Congress Vs. Inflation: The Legislative Tax Showdown

Tax Notes reporter Benjamin Guggenheim discusses the latest tax legislation on Capitol Hill: the recently passed CHIPS and Science Act and the revived reconciliation bill known as the Inflation Reduction Act.

This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: Build Back smaller?

After months of stalled negotiations, little agreement in either chamber of Congress, and a declaration that Build Back Better was dead, last week, Senate Democrats were able to make progress on not one, but two separate bills.

The first, known as the CHIPS and Science Act, was a more bipartisan effort from the Senate that has generally been split down party lines. While the second, known as the Inflation Reduction Act (IRA), is Senate majority leader, Chuck Schumer, D-N.Y., and Senator Joe Manchin’s, D-W.Va., answer to the issues that caused friction in previous iterations of Build Back Better.

But is the Schumer-Manchin deal enough to secure the vote of the other democratic Senator holding out: Arizona’s Kyrsten Sinema (D)? And will it make it to President Biden’s desk?

Tax Notes reporter Benjamin Guggenheim will talk more about this in just a minute.

Benjamin, welcome to the podcast.

Benjamin Guggenheim: Thanks for having me, Dave.

David D. Stewart: Now, before we begin, I should note that this recording was made on August 2. And since it’s about ongoing legislative processes, things may have changed by the time it comes out.

Now we’ve seen a lot of bills starting in one House of Congress and dying in the other, but we just recently got full approval from Congress on a bill. Could you tell us about that one?

Benjamin Guggenheim: Sure. The CHIPS and Science Act, as it is called, passed the Senate on July 27 and the House the day after. It makes a historic investment in American capacity to produce semiconductors, or “chips” as policy makers have been calling them for short.

Although these sound like an obscure technology, these things are really the building blocks for all of our electronic devices and really power our everyday lives from our phones and televisions, to medical devices and cars. They are also critical to our national security infrastructure and are used to make advanced missile systems, satellites, fighter jets, that sort of thing.

This bill would rebuild local American manufacturing capacity to produce these semiconductors. It provides $52 billion in new subsidies to encourage the construction of semiconductor fabrication plants and a 25 percent investment tax credit for semiconductor manufacturing.

The science part of this bill also includes new investments in a technology and innovation directorate at the National Science Foundation, with an eye towards boosting American competitiveness and developing artificial intelligence, robotics, and biotechnology. It also makes a substantial investment in the energy department and regional technology hubs that lawmakers say it would support tech startups in more geographically diverse areas.

David D. Stewart: Why did this bill pass now?

Benjamin Guggenheim: The legislation has been more than two years in the making, as Senator Mark Warner, D-Va., told me, the sausage making for this particular bill has been particularly ugly. While it makes some game changing investments, it has been substantially gutted down from what its main proponents such as Senate Majority Leader Chuck Schumer and Senator Todd Young, R-Ind., originally envisioned for the bill, which is a piece of legislation that would fundamentally change U.S. foreign policy towards China and the Indo-Pacific region.

Generally speaking, within the last two years, the COVID-19 pandemic really exposed vulnerabilities in U.S. supply chains causing a nationwide chips shortage, for one. Lawmakers realize that without domestic production capacity, Americans could be left stranded in a national emergency.

This is especially concerning since the island nation of Taiwan dominates the semiconductor market and if China invaded the island, as it has threatened to do in the past, that would pose a grave threat to U.S. national security.

Within the past three weeks, there’s been a sense among lawmakers that if the United States doesn’t act soon, key semiconductor manufacturers are making their strategic business decisions now and will take their business out of the country where there are better incentives to set up shop.

For instance, Warner has cited that Intel delayed the groundbreaking for a new semiconductor facility in Ohio over concerns that the chips and science bill wouldn’t be passed. That created a sense of urgency for Congress to act before everyone leaves for the August recess, to get this thing done.

David D. Stewart: How did the votes come down? It seemed a more bipartisan vote than usual.

Benjamin Guggenheim: The vote in the Senate was 64-33 with 17 Republicans and 47 Democrats voting for it. And 243-187 in the House, with 24 Republicans joining to approve the legislation. It was really a bipartisan effort.

In the Senate 60 votes, of course, are needed to clear a potential filibuster of the bill. There needed to be at least 10 Republican senators to get the CHIPS and Science Act over the finish line.

That said, the bill was not without its detractors. I mean, Bernie Sanders, I-Vt., repeatedly decried the bill as corporate welfare and said, “It was hypocritical that Congress would give billions of dollars to highly profitable corporations, but couldn’t even pass the critical social policies such as universal childcare and parental leave.”

Republicans such as Chuck Grassley, R-Iowa, and Mike Lee, R-Utah, in a rare case of agreement with the democratic socialist from Vermont, also called the bill “fiscally irresponsible.”

Its passage also notably relied on political sleight-of-hand by Schumer, which left Republicans pretty upset afterwards.

David D. Stewart: What sort of sleight-of-hand?

Benjamin Guggenheim: Well, as I mentioned earlier, Democrats needed the support of at least 10 Republicans to get this bill into law. However, that was at one point jeopardized by Democrats’ partisan negotiations over their reconciliation deal.

Minority Leader Mitch McConnell, R-Ky., told them in June that no Republicans would support the semiconductor legislation so long as Democrats kept working on a partisan bill that would include raising taxes and massive climate spending. That reconciliation bill had seemed dead for a while leading Republicans to drop their ultimatum and ultimately help Democrats pass the CHIPS and Science Act.

However, near hours after that vote happened, Manchin and Schumer out of nowhere announced the revived reconciliation bill with 725 pages of text. That left many Republicans feeling like they had been effectively duped.

David D. Stewart: Now, before we get to what is in the Schumer-Manchin bill, why don’t we take a step back and talk a bit about the Build Back Better Act, how it evolved, and reports of its death?

Benjamin Guggenheim: Sure. The original Build Back Better framework was a massive social policy agenda that in the summer of 2021 looked to have a price tag of around $3.5 trillion. It comprised all the economic ambitions that Biden laid out on the campaign trail and subsequently described in detail during the spring of 2021, from proposals that would provide free preschool to every three and four year old in America, expand high quality childcare for American families, lower the cost of Medicare, invest in affordable housing, and set aside a record shattering $555 billion to transition the economy into clean energy and address the climate crisis.

Biden and Democrat leadership intended to pass these proposals into law through a process called “reconciliation,” which involves bills that essentially solely affects the federal budget and only requires a majority of those present to pass. With every Senator in attendance, that would mean 50 Democrat votes plus the tie breaking vote of Vice President Kamala Harris.

The ambitions of that agenda were ultimately shrunken down over the objections of the two most centrist Democrats in the Senate: Kyrsten Sinema of Arizona and Joe Manchin of West Virginia.

The House ended up passing a roughly $2 trillion bill in November 2021 that included the climate spending and much of the social policy spending, in addition to elements that were not in the original framework, such as four weeks of comprehensive national paid parental leave.

The bill would be paid for by a 15 percent corporate minimum tax, new tax surcharges on Americans making over $10 million and $25 million annually, and an application of net investment income tax to pass-through businesses among other revenue raising provisions. It also included an $80 billion investment in the IRS, which was estimated to return $207 billion in revenue for a net gain of $127 billion.

While the bill’s passage through the House represented an enormous accomplishment for Democrats, they did know in both the House and the Senate that they would face huge challenges in trying to get Sinema and Manchin to sign off on it, as they had both objected to the price tag. Manchin, in particular, said the maximum he’d support was $1.5 trillion. In particular, it was Manchin who ended up being the last senator Schumer had to get on board.

In December 2021 Manchin made this surprise appearance on Fox News to announce that he could no longer support the social policy package. He said that he had done everything he could, but he simply couldn’t get to an agreement on this bill. That came as a shock to many in the Democratic Caucus and seemed to sound the death knell for the Build Back Better act for a while.

A few months down the road negotiations did, in fact, start again on a package that was narrowly scaled back to focus on cutting the deficit, lowering prescription drug costs, and tackling climate change.

But Manchin appeared to derail those negotiations yet again, purportedly telling Schumer on July 14 that he cannot support the climate and tax elements until record breaking inflation, at the time 9.1 percent for the month of June, started showing signs of cooling off. That was a huge blow to Democrats, many of whom said at that point they lost trust in Manchin as a good faith negotiator. It seemed like the climate spending and new tax proposals were dead for good.

However, in yet another U-turn in this roller coaster, Manchin released a statement on July 27 that was completely unanticipated. He had come to an agreement with Schumer on an IRA of 2022, what was effectively a revived reconciliation bill.

David D. Stewart: What is in this new bill?

Benjamin Guggenheim: We’re looking at $369 billion in new spending to address the climate crisis, in addition to $64 billion to extend Affordable Care Act premium tax subsidies that were created during the pandemic under the American Rescue Plan Act to provide relief to people enrolled in Medicare and an $80 billion investment in the IRS.

To pay for the bill we have $313 billion coming from a new 15 percent corporate minimum book tax, $288 billion from price caps the government is putting on prescription drugs under the Medicare program, that $124 billion from increased IRS enforcement, and $14 billion from raising taxes on carried interests on investment earned by managers in industries such as venture capital and private equity.

More than $300 billion of the remainder of that revenue would go towards cutting the deficit, which was a key requirement for Manchin, who has said repeatedly during these talks that he wants to scrub everything from the bill that could exacerbate inflation and cutting the deficit would go a ways towards cooling down inflation.

David D. Stewart: We’ve gone from Build Back Better to the IRA. What sort of things have been left out?

Benjamin Guggenheim: Pretty much everything else. I mean, the bill leaves on the table huge priorities for several Democrats, including universal pre-k, home care for the elderly and the disabled, and higher quality childcare, the expanded Child Tax Credit, and a number of new taxes that were at some point floated for reconciliation, such as the new net investment income tax, a so-called Billionaires Tax, a tax on stock buybacks among many others.

David D. Stewart: What sort of reactions are we seeing from Congress on this agreement?

Benjamin Guggenheim: For many Democrats utter jubilation. The vast majority of Democrats were kept in the dark about secret negotiations between Schumer and Manchin and thought all proposals essentially, outside of a slimmed-down health package that included prescription drugs and Affordable Care Act subsidies, were dead.

Especially climate champions, such as Brian Schatz, D-Hawaii, and Sheldon Whitehouse, D-R.I., were thrilled that the country would finally make this monumental game changing progress in fighting climate change with the IRA estimated to reduce carbon emissions by 40 percent by 2030. That’s a huge deal.

Some others I spoke with like Elizabeth Warren, D-Mass., and Ron Wyden, D-Ore., the chairman of the Senate Finance Committee, said there were definitely priorities that were left out that they would’ve liked to see in there. But they acknowledged that this package is what they could get at the end of the day with 50 votes. They said after a long slog of negotiations, they are ready to celebrate and get this thing done.

For Republicans of course, this is a huge setback. They hate the idea of providing more funding to the IRS and raising taxes in any way, citing the record breaking inflation we’ve seen and continue to see. Minority Leader Mitch McConnell called the bill “an absolute monstrosity” and said Republicans would try to fight it very aggressively.

David D. Stewart: What have you heard from the tax community about the tax provisions of the bill?

Benjamin Guggenheim: Well, on one hand, many are happy to see the new IRS funding. The IRS, of course, experienced substantial processing backlogs at the start of the pandemic that impeded tax professionals from doing their job and prevented taxpayers from receiving much needed tax refunds and tax credits in time. People also had difficulty getting IRS customer service on the line, with employees only answering one in 10 phone calls during the 2022 filing season. The $80 billion in new funding would go a ways towards addressing those problems.

The 15 percent corporate minimum tax, according to conversations I’ve had with tax professionals early on, is a different matter. Some progressive tax analysts say that the new tax would get the most profitable companies making over one billion to pay their fair share of taxes, since many of them use accounting mechanisms to pay less federal income tax than average working Americans.

However many practitioners I’ve spoken with have said the corporate minimum tax would pose enormous challenges and would make the tax code far more complex. They say it would reduce effective tax incentives, certain credits, and do so in an inefficient way on the back end.

They also say it would potentially encourage companies to manipulate their financial statements for the purposes of paying less federal income tax. The purpose, of course, of financial statements is to provide information as transparently and objectively as possible to shareholders and investors.

So, if the corporate minimum tax did create perverse incentives to change those statements, that of course would not be a great thing.

David D. Stewart: Well, this has been fascinating and it’s definitely going to be interesting to watch. Benjamin, thank you for being here.

Benjamin Guggenheim: Thanks so much for having me.