CBO Estimates Inflation Reduction Act will Trim $102 Billion off Federal Deficit

The Congressional Budget Office (CBO) has scored the $739 billion “Inflation Reduction Act” (a.k.a. Build Back Better-lite). The CBO forecast the legislation will lead to a net deficit decrease of more than $102 billion over the next ten years.

You can access the CBO report HERE.

The CBO scoring will be seen as a victory for Senate Democrats and clearly helpful to their efforts to get the Reconciliation package voted on in the next week. Moreover, they hope it helps convince Senator Kyrsten Sinema (D-AZ) - whose vote will make or break the deal - to get to a “yes” vote on the deal.

As of this writing, Sinema has yet to comment on the bill, saying she wanted to see how the Senate Parliamentarian ruled on the package (e.g., will it qualify as a Reconciliation worthy bill, or will certain parts be struck as not meeting the Reconciliation standard).

A Check-List to Getting the Inflation Reduction Act (“BBB-lite”) Done

Last Wednesday, Senator Joe Manchin (D-WV) surprised the markets and most of his fellow members of Congress by announcing he and Senate Majority Leader Chuck Schumer (D-NY) had reached an agreement on a new $739 billion energy/climate change/drug price cap/tax/deficit reduction package – in effect, Build Back Better-lite (BBB-Lite) but now being called “The Inflation Reduction Act.”

We have been warning since December 2021 – when the original $3.5 trillion Build Back Better (BBB) package was declared “dead” – that it really was still alive, albeit barely. We thought then, as we think now, it was just too important for the base of the Democratic Party going into the November mid-terms. Defeat was simply not an option – it was just a matter of how much they could winnow down the package from the original proposal without losing the support of Progressive Democrats in the House and Senate.

Passage is not a “slam dunk” by any measure, but we believe there is now more than a 60% chance they will get it done in the next two weeks and on the President’s desk to be signed into law.

Before we lay out what is in the bill, we thought it a good idea to offer a rough “check-list” of what must be done to pass this legislation into law. Here is our “check-list” – with the quick caveat we may find a few new items to add as Congress moves forward:

1. Getting Senator Krysten Sinema (D-AZ) to Sign-Off on the Deal: With a Senate divided 50-50 by Party, every vote matters, as we saw when Senator Manchin temporarily scuttled BBB last December. Now, all eyes are on Senator Sinema and whether she will support or oppose the package. As of this writing (Tuesday morning), Senator Sinema has not commented one way or another. Her staff has told reporters and other senate staffers, “she is reviewing the bill and waiting for the ruling from the Senate Parliamentarian” (see next item on what that means). But Sinema has long opposed making any changes to existing tax laws dealing with carried interest. This draft legislation closes the carried interest loophole. We have learned Sinema was not consulted on the deal. There have been issues between her and the Senate Majority Leader in the past and it is not clear what level of discussions are happening between Sinema and Leader Schumer now. If Sinema opposes the package, it will not pass;

2. Getting the Senate Parliamentarian to Sign-Off on the Legislation Qualifying as a Reconciliation Bill: Reconciliation legislation is very arcane and confusing. In short, it is legislation that cannot be blocked by filibuster in the Senate. A simple one-vote majority wins. But it must pass a strict requirement that the bill deals strictly with 1) spending, 2) revenue, and 3) federal debt limit. The Senate can only use Reconciliation once in a calendar year per those three criteria (e.g., three Reconciliation bills per year).  And a Reconciliation bill cannot add to the federal deficit. The Senate Parliamentarian – who is charged with interpreting the Standing Rules of the US Senate and parliamentary procedure – must decide if the bill meets these criteria.  We expect the Parliamentarian to approve by the end of this week.

3. Getting Sign-Off from the House SALT Caucus:  Last year, more than 15 Democratic House members sent a letter to Speaker of the House Nancy Pelosi (D-CA) threatening to vote against BBB unless there was a lifting of the $10,000 cap on state and local tax deductions. The letter signatories came from states with high state and local taxes (primarily New York and New Jersey). The current draft bill does not lift SALT caps – so what will these members do? Recall that Democrats only have a four-seat majority in the House, so every vote is needed if and when the bill comes over for a vote.  We believe all signatories will yield and vote in favor of the package. 

4. Making Sure All Senate and House Members Are Healthy/COVID-Free:  In the last month, at least six Senate Democrats have been diagnosed with COVID. This has, in turn, slowed Leader Schumer’s efforts on several pieces of legislation and a slew of presidential nominations needing all 50 votes plus the Vice President’s tie-breaking vote.  If this bill is to pass in the next seven to ten days, a completely healthy Democratic Caucus in both chambers is critical. But we would quickly note the same is true for Republicans – and Senator John Cornyn (R-TX) who is the Deputy Minority Leader announced yesterday he has tested positive.

5. Can Democrats Successfully Push Back on Two Studies Arguing the Bill Will Not Lessen Inflation and/or Will Actually Raise Taxes On Those Earning $400,000 or less?  The Congressional Joint Committee on Taxation (JCT) – a bipartisan congressional committee that is non-partisan – as well as the University of Pennsylvania’s Wharton School of Business Budget Model each offered an analysis of the bill which says it will do virtually nothing to reduce inflation. The Wharton study (HERE) actually says it will slightly increase inflation until 2024. And the JCT analysis (HERE) says it will raise taxes on households earning less than $400,000 (meaning it breaks President Biden’s promise not to raise taxes on those earning less than $400,000).  But will either or both reports help opponents of the Schumer-Manchin deal? In short, we do not think so. But they do not help and will be used by Republicans going into the November mid-term elections against Democrats. 

Turning to what is in the legislation, here is a link to the US Senate Majority Leader’s website that offers:

• The full text of the Inflation Reduction Act of 2022;

• A one-page summary of the Act;

• An overview of the tax provisions;

• An overview of the provisions aimed at capping drug prices and;

• A summary of the energy security and climate change investments in the bill.

The legislation includes roughly $790 billion in offsets to fund approximately $485 billion in new spending and tax breaks. Below is a breakdown of the expenditure and revenue:

Source: Committee for Responsible Federal Budget

We hope you find this helpful. Please let us know if you have any questions.