Reconciliation Achieved - Congress Now Turns to Lame Duck and Beyond

Scroll down

Nearly two years into the Biden Administration and with the 2022 mid-term elections fast approaching, Democrats secured a major legislative victory with final passage of the Inflation Reduction Act of 2022 (IRA) – a landmark climate and health care bill that achieves at least some of the party’s campaign promises and long-held policy goals.

When President Biden’s signature Build Back Better Act faltered last year even after being shrunk from a cost of $3.5 trillion to $2.2 trillion, many viewed the effort to be a failure. However, negotiations continued between Senate Majority Leader Chuck Schumer (D-NY) and Sen. Joe Manchin (D-WV). In late July, the two senators announced they had agreed on a $740 billion package focused on deficit reduction, health care, and energy security and climate change.

The IRA raises $737 billion in revenue through a new 15% corporate book minimum tax, reform of prescription drug pricing, IRS tax enforcement, a 1% excise tax on stock buybacks, and a two year extension of the excess business loss limitation rules. The bill makes $437 billion in investments, including $369 billion for energy security and climate change, $64 billion for Affordable Care Act subsidies extension, and $4 billion for Western drought resiliency. Congressional Democrats and the White House say the bill will reduce the federal deficit by more than $300 billion.

The IRA included one nugget for private activity bonds, changing the treatment of the 45Q credit for carbon capture, utilization, and sequestration (CCUS) facilities that use private activity bonds for financing. In order to increase the appeal of PABs for such projects, the IRA alters the amount by which the credit is reduced for facilities using private activity bonds, lowering the reduction to the lesser of 15 percent or the percentage of private activity bonds used for the project

10308-AD-MLS-1042x342-Bond Dealers of America Maga

The IRA was approved by the Senate 51-50 on August 7 under budget reconciliation rules allowing passage of a bill with a majority vote and foregoing the usual 60-vote threshold to end debate. All Democratic senators supported the IRA and all Republicans opposed the bill, with Vice President Kamala Harris casting the tie-breaking vote. In the House of Representatives, where progressives had long argued for a more robust bill, the bill was approved on August 12 in a 220-207 vote with all Democrats in favor and all Republicans opposed. President Biden signed the IRA into law on August 16.

Having achieved a significant legislative victory with enactment of the IRA, Congress will now tackle a number of outstanding legislative agenda items in the remaining months of the current 117th Congress, with the upcoming mid-term elections having the potential to upend the balance of power next year in the 118th Congress and potentially influence year-end activities on Capitol Hill should Democrats lose unified control of government.

Top Year-End Legislative Agenda Items

The current fiscal year ended on September 30 with the appropriations process for the next fiscal year, starting October 1, far from complete. In July, the House of Representatives approved a minibus spending bill, including six of the twelve annual spending bills, although the Senate has not approved any of the twelve bills to date. Given this lack of action, Congress approved a Continuing Resolution (CR) to extend current spending levels to December 16 until final action or another CR that will kick the appropriations process into next year.

Other key issues left to address this year include legislation to protect the right to same-sex marriage and interracial marriage, mental health legislation and various FDA-related policy riders that were left out of the user fee act reauthorizations, reform of the Electoral Count Act, FCC spectrum auction authority, reauthorization of the FDA user fee, flood insurance, and the annual National Defense Authorization Act (NDAA).

Advocates Continue Push for Municipal Bond Modernization

Some of these outstanding policy goals could be rolled into a year-end omnibus appropriations bill, and that could extend to include key policy goals of the municipal finance community like reinstatement of advance refunding and enhancement of small borrower rules. Supporters of these policy changes had worked over the past year-plus to have them included in the now-failed Build Back Better Act, and before that the Infrastructure Investment and Investment Act (now referred to as the Bipartisan Infrastructure Law).

While inclusion of advance refunding and small borrower in the omnibus faces a very steep hill, supporters will continue to push for the changes in the final weeks of the 117th Congress.

House Ways and Means Committee Chairman Richard Neal (D-MA) is a long-time champion of tax-exempt municipal bonds and his committee produced language for the Build Back Better Act to achieve both policy goals; however, that language was not included in the bill that was eventually approved by the House and then rejected by the Senate. Should Democrats lose the House majority, advocates of advance refunding and small borrower will redouble their efforts to urge Chairman Neal to achieve these long-standing policy goals before handing the chairman’s gavel over to Republicans next year.

Committee Ranking Member Kevin Brady (R-TX) led Republicans in the 2017 tax reform bill that did away with advance refunding and has, understandably, been resistant to undoing his own legislative achievements. Rep. Brady is not seeking reelection this year, but his departure from the committee and a leadership transition for the GOP does not automatically clear the path for reinstatement of advance refunding, meaning the next few weeks, with Chairman Neal holding the gavel, could be crucial to any chance of restoring advance refunding anytime in the near future.

Financial Data Transparency Act Raising Concerns in Muni Bond Community

Senate Finance Committee Ranking Member Mike Crapo (R-ID) has introduced legislation with Sen. Mark Warner (D-VA) – the Financial Data Transparency Act (S. 4295) – that requires financial regulators to develop common standards that promote the organization, readability, and availability of financial data they collect from regulated institutions. Identical legislation, introduced by Reps. Carolyn Maloney (D-NY) and Patrick McHenry (R-NC), was approved in the House last year and was successfully amended to the House version of the National Defense Authorization Act this past July. The two senators are seeking to include the language in the Senate NDAA as well, with Senate Majority Leader Schumer saying he would like to see the bill passed in the Senate in October. The NDAA is considered “must pass” legislation and we anticipate final action on the bill toward the end of the year.

The Financial Data Transparency Act requires that governmental and non-profit financial reporting be done in a standardized format, with the Municipal Securities Rulemaking Board (MSRB) tasked with promulgating a rulemaking to establish data standards for more than 40,000 issuers of bonds. Key concerns in the muni bond community include that the bill does not say who is to pay for data standards conversion, requires identical financial reporting across all types of entities, does not recognize that all entities do not have identical financial reporting inputs, and has a short two year timeframe for implementation and compliance.

The municipal bond community has raised these concerns about the legislation, and various potential solutions are under discussion including potentially providing an exemption or longer compliance timelines for smaller issuers and borrowers, requiring MSRB and SEC to set less burdensome standards for small issuers and borrowers, requiring trials and demonstrations before mandates, and requiring a complete cost benefits analysis.

Some in the bond community are calling for the language to not be included in the final NDAA at all, while others view tweaking the language to address specific concerns as a more achievable goal.

Impact of Election on Tax Writing Committees

As noted above, House Ways and Means Committee Ranking Member Kevin Brady (R-TX) is not seeking reelection this year, opening up the top slot for Republicans at the powerful tax writing committee. The two leading contenders are Rep. Vern Buchanan (R-FL) and Rep. Jason Smith (R-MO). Either as chairman or ranking member, Rep. Buchanan is expected to focus his efforts on tax, international trade, small business issues, and health care. The congressman has highlighted his support for promoting incentives for research and development, including providing incentives for companies to move the intellectual property results of research and development back to the United States. Rep. Smith, as leader of committee Republicans, is likely to focus on health care, federal spending, and addressing inflation.

A key indicator of where either Republican would take the committee was revealed in late September when House Minority Leader Kevin McCarthy (R-CA), who hopes to become Speaker if Republicans take the House majority, unveiled his party’s “Commitment to America” agenda for the 118th Congress. As part of that agenda, Rep. McCarthy says that the first action of a new Republican House majority next year would be legislation to repeal the IRA provision funding new agents at the Internal Revenue Service. A key component of funding the IRA was through increased tax collection of owed taxes. However, we note that even if such a bill did pass the House, it would require a Republican majority in the Senate for final passage and a willingness from President Biden to undo one of his greatest legislative achievements.

Ways and Means Chairman Richard Neal (D-MA) is on the ballot and overwhelmingly favored for reelection and will continue to lead committee Democrats next year either as chairman or ranking member. Having achieved many of his tax goals in the IRA, Rep. Neal will, as leader of Democrats at the committee, work to protect those achievements while also continuing his focus on retirement security for all Americans and including federal workers. And of course, should advance refunding or small borrower not advance this year, the congressman is expected to continue as a champion for these issues.

Moving to the Senate, where Democrats have a stronger likelihood of holding the majority, both leaders of the Senate Finance Committee – Chairman Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID) – are up for reelection and both are expected to easily win another term and will continue to lead the committee as chairman or ranking member.

Either as chairman or ranking member next year, indications are that Sen. Wyden will likely focus on improving the enforcement of tax collection – and potentially fending off House legislation to defund such efforts – and increasing taxation of natural gas and oil producers based on recently introduced legislation. Sen. Crapo has indicated that in his leadership of the committee next year his focus will be on tax reform and fighting inflation. The senator recently introduced a bill to prohibit the use of additional funds appropriated to the Internal Revenue Service under the IRA for audits of taxpayers with taxable incomes below $400,000. As with House Republicans, we are expecting Senate Republicans to be looking for ways to incrementally undo some of the IRA’s tax provisions.

Concluding Thoughts

As we enter the final weeks of the 2022 campaign season, Democrats will work to convince voters that their achievements, such as the Inflation Reduction Act, will positively impact the lives of Americans, while Republicans will offer that they have a better way. Whatever the outcome of the election, when Congress returns in November they face a daunting legislative agenda and just a few weeks before the start of the new Congress.

ML Strategies professionals welcome the opportunity to answer any questions BDA members may have about the outlook for their policy priorities in the coming weeks or in the 118th Congress.