Senate Democrats make progress with reconciliation package

For the first time in months, Senate Democrats appear to be making meaningful progress on a potential budget reconciliation package. The scaled-down proposal is expected to include the lowering of prescription drug costs, an extension of Affordable Care Act (ACA) subsidies and funding for climate change initiatives. New spending is likely to be paid for by increases in tax revenue. There is currently an agreement among Democrats to significantly expand the types of passthrough entity income subject to the net investment income tax (NIIT). Negotiations are ongoing, with numerous items yet to be addressed. Our expectation is additional tax provisions will be included in a final agreement.

Sen. Manchin in the driver’s seat

In late 2021, President Joe Biden’s Build Back Better (BBB) agenda came to a standstill when Sen. Joe Manchin (D-W. Va.) announced he would no longer continue to negotiate “this mammoth piece of legislation.” Now, as Democrats revisit the possibility of a smaller reconciliation agreement, Manchin is actively collaborating with Senate Majority Leader Chuck Schumer (D-N.Y.) on a smaller compromise package.

These negotiations have been occurring in piecemeal fashion over the last few weeks. Last week, Democrats finalized a Medicare prescription drug pricing proposal and, as noted above, have agreed upon a framework for the expansion of the NIIT.

While all eyes remain on Manchin, Sen. Kyrsten Sinema (D-Ariz.), a key architect of the final tax provisions included in the 2021 BBB negotiations, is also worth watching. While Sinema hasn’t commented on the latest reconciliation discussions, her support will be essential to the passage of any bill. Specifically, Sinema has consistently been a critic of increasing ordinary income or capital gains tax rates.

Package structure

What will ultimately be included in any legislation brought to the Senate floor remains unclear; however, it will assuredly be smaller than the sweeping 2021 BBB package. The new package is likely to come in around $1 trillion, per current forecasts. In addition to requiring a smaller scope, Manchin has demanded that 50% of revenue raised by the bill be applied to budget deficit reduction, further constraining the capacity for spending provisions.