The Small Business Legislative Council Alert - Reconciliation Begins to Take Form

• Reconciliation – The Democratic leadership will be attempting to pass this bill under a process known as budget reconciliation. The chief benefit of using the reconciliation process is that reconciliation bills are subject to special rules in the Senate and cannot be filibustered. Therefore, bills brought to the floor under the reconciliation process can pass the Senate with a simple majority. The limits of budget reconciliation are that provisions can only be included in a reconciliation bill if they directly impact federal spending, revenues or the debt limit and provisions cannot increase the deficit outside of the budget window (typically ten years). As you may recall, in 2017, the Republicans used the reconciliation process to pass the Tax Cuts and Jobs Act. The limits of reconciliation are why a number of the provisions in the 2017 legislation, including the 199A deduction for pass through entities and the increased federal estate tax exemption, are set to sunset ten years after their passage.  

The first step in the reconciliation process is the passage of a budget that includes what are known as reconciliation instructions (or reconciliation directives). These instructions direct specific committees to develop legislation that meets certain budgetary parameters. While the reconciliation instructions do not specifically spell out how any particular committee is expected to meet these targets, they are structured with an understanding as to the end goal of the bill. Both the House and Senate adopted the budget resolution with reconciliation instructions in August. Now the rubber will be hitting the road as the committees develop the legislative language. The budget resolution instructed the committees to have the drafts of their sections ready by September 15. However, it is very unlikely that this will be accomplished and there are no strict consequences if it is not. Rather the optimistic goal for the Democratic leadership is to have a package ready by the end of the month (though even that is looking more and more unlikely).

• Close Margins and Party Dynamics – Passing the final package on a party line vote will require the support of every member of the Democratic caucus in the Senate. In the House, the Democrats can only afford a maximum of three defections. These tight numbers have already created tension between the more moderate and progressive members of the Democratic Party. For his part, Senator Joe Manchin (D-WV), who will be a critical vote in the Senate, suggested last week that perhaps Congress should pause its work on the package. Manchin has previously expressed concerns over a bill that would add to the federal deficit and just this week made it clear that he thought that a $3.5 trillion bill is too large and should be trimmed back by about $2 trillion.AICC members must login before registering to receive member rate!

Speaker of the House Nancy Pelosi (D-CA) has promised that she will not bring a bill to a vote in the House that will not be able to pass the Senate. Accordingly, while leadership has emphasized that the efforts to prepare legislative text are still full steam ahead despite Senator Manchin’s statement, ensuring buy in particularly from moderate Democrats in the Senate will be critical to moving anything forward in either chamber. In addition to taxes (discussed below) there are a number of other issues in the proposed package, including expansions to Medicare, where divergent views and objectives will need to be negotiated.

• Bipartisan Infrastructure Bill – On August 11, the Senate passed a $1 trillion bipartisan infrastructure bill. The bill is now awaiting passage in the House where it has become something of a political football. Progressive members of the Democratic caucus have pushed to tie the future of the infrastructure bill to that of the larger spending package – essentially using infrastructure as a bargaining chip to pressure their more moderate colleagues to support the spending package. On the other hand, a number of centrist Democrats have been vocally advocating for an immediate vote on the infrastructure bill. To appease this faction, the August budget resolution included a nonbinding commitment by the House to vote on the infrastructure bill by September 27. Given that the commitment is non-binding, there will be wiggle room as to when a vote on infrastructure is scheduled but pressure to move on the bipartisan infrastructure bill will continue. On the other hand, if the budget negotiations stall, that could also jeopardize the path forward for the infrastructure package with certain progressive members indicating that they might not vote for the infrastructure bill unless it looks like the economic package will pass.

  
  

  · Taxes – As we have previously reported, the tax provisions are likely to be one of the most contentious parts of this bill. The Ways and Means Committee has been releasing its parts of the proposal in tranches and has not yet released the tax provisions. However, discussions and informal debate over the anticipated provisions including increases in the capital gains rates and elimination of the step up in basis for assets going through an estate, among others, has already begun. Additionally, a number of House Democrats from high tax states have indicated that they will not support a package that does not change the limit on the deduction for state and local taxes that was put in place as part of the Tax Cuts and Jobs Act in 2017. [Unfortunately, we predict that if the state and local tax deduction is reinstated look for an elimination of the deduction for taxpayers with income over a certain amount (likely $400,000).] Of course, the SBLC will be monitoring and responding to what the Committee releases.. We anticipate that there will be more to report in this area as the details emerge in the coming weeks. Of course, as we have discussed earlier, the input from Senators Manchin (D-WV) and Sinema (D-AZ) and possibly Senator Warner (D-VA) (who is a very pro-business Democrat) will be critical as to what will ultimately be passed. It has been informally reported that particularly Senators Manchin and Sinema will not vote for a bill that will “hurt small businesses.” As mentioned in earlier Alerts, we believe that the loss of the step-up in basis could be devastating to small businesses, as would increased capital gains rates. We are also concerned that an attempt to eliminate the 199A deduction for taxpayers with income over a certain threshold amount could be folded into this bill inasmuch as this is projected to be a significant revenue raiser. Interestingly rumors continue to circulate that none of the negative estate tax provisions will be included in the bill. Unfortunately, as of now, these are rumors with no written confirmation.

• Debt Limit – Here we go again! – On September 8, Treasury Secretary Janet Yellen warned Congress that options to prevent the federal government from hitting the debt ceiling will likely be exhausted by October. Accordingly, Congress either needs to raise the debt limit or risk a default which could have catastrophic global consequences. Speaker Pelosi has made it clear that the debt ceiling will be addressed separately from the budget reconciliation bill – though there is a chance it could be bundled with a continuing resolution to prevent a government shutdown at the end of September if the budget bill hasn’t been finished yet. However, not only will this be another time sensitive issue on Congress’ already full plate, discussions surrounding the debt ceiling may further add to or highlight the concerns of those members, who like Senator Manchin, are concerned about the price tag of the President’s economic agenda.

With everything involved, the prospects of the Democrats’ efforts to negotiate and pass an omnibus package varies from day to day – with the only clarity being that it resides somewhere between being a lost cause and a sure thing. The negotiations surrounding the budget plus the debt ceiling are expected to be the singular focus of Congress this month and most likely will carry over into the months to come.


UPCOMING EVENTS
Tuesday, September 14, 2021* – SBLC Legislative Meeting, via Zoom

Tuesday, September 14, 2021* – SBLC Board Meeting (to immediately follow Legislative Meeting), via Zoom

Tuesday, November 9, 2021* – SBLC Legislative Meeting, TBD (hopefully in-person)

December 1-3, 2021 – SBLC Retreat, TBD
* Legislative Meetings will be held from 10:00 a.m. to 11:30 a.m. EST if via Zoom and until noon if in person.

Paula Calimafde 
calimafd@paleyrothman.com
301 951-9325

Jessica Summers
 jsummers@paleyrothman.com
 301 968-3402