Sinema Is a “Yes” on the Budget Bill. But What Did She Change in It, and Will It Now Pass?

Photo: J. Scott Applewhite / AP

Against all expectation, both Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) have signed off on the Democratic reconciliation bill for climate, healthcare and tax reform, dubbed the Inflation Reduction Act of 2022. Manchin had surprised nearly everyone with his eleventh hour announcement in support of the package, which he then went on the airwaves to support enthusiastically, and at times confrontationally, with his critics. 

But for the past week, Sen. Sinema had been eerily silent, leading some to speculate that keeping her out of the secret negotiations had been a mistake. Sinema had been seen huddling with Manchin but also speaking with GOP leadership on the floor of the chamber about unknown matters. But to the relief of the party, the enigmatic and much-maligned senator from Arizona finally issued a statement last night in support of the budget bill: “We have agreed to remove the carried interest tax provision, protect advanced manufacturing, and boost our clean energy economy in the Senate's budget reconciliation legislation. Subject to the Parliamentarian's review, I'll move forward."

There’s a lot in that to unpack, and it doesn’t tell the whole story about her position (it’s actually better than it sounds), nor does her support guarantee the ultimate fate of the bill, though the chances of passage just improved considerably. Let’s dive in.

Removal of the Carried Interest Provision

The draft of the bill announced by Majority Leader Chuck Schumer (D-NY) and Sen. Manchin contained a provision for eliminating a tax loophole called “carried interest.” This is essentially about how much private equity and hedge fund managers take in as compensation. As The New York Times explained, one of the reasons they pay far lower taxes than the average person is that their companies make most of their money from investment gains. In most instances, the share of profits paid to managers is about 20 percent. That money in turn is taxed at a capital gains rate of 20 percent—meaning about half the rate of what would be their individual income tax bracket of 37 percent—if they hold their investment for at least three years. The new bill would have increased the holding period to at least five years.

The amount at stake under the carried interest provision, relatively speaking, isn’t large: about $14 billion in new revenue in a bill that is hundreds of billions in size. But Sen. Sinema has long been on record against taxing carried interest as normal income, arguing that it would hurt entrepreneurship and investment. She and her financial backers, no doubt, want the system reformed and certain sectors such as manufacturing exempted or protected from the changes. As part of the deal announced last night, Democrats have agreed to look into carried interest at some later date. This reform effort may prove illusory, however: At least 10 GOP senators would have to sign off on any stand-alone reform bill introduced outside of the budget reconciliation bill, and there aren’t the votes to get there.

As I wrote about earlier, the specific and unique inclusion of the carried interest provision in the massive budget bill—a provision that would have brought in less than a couple billion a year annually—seemed out of place when the deal originally was announced. To me, Schumer and Manchin likely added it in knowing full well that Sinema would be miffed at being excluded from negotiations and would need some kind of face-saving way to claim she had provided her say, too. By including the provision as an easy target, Sinema could nix the part of the bill she didn’t like, mollifying her big money donors to some extent even while the bill moved forward.

But Wait…There’s More

There’s also a new and surprising switcheroo in the deal that very few people are talking about. As part of the compromise with Sinema, the carried interest provision is being replaced by an even larger tax revenue generator: a 1 percent excise tax on stock buybacks. While the carried interest provision was only projected to take in $14 billion over the course of 10 years, the excise tax would be far greater, with revenues projected at $73 billion, ballooning the bill in size considerably. This additional money will be more than enough to cover the $5 billion Sinema insisted upon for drought relief programs in the Western U.S.

Stock buybacks have been favored and used heavily by big public companies as a way to transfer the value of their soaring profits back to company shareholders, which usually include key corporate officers along with big stock funds, rather than reinvest the money into research, increased pay for workers, or infrastructure. The buybacks tend to inflate stock prices, benefitting primarily upper middle class and wealthy Americans. An excise tax upon buybacks could put a damper on this practice. Few observers expected that Sinema would agree to what amounts to another tax upon big corporations, but in some ways, it is consistent with her professed desire to incentivize companies to reinvest rather than pocket their profits.

What About the Senate Parliamentarian? And the Vote-a-Rama?

Obstacles still lie ahead for the budget bill. Before the Senate can vote to begin debate on the bill, which is expected to happen as early as Saturday, the non-partisan, rule interpreting office of the Senate Parliamentarian must determine, through a somewhat arcane process, whether the bill meets the requirements for reconciliation, meaning that each of its provisions is primarily for the purpose of revenue generation or expenditure and not ancillary to some non-budgetary purpose. The GOP will argue to the Parliamentarian that certain provisions, such as the proposed cap on insulin, fail this test, so we will have to see later today or tomorrow what she allows and what she denies.

Assuming most of the bill’s key components survive, the Senate will then begin a vote-a-rama where amendments can be proposed on the bill and voted up or down in around 15 minutes apiece. Progressive such as Sen. Bernie Sanders (I-VT) may seek to add provisions like childcare tax credits and parental leave that had fallen out of the bill upon Manchin’s insistence, but he would need all 49 other Democratic senators on board, and that is far from a given. Many simply want to see the bill pass close to “as is,” given that new spending would require new taxes, and that likely won’t win support from Manchin or Sinema.

Republicans also will attempt to add “poison pill” amendments that make a yes vote on the final version unpalatable to at least one Democrat and thereby kill the bill in its cradle. They plan to force Democrats to take unpopular positions on votes, even on issues that are wholly unrelated to the budget bill or that would be stricken out by the Parliamentarian later. Most political observers understand, however, that the vote-a-rama is mostly to gain “gotcha” soundbytes to be used in ads for the elections and is not really about substantive legislation at all. Democrats will need to hold firm and not be swayed by these tactics.

Finally, even if the bill is passed, it must also pass the House, where a few moderate Democratic members could still kill it for failing to meet their demands, including raising the cap on SALT deductions for their wealthier constituents. Such a move is unlikely, however, given the popularity of the bill itself with Democratic and independent voters who like the caps on Medicare out-of-pocket costs and the bill’s investments into green energy.

In short, with Sinema’s sign-off on the bill with some adjustments, the chance of its passage went up considerably. The biggest risk to it finally becoming law is now behind us, with just a few obstacles ahead. Fifty is a very tricky number to hold consistently, across divisive amendments, competing proposals and priorities, and a Covid-19 surge. If Democrats can push this through, however, it will be another major milestone for the Biden Administration and a vindication of Majority Leader Schumer’s abilities as a negotiator. It’s not the multi-trillion “Build Back Better” package many had hoped for, but it is still a game changer on climate and healthcare, and it would give the party a very positive platform to run on in November.