What is in this massive piece of legislation? How will Congress pay for it? Can they possibly get it across the finish line? Let’s explore these questions and more:
What’s in it?
The Build Back Better Act (BBBA) focuses on three areas: (1) Lowering costs for childcare, higher education, prescription prices, healthcare, and housing. (2) Cutting taxes for families with children and workers without children. (3) Creating jobs in clean energy, workforce training, and investments in teachers and schools.
How does Congress pay for it?
Congress has introduced several measures to pay for this massive program. They include corporate and international tax reform, tax increases for certain high income individuals, modifications to retirement plans and mega IRAs,1 funding the Internal Revenue Service (IRS) to improve taxpayer compliance, raising taxes on tobacco and certain nicotine products, and lowering the estate and gift tax exemption.
How might it pass?
Passing the BBBA will be a herculean task – but only for the Democrats. This bill will be strictly partisan. Therefore, it will need to rely on reconciliation instructions included in the 2022 budget resolution to pass. Reconciliation allows the Senate to pass a bill with a simple majority of 51, instead of the filibuster number of 60 senators.
Democratic leaders, Senate Majority Leader Schumer and House Speaker Pelosi, must keep their caucuses together in order to pass the BBBA. The Senate cannot afford to lose a single senator and the House can only lose three votes. On the outside, the Democratic caucus looks unified. Throughout the year it has voted together to get their bills through. However, negotiating the BBBA will show the strong rifts between the moderate and progressive members of the caucus and the struggles between the House and Senate Democrats. In fact, the rifts and struggles are already showing.
The first challenge is the promise House Speaker Pelosi made to the progressives to put both the BBBA bill and the bipartisan infrastructure bill up for a vote at the same time. The Senate passed the Bipartisan Infrastructure Framework (BIF) back in June. Therefore, it has been ready for a House vote for several months now. Pelosi made this promise to the progressives as they feared that if the House voted for a stand-alone $1 trillion BIF, momentum would fizzle to pass the comprehensive BBBA. As the BIF doesn’t come close to meeting their policy agenda, progressives probably have good reason to worry. They know the cost of the BBBA is too rich for many moderates – especially those who live in swing or red districts and are up for reelection in 2022.
The moderate Democrats have also been making demands. Back in July, before they went on their August recess, a group of about a dozen moderates demanded that Speaker Pelosi bring the BIF to the House floor for a vote or they would not vote for the budget resolution that had the reconciliation instructions for the BBBA bill. Without passing the budget resolution, the committees could not move forward with writing their portions of the reconciliation package. The Speaker knew she could not bring the BIF forward as it wouldn’t pass without the progressives – and she couldn’t risk leaving DC for six weeks with the budget resolution in limbo. Therefore, Pelosi made a compromise with the moderates. She instructed the Rules Committee to put a September 27 deadline on writing the infrastructure plan. The moderates agreed to this action and then voted to move the budget resolution forward.
What if the House misses the deadline?
Meeting this September 27 deadline will be very tough. Remember, the moderates are apprehensive about the size of the BBBA bill. The House is moving forward with the $3.5 trillion bill, but moderate Democrats in the Senate are pushing back. They want a bill somewhere around $1.5 trillion. Therefore, House moderates do not want to vote on the House version of the BBBA at $3.5 trillion – especially if half of it lands on the Senate cutting room floor. House members face reelection next year and will be hard pressed by their constituents as to why they voted for such a hefty piece of legislation. Overall, House moderates want to know exactly what the Senate is going to pass and the Senate is still haggling over the bill.
The problem both sides of Congress have is if they were to cut the bill in half, what stays and what goes? Do you cherry pick? Do you (can you) means-test certain aspects of the bill? Cut everything equally? There are also policy disagreements between the moderates and progressives on issues like extending healthcare and child benefits, prescription price reform, and how to raise taxes. Also, the Senate progressives are proclaiming in the media that they will not accept anything less than the $3.5 trillion bill. Meanwhile, it is almost certain that a handful of Senate moderates will not vote for a $3.5 trillion bill.
Negotiations between the House and Senate and moderates and progressives will have to claw their way to a number, and likely do a lot of reverse engineering to fund the proposed programs. Failing to pass the second infrastructure package is not an option for Democrats: If they fail, the fallout will be massive and reflected in the 2022 midterm elections. History has shown that the party not in power takes back the House, the Senate or both in the midterms. This means President Biden and the Democrats only have this year and next to push their agenda through. The leaders of the House, the Senate, and the White House will have to work magic to get the two chambers and the two sides to agree on a final bill.
If September 27 comes and goes without a House vote, both bills (BBBA and BIF) will get pushed out to October, November or maybe even December. Neither Senate Majority Leader Schumer nor House Speaker Pelosi will put either bill out without a united caucus.
Looming budget and debt ceiling issues
In addition to passing both infrastructure bills, Congress needs to pass the 2022 budget and raise the debt ceiling, which expired on July 31, 2021. Both of these issues are also herculean tasks. The US budget runs out on September 30, 2021. Congress will be forced to pass a continuing resolution (CR) on the current budget to keep the government funded and avoid a government shutdown. Since August 1, 2021 the Treasury has been utilizing “extraordinary measures” by using cash reserves to fund our country’s debt obligations. Treasury Secretary Janet Yellen has been very clear that the extraordinary measures will run out around mid-to-late October.
What options does Congress have to raise the debt ceiling?
The easiest way would be to pass a bipartisan bill, but that is not going to happen. The Republicans have been very clear that they would not vote to raise the debt ceiling. The Democrats could take it to the floor of the Senate and pass it with just the 50 Democrats. However, if the Republicans filibuster – and someone probably will – 60 votes will then be needed. The nuclear option is to put the debt ceiling in with the short-term budget funding resolution. This option is what the Democratic leadership chose to do as their opening salvo. They introduced a resolution to keep the government funded until December and to suspend the debt ceiling until December 2022. Suspending the debt ceiling would allow the Treasury to continue borrowing to meet US debt obligations. Of course, Congress will not get one Republican vote for this approach. It will be filibustered in the Senate and it will fail.
As a result, the Democrats will most likely blame the Republicans for allowing the government to shut down and taking the country to the brink of defaulting on our debt. Also, they will probably claim that the Republicans have an obligation to keep the government funded because they voted for the $908 billion Covid-19 relief bill in 2020. For their rebuttal, Republicans will continue to argue that we need the debt ceiling raised not because of the $908 billion that was borrowed in 2020 (which has already been paid) but because of the $3.5 trillion social spending plan the Democrats are trying to jam through.
Why take the risk?
The Democrats think the Republicans will cave. I personally would not take that bet. The Republicans could possibly come to the table and negotiate the debt ceiling if the Democrats sideline the BBBA until 2022. But I wouldn’t take that bet, either. The Democrats need the bill to stay alive, otherwise momentum could fade – and moderate Democrats up for reelection could chicken out.
Once the vote fails, the government shuts down on October 1. After a week or so of political posturing, the Democrats will most likely strip out the debt ceiling suspension and put out a “clean” CR with some funding for disaster relief in the south and west and to resettle Afghan refugees. The Democrats could pick up a few Republican votes, including the two Republicans from Louisiana because of the disaster funding. In the end, this is more about political gamesmanship than economics or policy.
The most likely option for dealing with the debt ceiling is for Congress to write a shell budget resolution. Why? Because they can use another set of reconciliation instructions to raise the debt ceiling. Congress is allowed to use reconciliation for three reasons: spending, revenues, and the debt ceiling – all related to money that affects the budget. Using a shell budget resolution to pass the debt ceiling only involves a few committees and is cleaner than the complex $3.5 trillion infrastructure package. They can pass it quickly, and hopefully save our country’s credit rating and avoid economic fallout.
It all comes down to midterm elections
Before the end of 2021, Democratic members of Congress are attempting to pass two infrastructure bills, pass the 2022 budget to avoid a government shutdown, and raise the debt ceiling to keep the US from defaulting on its debts. Each of these issues would be enough to keep Congress busy in a normal year. Trying to finish all three items is certainly a herculean task. Much is on the line. The final results will impact the 2022 midterm elections. Americans will take to the polls to render their verdict on how they think the politicians and the parties handled these massive measures.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed may change based on market and other conditions. Natixis Investment Managers does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions. Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.