budget reconciliation bill would be difficult

Senate Minority Leader Mitch McConnell, right, listens as and Majority Leader Charles E. Schumer speaks at a room-naming ceremony in the Capitol on June 8. (Tom Williams/CQ Roll Call file photo)
Senate Minority Leader Mitch McConnell, right, listens as and Majority Leader Charles E. Schumer speaks at a room-naming ceremony in the Capitol on June 8. (Tom Williams/CQ Roll Call file photo)
Posted July 6, 2022 at 10:52am

ANALYSIS — Much of official Washington and interested observers outside the Beltway have been attempting to parse Senate Minority Leader Mitch McConnell’s bombshell last Thursday that appeared to drive a stake into bipartisan talks to pass a package of domestic semiconductor manufacturing incentives this summer.

After letting the Kentucky Republican’s comments sink in over the July Fourth holiday, we spoke to some veteran Washington hands about possible pathways for Democratic leaders to salvage both the competitiveness package and a skinnier version of their partisan budget reconciliation package. Getting both done before the August recess became more difficult after McConnell’s threat. However, there is another avenue for Democrats to have their cake and eat it too, if fraught with peril.

First, a little recap of where things stand: As McConnell tweeted Thursday, there won’t be a bipartisan competitiveness package “as long as Democrats are pursuing a partisan reconciliation bill.” He didn’t say anything about what happens after Democrats are done with reconciliation and President Joe Biden has signed it.

However, since clearing reconciliation will likely take much of July, and after the August recess lawmakers will be consumed with funding the government and avoiding a shutdown before going home to campaign, realistically the next opportunity will be during a post-election lame-duck session. That means if Democrats opt to jam through reconciliation in July, it might help out vulnerable incumbents on one score but deprive others in key states of a major talking point on the microchips bill.

So how can Democrats potentially score a double win before the August recess? Below we discuss the advantages and disadvantages of pulling out the $52 billion grant program for chipmakers and lumping it together with a "Build Back Better"-lite reconciliation plan that’s been percolating among Democrats.

The summer jam option

Under this scenario, Democratic leaders decide to jettison most of the 2,000-page plus competition bill that’s currently in conference, at least for now.

They instead draft a semiconductor grants program that’s compliant with the Senate’s Byrd rule limiting extraneous material in budget reconciliation bills, which observers say would pose challenges but isn’t a dealbreaker. There are all manner of mandatory appropriations provisions already in “Build Back Better” as well as the pandemic rescue package enacted last year using reconciliation.

Over $50 billion of the semiconductor financial incentives would be appropriated directly to the Commerce secretary under the current House and Senate versions of the competitiveness bill, which places it under the jurisdiction of the Senate Commerce Committee. That panel has nearly $53 billion left under its reconciliation instruction from the fiscal 2022 budget resolution, or more if it cuts back other areas in the ongoing talks between Democratic leaders and Sen. Joe Manchin III, D-W.Va.

The semiconductor industry is also clamoring for a 25 percent investment tax credit based on legislation authored by Senate Finance Chair Ron Wyden, D-Ore., and Michael D. Crapo, R-Idaho. A scaled-back version that sunsets after 2025 is already in Wyden’s base text of the reconciliation package, though it starts at 5 percent — with bigger benefits if companies meet certain prevailing wage and apprenticeship requirements.

Republicans argue those conditions violate the Byrd rule, which if upheld by the parliamentarian could open the door to a bigger base credit akin to what the industry prefers, though likely at a cost higher than the $10 billion estimated in the Senate Democrats’ reconciliation bill.

With plenty of available offsets, the Finance Committee’s reconciliation instruction could likely accommodate a change along those lines. The original provision is tucked into the measure’s $325 billion clean energy tax package, which is already getting whittled down in some areas, such as Manchin’s concerns about its electric vehicle tax credits.

Other advantages: Manchin already voted for the $52 billion semiconductor package without any offsets, during Senate debate last May. Sticking the program into the budget bill, if they can reach a broader deal before the recess, would give vulnerable Democrats like Sen. Mark Kelly of Arizona — who last week met with executives from companies like Taiwan Semiconductor Manufacturing Co. and Intel Corp. that have pledged investment in his state — a big pre-election win.

And by shelving the current conference negotiations on the competition bill, they’d reserve for themselves an available — and unamendable — legislative vehicle for later in the year. They could use that conference report to try to salvage numerous provisions left out of reconciliation, tax extenders and more.

The lame-duck pivot

There are plenty of reasons Democrats might opt to shelve the chips bill for now in the face of McConnell’s threat. For one thing, potential Byrd rule challenges in reconciliation might prove too high a hurdle.

Another reason is cost: While technically there’s room in the budget, and despite his past support for un-offset chips grants, Manchin has conditioned his support for “Build Back Better”-lite on at least half of the offsets going to deficit reduction, sources have said. That could require Democrats to come up with an extra $100 billion or so in offsets at a time they are already struggling to close a deal.

Additionally, other stakeholders could come down with a case of “what about me” syndrome. In other words, if negotiators open the door to one issue that hasn’t really been part of the reconciliation talks, then others might line up with their hands out. The Senate Small Business Committee has $20 billion left under its reconciliation instruction that could be used for restaurant relief grants, for instance.

And there’s a real chance the big reconciliation deal that key players are working toward doesn’t come together. That means no major clean energy package, and no new suite of tax increases aimed at wealthier households and corporations. Instead, an even skinnier option that’s been discussed would incorporate the prescription drug pricing deal struck last week — if it survives the parliamentarian’s scrubbing — and a permanent extension of expanded health insurance subsidies that are set to lapse after this year.

That would be a major win for Democrats in and of itself: enacting long-sought changes to drug costs that Democrats have billed as an inflation-fighter, and avoiding notices of health insurance rate hikes going out before the midterms. But in all likelihood it wouldn’t have any room for unrelated matters like semiconductor manufacturing incentives.

Finally, that competitiveness bill conference report would still be available after the elections, when lawmakers could use it as a vehicle to carry all other unfinished business.

War and peace

McConnell has likely considered all the permutations of what Democrats might try, observers say. And his tweet Thursday was designed to give Democrats a choice: You can either have the chips bill before the elections, or you can have reconciliation before the elections. But you can’t have both.

One observer familiar with the issue and the players likened McConnell’s move to the famous scene from “The Godfather” in which Michael Corleone sacks Tom Hagen as the family’s trusted adviser, telling Hagen he’s “not a wartime consigliere.” McConnell, in the eyes of this source, is telling Democrats: “I’m either a wartime consigliere or a peacetime consigliere. If you’re doing reconciliation, I’m a wartime consigliere.”

And whether Democrats can thread the needle McConnell has concocted may, once again, come down to Manchin's willingness to be a team player.