Reconciliation on Track in Congress but Size Could Shrink
September 13, 2021
The House held a number of committee sessions last week to move the multi-trillion dollar reconciliation package that is President Joe Biden’s agenda to expand the social and economic safety net.
House Democrats will hold committee votes this week on how to pay for the massive spending package. On Sunday, a list of tax increases to pay for the spending was released by the House Ways and Means Committee. The proposed increases are not as large as Biden proposed and are subject to change. A full list can be found on this document which includes:
- Top capital gains rate increases to 25% from 20%
- Top corporate tax rate rises to 26.5% from 21%
- Increase carried-interest holding period to five years from three
- A 3% surtax on individuals who earn more than $5 million
- Cuts some estate-tax discounts, with no effect on family farms and businesses
- Cuts tax rate for businesses with income of less than $400,000 to 18%
- Cryptocurrency subject to additional reporting
The increased revenue from high-income individuals is expected to be around $1 trillion while corporate tax increases are expected to net $900 billion. Senate Democrats suggested a 2% tax on stock buy-backs and Senate Finance Committee Chair Ron Wyden (D-OR) floated a list separate from the House Ways and Means Committee of possible tax increases. Wyden also proposed to raise $270 billion by tightening tax reporting requirements around business partnerships, which he says allow “the wealthiest individuals and most profitable corporations to decide when, and whether, to pay taxes at all.” More specifics on which taxes would increase under the reconciliation bill will be available this week.
Capital gains increases and ending the step-up-in-basis are being actively debated among Democratic tax writers. One in three Democrats on the Ways and Means committee are said to want a capital gains rate potentially around 28%, according Bloomberg sources who requested anonymity. Biden’s plan to raise the capital gains rate on those earning above $1 million to 39.6% from 20% would raise about $322.5 billion over a decade. Some Democrats on the panel also balked at Biden’s plan to end “step-up-in-basis,” which allows appreciated assets to be passed to heirs tax-free, over concerns it would hurt family farms and small businesses. A Senate spokesperson insisted, “Step-up is not off the table. And nothing is settled on rates.”
Specific spending provisions approved by the House Ways and Means Committee last week include:
- Expanding retirement savings by requiring employers to automatically enroll employees in a retirement plan (unless they opt-out), and deduct 6% of wages from paychecks, rises to 10% over time and set target-date funds as the default investment. The committee approved by a 22-20 vote.
- Paid family leave for U.S. workers, which was approved by a 24-19 committee vote. Of note, centrist Rep. Stephanie Murphy (D-FL) broke party lines after voicing frustrations with the “rushed” process. The debate also raised questions about whether Social Security Administration or the Treasury Department could successfully operate a paid family and medical leave program.
- Extend through 2025 the recently-expanded child tax credit for children under six of $3,600, and $3,000 for older children. Some lawmakers pushed to make the expansion permanent, but doing so would be expensive and could crowd out other lawmaker priorities vying for a place in the budget reconciliation package.
- Extend energy credits for renewable energy.
- Allow the government to negotiate drug prices
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- $25 billion in additional pandemic relief through the Small Business Administration, approved by a separate committee.
Size of Reconciliation
Also still unresolved is the total size of the program. While $3.5 Trillion has been the assumption, Senator Joe Manchin (D-WV) published an op-ed calling for Democrats to slow down and reduce the size of the package to something closer to $1.5 or $2 Trillion. Manchin reiterated this lower number in a CNN interview. The 50-50 Senate gives leverage to any Senator who is willing to insert themselves into the process. But Democratic leaders expect Manchin to eventually back down, according to The Hill.
SALT Deduction
Also unresolved is the extent to which Democrats will address SALT or the State and Local Tax deduction limit. A full SALT-limit repeal is estimated to cost $380 billion. More than 30 lawmakers say SALT is critical to their vote for the overall reconciliation and are pushing for a full repeal of the SALT deduction limits, which they say unfairly target high-tax states like New York and New Jersey and encourages people to move to low-tax states like Florida. However, progressives view that provision as a giveaway to the wealthy.
Housing
Also this week, the House Financial Services Committee will consider legislation by Maxine Waters (D-CA) to spend an additional $300 billion on housing and to expedite the distribution of federal rental assistance that would impose new eviction restrictions on landlords. A hearing on this legislation was held Friday and is discussed in further detail below.
Process to Date
Following the last Policy and Capital Markets Briefing on July 26, on August 9, the Senate passed a $1 trillion bipartisan infrastructure bill by a vote of 69-30 and passed the Democrats’ $3.5 trillion budget resolution by a vote of 50-49 (shortly before 4:00a.m.) on August 11.
Following these monumental votes, attention turned towards the House of Representatives which has a (non-binding) deadline of September 15 to draft the text of the reconciliation bill to expand the economic and social safety net. After a dozen committees vote on their parts of the bill, the package is sent to the House Budget Committee, which assembles the reconciliation bill. The House Rules Committee then votes on the bill before it goes to the House floor for a vote by the end of September. This ambitious timetable may slip as there is not perfect unanimity among progressive and centrist Democrats over the size and scope of the bill.