J. Scott Applewhite/AP Photo
Sen. Joe Manchin (D-WV) is met by reporters outside the hearing room where he chairs the Senate Committee on Energy and Natural Resources, at the Capitol in Washington, July 21, 2022.
Five years ago today, the late John McCain strode onto the Senate floor and delivered a thumbs-down to the Republican repeal of Obamacare, a white whale they had been pursuing since well before obtaining a governing trifecta. The legislative agenda in the Trump years narrowed to a historically unpopular tax cut and deregulation.
One year ago today, Chuck Schumer and Joe Manchin signed a secret deal to deliver a $1.5 trillion reconciliation bill that would include “no additional handouts or transfer payments” on any health or family care policies, and investments in “fuel neutral” energy, with carbon-capture technologies mandated for fossil fuel infrastructure, a zero-emission vehicle credit that included hydrogen fuel cell cars, with parity for both renewable and fossil fuel tax credits. Among the measures to help pay for it were a corporate minimum tax of 15 percent and an end to the carried interest loophole.
For 364 days, Manchin went back and forth on pretty much all of these provisions, rejecting the bill outright, then crawling back to the table, going into bargaining with Schumer, leaving that bargaining, and coming back. And one year to the day later, we have a bill called the Inflation Reduction Act of 2022, which includes everything in that previous paragraph and a lot more on energy and climate, plus the ACA insurance exchange subsidies and prescription drug price reforms we knew about. But overall, the bill spends $433 billion, a little over $1 trillion less than that original topline. Much of its revenue goes to deficit reduction.
There is no such thing as a genuine surprise in Washington—usually. This was a genuine surprise. I had been talking to people this week who would or should have known that talks between Manchin and Schumer, thought to be moribund, were taking place. The closest I got to foreknowledge was one source saying that they just didn’t believe it. An army of reporters, lobbyists, and hangers-on didn’t know this was happening.
The reveal was made a few hours after the Senate cleared the CHIPS and Science Act, a bill that offers semiconductor manufacturers subsidies for reshoring and boosts science programs. Mitch McConnell had threatened that bill, something highly cherished by Schumer, if Democrats persisted with a party-line bill that raised taxes and boosted clean energy. When Manchin walked away from negotiations with Schumer just two weeks ago over those two items, McConnell let his guard down and allowed a vote on CHIPS, which was popular with many of his Republican colleagues. Schumer and Manchin waited until that cleared the Senate before announcing a reconciliation deal with taxes and climate back in.
If you told me a cosmic ray hit Washington and flipped everyone’s brains, giving Schumer the Machiavellian cunning of a Republican and giving McConnell the guileless approach of a Democrat, that might be a more plausible explanation for this display than the truth. It’s a near-legendary turn of events that infuriated McConnell so much he took hostage a bill to give dying veterans exposed to toxic burn pits medical care, something Republicans passed overwhelmingly just a few weeks ago (it needed a technical fix). The combination of the revival of the Biden agenda and red-faced Republicans making terrible choices on highly popular legislation is one for the ages.
There is no such thing as a genuine surprise in Washington—usually.
We’ll get to the details, which are critical, and the lingering opportunities for failure, which are real, in a minute. But in the interest of full disclosure, I personally thought it was no longer worth bothering with Manchin anymore after he walked away yet again and offered only the ACA/drug pricing remnants as what he could accept. Time and again in this interminable process, Manchin was asked what he could accept, by Schumer, by Biden, and he’d just change his mind, from day to day and week to week. It was impossible to get a straight answer, or one that stuck for more than a day or so. And so I thought it was time to cut bait.
But Manchin did not. According to his interview with Politico last night, it took him all of four days after killing the deal to ask Schumer to restart it. What happened in that time? Manchin was clearly bothered by being blamed, by everyone, as the man who let the Biden agenda die and the planet burn. The very next day, he went on local radio and insisted he hadn’t ended anything, that he just wanted to see the July inflation numbers (which won’t be out for a couple more weeks). He was attacked, in op-eds that detailed “What Joe Manchin Cost Us” (written by a lead technical adviser to the Democrats on climate policy), in news stories that made very clear who was responsible. Green groups and particularly blue/green labor/environment groups were insistent. Larry Summers told him in a meeting that his rationale that climate investment and tax increases were inflationary was nonsense.
Now, I was calling out Manchin’s disingenuousness on inflation and public investment as far back as last September. But Joe Manchin isn’t supposed to listen to someone like me. His Achilles’ heel was elite accountability. He didn’t want to be targeted by elites as the bad guy, the man who dashed Democratic hopes, alone, by himself. Past wavering from Manchin had some elite buy-in, that he was just mad about “gimmicks” in the spending package, or that the inflation claims had some validity. That was not the case here. And Manchin wilted under that pressure. There was an inside-outside game that succeeded.
The irony is that many, many, many millions of dollars were spent trying to prop up Build Back Better in very traditional ways, when all that was needed was prime placement in the op-ed pages Manchin reads to make him uncomfortable.
Now, all that said: What’s in the bill, and was it worth the agita? The health care piece has already been covered: extending the subsidies that make insurance affordable in the Affordable Care Act (for three years, beyond the end of this presidency, which is important), combined with an exceedingly modest drug price reform that still yields $288 billion in Medicare savings and more for individual seniors, is fine. The Democrats should find a way to get insulin back into the mix, rather than leaving it out so a bipartisan bill can fail.
The tax measures are simple. There’s a corporate alternative minimum tax for companies with more than $1 billion in annual profit. It’s based loosely on Elizabeth Warren’s book profits tax from the 2020 campaign, which derived profit from financial statements to investors, not deduction-heavy tax filings; however, it seems like some credits will be able to count against profits, meaning more savings for corporations. There’s also an $80 billion investment in the IRS that CBO believes will raise $124 billion in revenue on net (the Biden administration thinks it will be much higher), and a tweak, not a closure, of the carried interest loophole.
As Victor Fleischer explains, that tweak really just extends the “holding period” where income is treated as capital gains (with a lower tax rate) from three to five years. So if a private equity fund owns an asset for more than five years before selling, they get the lower tax rate. Often portfolio companies are held for longer than that. Regulations could strengthen this, but the tweak only adds $14 billion over ten years, and you could easily see it having been put in so it can be taken out later.
There’s also a nice $15 million pilot program to study a direct e-file tax return system, administered by the government instead of private tax preparers like Intuit. The administration has a keen interest in that one.
As for the climate and energy measures, you will hear a lot that this is the largest climate action taken by the U.S. government in history. Those statements often tell you nothing, because it’s a “compared to what” scenario. On its own terms, this narrows energy investment from $550 billion in the initial Build Back Better Act to $369 billion, though a “climate bank” and “climate accelerator” could allow for another $290 billion in investment from the private sector. This is mostly achieved through scaling back the credits; included in that number is an “all of the above” energy strategy with incentives for fossil fuel production (with carbon capture), offshore oil and gas (with a larger royalty payment), biofuel production, and more. This was of course the only way to get Manchin’s buy-in, a trade of sustaining carbon emissions (hopefully slightly cleaner ones) for the green transition.
I don’t have a full breakdown of how much of that $369 billion is for cleantech, but there are hundreds of billions enumerated in the topline summary, and that doesn’t include the electric-vehicle benefit, which is $4,500 for used vehicles and $7,500 for new ones, up to fixed income limits, and available at point of sale. Other things climate hawks have pointed out include $60 billion in environmental justice provisions (neighborhood block grants, along with port pollution reduction), manufacturing tax credits for renewables, energy efficiency subsidies, a methane leakage fee, and $5 billion in grants to utilities to decarbonize, as well as a direct-pay credit for public power facilities.
It’s not all roses. There’s a weird assist to Canada and Mexico, weakening Buy American standards by creating a “North American” vehicle assembly credit. The $500 million for the Defense Production Act for heat pumps and minerals needed in the green transition seems quite low, but there’s enough investment here to accelerate the country’s energy mix. Overall, the claim is that the bill will reduce emissions by 40 percent by 2030. This is roughly four-fifths of what the original BBB did, though the money available is much lower than that. So seeing some independent modeling would be useful.
Manchin also secured a promise from leadership for unspecified “permitting reform” by the end of September. (This is apparently mainly so the natural gas Mountain Valley Pipeline that runs through West Virginia can get approved.) This creates an interesting new “two-track” strategy, where Manchin wants the thing that will come later (permitting) instead of the thing that will come first (the Inflation Reduction Act). Progressives could certainly stiff Manchin on the permit stuff, though they’d be under pressure not to, and Republicans could vote to deregulate permitting and make progressives irrelevant.
As ever, it’s not over. Schumer wants to put this on the floor next week. The measures were all things Kyrsten Sinema previously supported, but she was blindsided by the deal and hasn’t firmly said she’s on board. Bob Menendez, who has been a quiet problem on several elements of the bill, got louder on Wednesday, saying that the restoration of the state and local tax (SALT) deduction should get into the final version. Other SALT fans lurk in the House, where Nancy Pelosi only has four votes to spare, but they were less insistent than Menendez.
It’s hard to predict anything in this situation anymore, but the potential holdouts are much more tied to the Democratic establishment structure than Manchin, so the odds lean toward it working out, though not necessarily sharply.
So what’s the final verdict? It’s nothing short of a miracle that Manchin came back to the bargaining table, thanks to an inside-outside game that was one of the few examples of smart tactical strategy in the past two years. The result is about one-ninth of the spending and less than half of the revenue of the initial Biden agenda vision.
But all that spending couldn’t carry its own weight. As I said last October in The New York Times, it would be far superior to do a few less things and do them well. Laying out a climate, health care, and tax bill in March 2021 would have saved a year-plus of heartache that ruined Democratic approval ratings and created a sense of futility. Squishing the entire agenda into one bill, and significantly worsening those pieces so they could fit, was a bad idea. This isn’t a perfect one either. It is what the system could bear, and it got the big thing—a plan to protect the planet from the worst ravages of global heating—about 80 percent right.
