The Five Most Controversial Provisions in the Second Infrastructure Bill

THERE’S A PRESUMPTION among most analysts that Joe Biden’s first and second infrastructure bills will pass this fall, but that assumes Congress will agree with the very controversial provisions in the second bill — especially his tax hikes, which almost certainly will get watered down.

THERE’S WIDESPREAD SUPPORT for the $1 trillion first bill, for highways, bridges, dams, wi-fi, clean water, etc. But the crucial issue involves the $3.5 trillion second bill
— a huge package of social spending, partly paid for by major new taxes.

THIS RAISES A GREAT UNKNOWN: Will the nearly 100 House progressives agree to a second bill that will inevitably get a tax and spending haircut in the Senate — or
will the liberals reject both bills rather than accept major compromises?

HERE WE ARE, ON SEPTEMBER 2, with controversy already percolating as moderate Democrats express opposition to key key provisions. In talking with staffers this week, we sense growing uneasiness over five unpopular components in the second bill.

1. The overall cost: There’s no way moderate Democratic Sens. Joe Manchin and Kyrsten Sinema will accept a $3.5 trillion second bill; they might agree to $2 trillion or a little less. There will be a fierce debate on how to pay for the measure; getting $538 billion from drug price controls is laughably aspirational, as are assumptions of billions of dollars in added revenue from “dynamic scoring.”

2. The top corporate rate: Once again, Manchin will be a major player. He is adamant that the top rate should not be hiked from 21% to 28%, as Biden proposes. The likely compromise will by at 25%. A compromise on the top individual rate is less likely; it’s likely to rise from 37% now to 39.6%.

3. The capital gains rate: Bloomberg reported yesterday that some House Democrats are getting cold feet over raising the capital gains tax from 20% now to the ordinary individual income tax rate, which may be set at 39.6%. A compromise of a 28% top capital gains rate seems likely with an effective date set at the date of the committee vote this fall.

4. Changes in the estate tax: There’s little enthusiasm among moderate Democrats for raising the estate tax and killing the step-up basis. This is an emotional issue for
small business owners and farmers, and Democrats fear their clout.

5. What to do with SALT? Several Democrats from wealthy states are adamant that there should be a generous restoration of the State and Local Tax exemption. If they aren’t satisfied, these Democrats could scuttle the entire revenue package; a compromise is likely, raising the SALT exemption.

THESE AND SEVERAL OTHER ISSUES, watering down tax hikes, have the potential to anger progressives, who want sharply higher taxes on corporations and wealthy individuals (and polls support them; the public also wants to hike these taxes).

BOTTOM LINE: Nancy Pelosi has promised a House vote by Sept. 27, a very ambitious goal considering how many tax issues are controversial. Even if she wins House approval of a huge second bill, there’s no chance that Manchin and the Senate would go along — raising the prospect of a drawn-out debate in a conference committee this fall (perhaps complicated by a bitter fight over raising the debt ceiling).

AS CHRISTMAS APPROACHES, the choice probably will be approving the first infrastructure package, with a greatly scaled-back second bill, or bogging down, with no bills passing. We think the former outcome is likely.

THAT MEANS BIDEN — with weakened political capital after the Afghanistan debacle — will have to accept half a loaf on the second bill. Will Pelosi and the House progressives let him? Probably, but this will be a major source of uncertainty for the markets for weeks to come.

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