The Fall Classic – Congress Confronts Tax Changes and the Debt Ceiling

The leaves are turning, temperatures dipping, and pumpkins filling front porches. Fall is in the air. And yes, the Fall Classic is just around the corner. Could it be the year for the Braves, Astros, Red Sox, or someone else? Another fall classic of sorts is underway in Washington, too. Congress is undertaking its traditional pastime of harvesting new tax laws. Let’s see where things stand now in the congressional ballpark.

We’ve followed the infrastructure bill and reconciliation legislation since the middle of summer (see past articles here and here). While separate bills, their progress has been indirectly linked by congressional leaders.

In August, the infrastructure bill passed the Senate – now, it awaits action in the House. A moderate group of Democrats wanted to see the infrastructure bill voted on promptly, not worrying about the outcome of the reconciliation package. While Speaker Pelosi told the moderates in August that there would be a House vote on the infrastructure bill on September 27, 2021, Pelosi delayed the vote to September 30, 2021. That date too came and went with no vote on the infrastructure bill.

What is holding up the infrastructure bill? Another Democratic faction in Congress, the progressive block, vows to vote against the infrastructure bill unless the reconciliation package first passes in the Senate. Since the reconciliation package has work to be done, this progressive group threatens it will vote against the infrastructure bill in the House. No date has been announced yet as to when the infrastructure bill will be voted on in the House.

Next up, the reconciliation package. The bill has advanced in the House Ways & Means Committee and House Budget Committee. It awaits final changes in the House Rules Committee, where additional changes to the bill are expected (including tax changes) before a vote of the entire House. But, it is uncertain when this will be. There are some members in Congress questioning the overall size of this reconciliation bill, and may seek to scale it back. The Senate has not taken direct action on the reconciliation package, but several key Senators – Manchin (West Virginia) and Sinema (Arizona) – have reservations about the package. They would like to downsize the reconciliation package; however, this may run into resistance with progressives in Congress.

While there seems to be many hurdles with this reconciliation package, this is to be expected, especially with a slim three-vote margin in the House and no margin in the Senate.

Here are several observations:

• Embarking on reconciliation in Congress involves a significant investment of political capital. This is even more the case this year with a package this large and far-reaching.
• While it seems there are obstacles to overcome with the reconciliation bill, keep in mind that congressional leaders control: (1) what’s in the final bill; (2) what the rules are for any votes; and (3) when to conduct the votes.
• Leadership can revise the bill and delay the process to find the lowest common denominator so they can push the bill through the final innings. Note that when a reconciliation bill begins its legislative game, congressional leaders plan to win the game and pass the bill at some point. Defeat is not viewed as an option.
• Thus, while many curve balls remain in delivering this bill, Congress will look for a way to eventually get there. What is uncertain is: (1) what will be included (and excluded) in the final bill; and (2) when it will be completed.
• For the reconciliation package to pass, the $3.5+ trillion limit is likely to be pared back, perhaps in the $1.5 to $2 trillion range with other changes made as well. The 10-year period mapped out for the reconciliation package could also be trimmed back to, say, five to six years for various items.
• As far as a timetable for the reconciliation package, it will likely take all of October and perhaps into November for the provisions to be ironed out and any dissenters appeased.
• With the reconciliation bill, this game is far from over.

Debt Ceiling. The debt ceiling is an issue that needs to be dealt with periodically by Congress. The debt ceiling was reached July 31, 2021, and the Treasury Department has taken extraordinary measures over the past two months to keep the country afloat. However, Treasury Secretary Yellen stated recently that the country would default on its obligations around October 18, 2021 without raising the debt ceiling. Republicans announced this summer that since the Democrats are moving the reconciliation package without the Republicans being part of the process, the Republicans would not assist in raising the debt ceiling (which requires 60 votes in the Senate). The Republicans asserted that since Democrats control Congress and the White House, they can pass an increase in the debt ceiling without help from the Republicans. This legislation could include passing another reconciliation bill.

Nonetheless, the Democrats have stated they have no intention to use another reconciliation bill to pass an increase in the debt ceiling. They want the Republicans to join in this effort.

The debt ceiling dispute took center stage in Congress last week and muffled the discussion on the reconciliation package. This was a high stakes political showdown. The stalemate broke on October 6, 2021 when Republican and Democratic leaders agreed to a short-term extension to December 3, 2021 for raising the debt ceiling. The full Senate passed this short-term extension, and the House followed suit on October 12, 2021. Democrats will now double their efforts at completing the reconciliation package and infrastructure bill, while also working on raising the debt ceiling again.

The focus is likely to flip over now to the reconciliation bill, as the drama of this fall classic unfolds. Stay tuned, and please contact your Sikich advisor with any questions.

Resources: Congressional Research Service Tax Provisions in the Build Back Better Act

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