Schumer and Manchin Announce a Surprise Last-minute Deal on Energy, Taxes, and Health Care

Just as the Senate was passing the “CHIPS-Plus Act” on Wednesday afternoon, Senator Joe Manchin (D-WV) and Majority Leader Chuck Schumer (D-NY) announced a surprise $369 billion agreement to an advance energy, tax, and health care reconciliation package, even though most people thought such a legislative proposal was all but dead. Not only was there an agreement, but after a year of back-and-forth negotiating, the agreement was in writing and with ready-to-go bill text and summaries (Although Senator Sinema (D-AZ), who has opposed new taxes on businesses, was reportedly not part of the negotiations and it is unknown if she will support the legislation).

The move resuscitates President Biden’s plans on climate change and significantly shifts the current legislative and political dynamics as members of Congress prepare to return home for the August recess to campaign for the upcoming midterm elections. Just weeks earlier, Manchin surprised  Democrats by abruptly ending negotiations on energy and taxes, leaving Democrats no choice but to move to pass a much smaller budget reconciliation package that included only health-related provisions. But in a major about-face, Manchin announced on Twitter that the new “Inflation Reduction Act of 2022” would fight inflation, reduce the deficit, lower drug prices, and combat climate change.

According to a release from Schumer and Manchin, the $369 billion in climate provisions include tax credits to stimulate the adoption of clean energy technologies and reduce carbon emissions by 40% by 2030. The bill also imposes a 15 percent corporate minimum tax to raise $313 billion in revenue. It also seeks to close the so-called carried interest loophole, which allows investment managers to treat their compensation as capital gains and raises another $124 billion.

Republicans were quick to condemn the bill, saying that the tax hikes will only further weaken the US economy, which may already be in a recession.   Minority Leader Mitch McConnell (R-KY) had already vowed to block the CHIPS bill if Democrats advanced Biden’s agenda using reconciliation.  “Democrats have already crushed American families with historic inflation,” the Kentucky Republican wrote on Twitter. “Now they want to pile on giant tax hikes that will hammer workers and kill many thousands of American jobs.”  The CEO of the National Association of Manufacturers, Jay Timmons called the proposal “nothing more than a repackaging of the same bad ideas with a new name slapped on it.”

Manchin agreed to include provisions that would provide a $7,500 rebate for new vehicles and a $4,500 tax credit for used electric vehicles, a proposal he had previously rejected. However, there will be a lower income threshold for people who qualify for the tax credits. The package also provides funding and credits to encourage electric vehicle manufacturing. It calls for $2 billion in grants to convert existing auto manufacturing factories to ones that produce electric vehicles and $20 billion of loans for new clean vehicle manufacturing facilities. It also extends tax credits for hydrogen-fueled cars.

Manchin also secured wins for the oil and gas industry, including reinstating an offshore oil and gas lease sale conducted in the Gulf of Mexico and requiring the administration to conduct two more lease sales in the Gulf and Cook Island Inlet in Alaska. The bill increases royalty rates for oil and gas produced on federal land. The onshore oil rate will increase from 12.5% to 16.66%. Offshore royalties would be set at no less than 16.66 percent, compared to 12.5 percent currently.

The draft includes significant tax increases, including:

• 15 Percent Corporate Minimum (Book) Tax – $313 Billion – Which would mean companies would lose depreciation deductions and green groups would lose write-offs.
• 95 percent excise tax on prescription drugs unless drug manufacturers accept government-set prices.
• IRS to Increase Audits – $124 Billion – The proposal would give the IRS authority to hire 87,000 additional IRS agents to ramp up audits.
• Carried Interest Capital Gains – $14 Billion – Sen. Kyrsten Sinema (D-Ariz.) has previously opposed increasing taxes on carried interest capital gains.
• Natural Gas Tax – $8 Billion (From CBO score of House-passed reconciliation) The legislation would impose a new tax on oil and gas development based upon emission levels of methane during production.

Democrats will need to thread a needle on this deal. The bill is currently being reviewed by the Senate parliamentarian to make sure the text complies with reconciliation rules. Republicans are certain to try and challenge anything that could disrupt the agreement. All 50 Democrats in the Senate must agree to the language, with many Senators, including Sen. Kyrsten Sinema. Sinema has had objections to some of the provisions in the past, particularly eliminating the carried interest loophole.

Congress Passes CHIPS-Plus Act

Today, the House approved the bill by a vote of 243-to-187. Twenty-four House Republicans backed the act, which is destined for the desk of the President.

After more than a year and a half and a series of name changes, the Senate passed a drastically slimmed-down innovation package aimed at boosting domestic semiconductor chip production and scientific research. On Wednesday, the Senate voted 64-33 to pass the $280 billion “CHIPS -Plus Act” (H.R. 4346), which includes $52.7 billion for chip manufacturing, research, and production; a 25 percent investment tax credit for semiconductor manufacturing; and authorizes nearly $200 billion for science and technology research and development to spur the domestic development of emerging technologies. The funds will create a new Directorate of Technology and Innovation at the National Science Foundation (NSF) and provide $50 billion for the Department of Energy’s Office of Science.

With no time left for further negotiations, the original nearly 3,000-page bill full of hard-hitting measures meant to counter China was stripped down to just over 1,000 pages in order to facilitate passage. The trade title was deleted, as were the extensions to the Generalized System of Preferences (GSP) and the Miscellaneous Tariff Bill (MTB).

It is doubtful that the deleted provisions can still be reconciled and later passed as a separate package, but certain proposals are likely to resurface as possible amendments to the FY23 National Defense Authorization Act. Kevin Brady (R- TX), ranking member of the House Ways and Means, said he would continue to talk with Democrats about how to advance trade provisions not included in the final CHIPS bill, particularly GSP and MTB.

Before Manchin and Schumer’s IRA announcement, there were signs the bill was likely to pass with a number of Republican supporters. In a rare move, former Secretary of State Mike Pompeo was reaching out to House Republicans, urging them to vote “yes,” and the bipartisan Problem Solvers Caucus members also pledged support for the package. The House Science Committee ranking member, Frank Lucus (R- OK), emerged from the rules meeting yesterday afternoon confident that he didn’t “see anything at the present moment” that would derail the bill.

It was speculated that House Republicans were likely to withhold their support for the CHIPS-Plus bill. This would have been difficult for some Republicans who have a lot to lose if the bill failed, with much of the funding going to major semiconductor projects in states like Oklahoma, Ohio, and Texas.

Speaker Pelosi was able to unite the ranks in the Democratic caucus, where there were about five or six progressive outliers who opposed some of the provisions in the Senate bill. Democratic Congressional Progressive Caucus chair Pramila Jayapal (D-WA) this morning said the bill was a “massive step forward” while touting the opportunity to make historic investments in climate, health care, and prescription drug pricing.