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Battle Over Tax Hikes, Spending Bill Is Heating Up

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What You Need to Know

  • Sen. Joe Manchin, a moderate Democrat, has reportedly said he would support only $1.5 trillion in spending, enraging House progressives, Greg Valliere says.
  • Nancy Pelosi thinks she can get a House vote on the infrastructure and budget reconciliation bills by Sept. 27.
  • Expect a broad range of policy proposals in the days and weeks ahead, Raymond James analysts say.

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.”

Senate Majority Leader Chuck Schumer, D-N.Y., has said he wants a reconciliation bill done by Sept. 15.

President Joe Biden’s $3.5 trillion spending package “is clearly not credibly paid for, so Democrats are looking at Plan B — even more new taxes,” Valliere said Tuesday.

Bloomberg and others reported over the weekend that Democrats “are seeking a wide range of controversial taxes that would be a nightmare for the financial services industry — a tax on stock buybacks, curbs on executive compensation, a dramatic hike in Biden’s capital gains tax, plus a potential carbon tax,” Valliere said.

Moderate Manchin hasn’t weighed in on this “trial balloon,” Valliere continued, “but we’d guess he would be opposed, along with Sen. Kyrsten Sinema,” the Arizona Democrat. “If tax hikes are pared back, the second infrastructure bill would be in trouble because there’s no way to pay for it.”

Adding Tension

Raymond James analysts said in their Tuesday email briefing that Manchin’s call for a pause on reconciliation legislation is “largely consistent with his political position on the total level of spending, which will accelerate efforts by lawmakers to scale back the overall package. While [Manchin’s] more public position may add tension to negotiations and delay the timeline, effectively we see the topline moving down to match expected revenue along the lines of the desire of lawmakers to have a ‘fully paid for’ bill.”

What does this mean for tax increases? “Expect a broad range of policy proposals in the days and weeks ahead, consistent with our view that early negotiating dynamics will present a ‘menu’ of options rather than the expected path forward,” Raymond James analysts said.

“This is especially applicable to the tax and revenue conversations, with political dynamics broadly supporting less expansive impact, however negotiations remain highly fluid.”

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said Tuesday in a statement that “in order to meet the President’s goal of fully paying for his legislative priorities, it is important lawmakers not take reasonable pay-fors off the table. Rather, they should work to find more offsets and scale back the reconciliation package as necessary to avoid adding to the already high national debt.”

MacGuineas noted the opposition to “ideas to increase corporate taxes, lower prescription drug costs, close the step-up basis loophole that allows people to avoid capital gains taxes, tax carbon emissions, and even improve tax compliance. And the political pledge not to increase taxes on any family making less than $400,000 per year stands squarely in the way of a number of sensible policies.”

To make matters worse, MacGuineas continued, “some politicians are actually talking about cutting taxes for very high earners by repealing the cap on the state and local tax deduction.

“Politically, it is much easier to say what things you won’t do when it comes to pay-fors than what things you will — but with a debt as large as ours, we just don’t have that luxury. If politicians can’t agree to $3.5 trillion in offsets, they certainly shouldn’t enact $3.5 trillion of spending and tax breaks.”

The right approach, according to MacGuineas: “Develop a plan to gradually improve our debt situation before enacting new spending or tax cuts.”

Auto-IRA Bill

Meanwhile, House Ways and Means Committee Chairman Richard Neal, D-Mass., got the ball rolling Tuesday by announcing that his committee will consider on Thursday and Friday his auto-IRA bill as well as making the Saver’s Credit refundable — legislative proposals under the budget reconciliation instructions.

Neal’s bill requires employers without employer-sponsored retirement plans to automatically enroll their employees in IRAs or 401(k)-type plans.

A spokesperson for Neal’s office told ThinkAdvisor on Tuesday in an email that there have been some refinements to Neal’s auto-IRA plan. “For example, in this version, the auto IRA is the floor but employers also may satisfy the requirements of the proposal with an auto 401(k),” the spokesperson said.

The Saver’s Credit would be refundable under Neal’s plan so that those without any income tax liability would be eligible to receive the benefit in the form of a contribution to their retirement account.