Battle Over Tax Hikes, Spending Bill Is Heating Up

While Sen. Joe Manchin’s call on Sept. 2 for lawmakers to “pause” the budget reconciliation process likely won’t delay its passage, the West Virginia senator and other Democrats will demand a reconciliation bill that includes pared-down tax measures — setting up weeks of debate.

Greg Valliere, chief U.S. strategist for AGF Investments, told ThinkAdvisor Wednesday in an email that, for instance, the top corporate rate “won’t be 28%,” and the capital gains rate “will not be set at ordinary income.”

President Joe Biden’s tax proposal to eliminate the “stepped-up basis” on property transferred at death, however, ”will stay,” Valliere said.

House Majority Leader Chuck Schumer, D-N.Y., promised during a press conference Wednesday, however, “let me be clear: the [budget] legislation that Democrats are working on will be the largest tax cut for the middle class in a generation.”

The bill will be paid for, Schumer continued, by asking the wealthy and corporations to pay their fair share in taxes.

“Our goal is to have a joint proposal that House and Senate Democrats can all support,” Schumer said. “We’re working well toward that goal. There are some disagreements, but I am pleased with the progress we’re making” in the House, Senate and White House.

Raymond James analysts said in their Tuesday email briefing to “expect a broad range of policy proposals in the days and weeks ahead,” especially applicable to the tax and revenue conversations.

Bob Doll, chief investment officer of Crossmark Investments, said Tuesday that the tax increase “of the all-Democratic reconciliation bill could take the form of a hike in the top individual income tax rate from 37% to 39.6%, the corporate rate from 21% to 25%, and the tax rate on capital gains from 20 to 28%.”

Manchin wrote in an op-ed Thursday for The Wall Street Journal that “Instead of rushing to spend trillions on new government programs and additional stimulus funding, Congress should hit a strategic pause on the budget-reconciliation legislation.”

A pause, Manchin said, “is warranted because it will provide more clarity on the trajectory of the pandemic, and it will allow us to determine whether inflation is transitory or not.”

Andy Friedman, founder and principal of The Washington Update, told ThinkAdvisor Tuesday that he doesn’t think Manchin’s pronouncement “will affect the ultimate passage of the legislation,” and that Manchin “is trying to set the parameters of the upcoming reconciliation debate by signaling that the proposed spending amount is too large.”

Manchin continued in the op-ed that “while some have suggested this reconciliation legislation must be passed now, I believe that making budgetary decisions under artificial political deadlines never leads to good policy or sound decisions. I have always said if I can’t explain it, I can’t vote for it, and I can’t explain why my Democratic colleagues are rushing to spend $3.5 trillion.”

Manchin has privately said he won’t support a spending bill that is more than $1.5 trillion, Axios reported.

Manchin’s limit, Valliere said Wednesday, “enrages progressives in the House, who will not agree to a measly $1.5 trillion. Thus we think that a ‘pox on both your houses’ mood may prevail, with the massive $3.5 trillion social spending bill gridlocked for weeks to come — a source of uncertainty for the markets, which want to see more stimulus as the economic outlook turns cloudy because of Delta.”

In the op-ed, Manchin said he couldn’t back “a $3.5 trillion bill, or anywhere near that level of additional spending, without greater clarity about why Congress chooses to ignore the serious effects inflation and debt have on existing government programs. This is even more important now as the Social Security and Medicare Trustees have sounded the alarm that these life-saving programs will be insolvent and benefits could start to be reduced as soon as 2026 for Medicare and 2033, a year earlier than previously projected, for Social Security.”

Pelosi to Push Reconciliation

House Speaker Nancy Pelosi, D-Calif., thinks she can get a House vote on the infrastructure and budget reconciliation bills by Sept. 27, Valliere said, but ”the Senate version will look much different.”

Friedman added that he doubts that Manchin’s concerns will “affect Pelosi’s decision to go forward with the House vote as she has promised her members.”