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This week (October 11-15)

Congress: The Senate is out of session October 11-15 for the Columbus Day State Work Period.

The House was scheduled to be out of session in Washington, D.C., for the second of two Committee Work Weeks but is now set to consider the Senate-passed debt limit increase bill on Tuesday, October 12.

Global tax: The Inclusive Framework two-pillar solution will be delivered to the G20 Finance Ministers meeting in Washington DC on October 13.

Washington Council EY's latest "DC Dynamics" podcast includes discussion of the Build Back Better plan, reconciliation and what lies ahead on health care.

Last week (October 4-8)

Reconciliation outlook: There were no announced breakthroughs toward an agreement among House and Senate Democrats over a new topline spending number for a budget reconciliation bill that embodies much of President Biden's Build Back Better agenda, after moderates declared the $3.5 trillion-plus package assembled by 13 House committees too large. Senator Joe Manchin (D-WV) this week reiterated his insistence on a $1.5 trillion ceiling and met with the President again. House Progressives led by Rep. Pramila Jayapal (D-WA) say they would support a minimum size of $2.5 trillion, and Senate Budget Committee Chairman Bernie Sanders (I-VT) told reporters October 8 he is sticking by his insistence on a $3.5 trillion package. He has also expressed frustration over the sway moderate Senators Manchin and Kyrsten Sinema (D-AZ) — who has not publicly divulged her view on a topline spending number — hold over the process, tweeting, "When you've got the support of the majority of the American people, the Democratic House and Senate caucus, and when you've got the support of the president — this is not some 50-50 deal. Two people cannot stand in the way of delivering for the working people of this country." Senator Sanders has also told reporters that Sinema's position that she does not negotiate publicly leaves other members uncertain where she's coming from: "Tell us what you want."

On timing, House Democratic leaders have set the expiration of the highway authorization October 31 as a self-imposed deadline for a reconciliation agreement and a House vote on the bipartisan infrastructure framework (BIF), which is linked to the broader measure at the insistence of progressives. There is a widely-held view, however, that talks could extend beyond then and spill into December, when Congress will again be confronting the expiration of government funding (December 3) and some tax provisions at year's end, and now the debt limit must-act date appears likely to hit in December (or later).

Scaling back the bill: An agreement on a topline spending number is required for Democrats to determine how the $3.5 trillion-plus House package addressing issues like health care, climate, caregiving and low-income tax credits should be scaled back. There are differences of opinion among Democrats about how to fit their priorities into a smaller package — by reducing the scope of provisions, or including the same roster of proposals but with shorter duration and limited benefits. A significant amount of attention has been paid to the Child Tax Credit (CTC) extension, which under the Ways & Means bill would cost $556 billion over 10 years. The Wall Street Journal (WSJ) has reported that members like Rep. Suzan DelBene (D-WA), the chairwoman of the moderate New Democrat Coalition, are pushing to focus resources on the expanded CTC and avoiding doing "a little bit of everything" in favor of "picking what we're doing well." Axios reported October 6 that Senator Manchin told other members that progressives need to pick just one of Biden's three policies for helping working families and discard the other two; i.e., choose between the expanded child tax credit, paid family medical leave, and subsidies for child care. "He's also aligning himself with Democratic centrists in the House, who want to trim the number of programs in any final package but fund them for longer," the report said. "Progressives are hopeful they can retain all of their cherished programs in a final bill by funding many of them for shorter durations and therefore lower the bill's ultimate price tag." A separate WSJ story said: "Beyond adjusting the duration of the programs, Democrats are also looking at narrowing the eligibility for the programs to lower-income Americans. Some of the programs Democrats are proposing, such as universal prekindergarten, are currently set to be available to Americans regardless of income level." The New York Times reported October 5, "Some liberals have called for including as many programs as possible, and then continuing to build on them in future legislation. But Ms. Pelosi, speaking privately to members of the House Democratic leadership on Tuesday, suggested that many in the caucus felt it would be better to focus on fewer programs that they could carry out well." Bloomberg reported Senator Mark Warner (D-VA) as saying October 7 that the expanded CTC could be structured so that higher income people don't get the benefit. "We're talking about something that's going to be a much smaller plan," he said. "There are members of the Senate who are getting child tax credit. They're getting checks now, and I'm not sure that's appropriate."

Tax implications: Identifying a topline spending number likely precedes determining which tax increases will ultimately be tapped to help pay for the measure, for which there are similar approaches available, i.e., scaling back proposals or dropping some altogether. The Ways & Means bill proposed about $2.1 trillion in tax increases and Democrats are expecting to count revenue from drug pricing negotiation and dynamic scoring. An October 3 WSJ story discussed the effects on the largest closely held businesses of the Ways & Means Committee bill's provisions to limit the Section 199A deduction, add a 3% surcharge on income over $5 million, expand the net investment income tax (NIIT), and increase the top marginal tax rate to 39.6% from 37%. The story cited Ways & Means Chairman Richard Neal (D-MA) as saying he is starting to hear concerns from business owners. "There's some unease, that's for sure," he said. "We're trying to respond to some of the concerns they've raised and, if they're legitimate, we'd obviously be interested in repairing them." An October 8 Politico story, titled "Democrats likely to throw billions in tax hikes overboard as spending plans shrink," said while much of the focus has been on the spending side, "a smaller price tag will also mean big changes on the tax side as well because Democrats are unlikely to raise taxes by more than they need to defray the cost of their plans."

Global tax: All but four nations in the OECD's 140-member Inclusive Framework October 8 announced a years-in-the- making global tax agreement addressing how the largest and most profitable multinational enterprises (MNEs) should allocate their taxable profits to customer jurisdictions under Pillar One of the OECD's project and setting a 15% global minimum tax rate aimed at ensuring that MNEs pay a minimum level of tax under Pillar Two. The announcement by 136 nations adds additional details to the group's July statement, including setting the minimum tax rate (the July statement set the rate at "at least 15%") and percentage of profits to be allocated to market jurisdictions, and establishes target dates for implementation. Treasury Secretary Yellen remarked October 8 that the agreement on the international tax rules would be finalized in the coming weeks and acknowledged "no countries, other than the United States, have a minimum tax on foreign earnings." She released a separate statement saying, in part, "more than 130 nations — including all 20 in the G20 — have agreed to a new and specific set of provisions to uniformly tax the income of multinational companies, including a global minimum tax. Rather than competing on our ability to offer low corporate rates, America will now compete on the skills of our workers and our capacity to innovate, which is a race we can win." The July 2021 Inclusive Framework statement failed to garner support from all EU members; notably Ireland, Hungary and Estonia abstained, calling into question whether the European Union, which requires unanimity for adopting directives relating to taxation, could ultimately support the agreement. Those jurisdictions have joined in support of the revised statement. The new statement also includes further details on the expected implementation of both Pillars.

Debt limit: The Senate October 7 cleared a $480 billion increase in the federal debt limit to allow Treasury to meet the nation's obligations into at least early December, setting up another must-act date on the issue within the range of the expiration of government funding on December 3. (Some tax cliffs and extenders follow soon behind on December 31.) Senate Republican leader Mitch McConnell (R-KY) said Republicans acceding to the measure — GOP support was needed to break the filibuster on a procedural vote, not the actual debt limit increase bill — would preclude the Democratic argument that they lacked time to address the debt limit through the reconciliation process prior to a weeks-away must-act date. Others have noted that if Democrats are required to use reconciliation to ultimately address the debt limit on a long-term basis, it could also force them to raise the limit to a certain amount, rather than suspend it through a certain date. Importantly, addressing the debt limit through a reconciliation measure would not impact the budget reconciliation bill teed up by 13 House committees and awaiting a House-Senate agreement over a topline spending number. It isn't quite clear when the next must-act date would be, presuming the debt limit increase is approved by the House next week. Roll Call reported it's "possible incoming tax revenue could give the Treasury more room to stay under the new borrowing cap … as December and January are historically strong months for tax receipts," and that Senator John Cornyn (R-TX) suggested "Dec. 3 is not a drop-dead date" and the increase could "take us into 2022."

Trade: In a widely anticipated speech to the Center for Strategic and International Studies (CSIS), USTR Katherine Tai unveiled October 4 the Biden administration's China trade policy, the culmination of an eight-month review process. "For too long, China's lack of adherence to global trading norms has undercut the prosperity of Americans and others around the world … To be successful, we must be direct and honest about the challenges we face and the grave risk from leaving them unaddressed," Tai said. As expected, and to the dismay of some in the U.S. business community, Tai did not announce the removal of any of the existing section 301 tariffs imposed on Chinese imports by the Trump administration. However, USTR will open a new tariff exclusion process for U.S. companies negatively impacted by the tariffs. Tai also indicated she would be seeking to launch new talks with Chinese trade officials to review compliance with China's purchasing commitments under the Phase 1 deal as well as broader trade disputes. Biden administration officials indicated that further tariffs, or other trade restrictions, could be levied to the extent those talks are not successful. Further, Tai indicated in her remarks at CSIS that the U.S. had no plans to launch "Phase 2" negotiations with China — as had been contemplated by Trump administration trade officials — in the immediate future.

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