Weekly Plurus Strategies Update on Infrastructure and Reconciliation, the Debt Limit, FY22 Appropriations, and Other Activity in Washington

After last week’s recess, here’s the latest we are hearing on infrastructure and reconciliation, the debt limit, Fiscal year 2022 (FY22) appropriations, and other items on the Congressional agenda between now and the end of the year. 

Infrastructure/Reconciliation

Congress returned from recess on Monday, just 13 days before House Speaker Nancy Pelosi’s (D-CA) spooky deadline of October 31 for the House to clear theSenate-passed bipartisan infrastructure bill, as several transportation programs will expire at the end of the month. While Halloween is Speaker Pelosi’s date, it’s not the end all be all considering the entire House did not actually vote on theinfrastructure package before the previous September 27 deadline. It remains possible there could be another extension of surface transportation programs. As a reminder, in 2017 when Republicans controlled the White House and both houses of Congress, they did not pass the Tax Cuts and Jobs Act (TCJA) until three days before Christmas. With that in mind, the true deadline will likely be the end of the year. Once 2022 rolls around however, all eyes will be on the midterm elections, leaving deal making of any kind on the back burner. 

With lawmakers back in town, President Joe Biden held meetings this week with Democrats across the ideological spectrum in an attempt to unite moderates and progressives behind tax increases and social spending that is aimed at combatting climate change, as well as lowering the costs of childcare, higher education, and healthcare. The White House and Congressional Democrats are trying to trim their signature social spending proposal down from $3.5 trillion to closer to $2 trillion, and there's little agreement on what programs or timelines could end up being cut. Trade-offs have been outlined and offered, with the goal of reaching agreement on a Build Back Better framework by the end of this week.  

There are a number of pathways Democrats might go down to trim thereconciliation package. They could reduce funding or cut the timelines for various proposals. While we think it is an unlikely scenario, Democrats could also implement a haircut across all programs. There is also the possibility that entire provisions are dropped or are struck by the parliamentarian because they do not comply with the Byrd rule. Our instincts tell us the first two tactics might be theones Democrats rely on most heavily as Build Back Better negotiations move forward. For example, Speaker Pelosi has floated the idea of keeping the lion’s share of issues included but cutting down on the number of years to fund them in an effort to shave down the top-line figure, which remains up in the air.

At this point, we believe the child tax credit expansion will be included, but likely for one year. Obamacare subsidies and Medicaid expansion are also likely to be part of the package, although dental and vision benefits are still being worked out. Paid family leave and climate are still under serious discussion, with Sen. Manchin being a large opponent of the latter. Tuition-free community college is likely out of the deal, and current talks do not seem to favor a SALT fix. 

Several meetings have transpired this week between Sens. Joe Manchin (D-WV) and Bernie Sanders (I-VT) to try to strike a deal on a reconciliation framework that both moderates and progressives can live with. During Tuesday’s caucus lunch, Sen. Manchin committed to working with Budget Committee Chairman Sanders and Senate Majority Leader Chuck Schumer (D-NY) to reach a deal by the end of the week. While Sen. Kyrsten Sinema (D-AZ) has been less engaged and did not attend the caucus meeting, it is our understanding that Sens. Manchin and Sinema have divided up the outstanding issues that need to be addressed in order to win over their support, and that Sen. Sinema is most focused on pay-fors and tax provisions. Speaking of tax proposals, Sen. Sinema continues to oppose increases to the corporate tax rate. This could complicate matters by placing other more controversial tax proposals back on the negotiating table, as Democrats have made clear they still intend to pay for the Build Back Better Act in its entirety.

Optimism that an agreement can be reached has ebbed and flowed throughout the week. While Democrats were fairly positive on the prospects for agreement on a framework on Tuesday, the most recent reports suggest a collapse in talks between Sens. Manchin and Sanders, with Sen. Manchin threatening to walk away from the negotiating table. This comes after Sen. Manchin denied press reports suggesting that he might be considering leaving the Democratic party if Congress does not pass the bipartisan infrastructure bill and the reconciliation negotiations do not play out the way he would like. It’s unclear if these reports surfacing increase or decrease his leverage.

To the contrary, we attended an event this afternoon with Democratic Members of the Across the Aisle PAC, who were very upbeat about the Build Back Better framework coming together. Their view was that a lot of stuff will fall out of thefinal bill, although they admitted they are not very involved since House committees have already voted out their pieces of the package.

The reality is that tensions between moderates and progressives remain high, especially as Sens. Manchin of Sinema have twice sought to scale back the topline of the reconciliation, jeopardizing progressive priorities, such as Sen. Sanders’ healthcare vision and Rep. Alexandria Ocasio-Cortez’s (D-NY) climate proposals. While President Biden has been more engaged, meeting with lawmakers and traveling to his hometown of Scranton to sell the Build Back Better Act’s blueprint to overhaul health care, climate, education, and tax policy, the clock continues ticking and uncertainty abounds around how Democrats strike a bargain. 

Also complicating matters, at a time when Congressional leaders and thepresident’s domestic policy agenda may need him the most, President Biden will be traveling to Scotland for the United Nations (U.N.) climate summit at the end of this month. While President Biden has expressed that he wants the reconciliation package finalized before he leaves, a final date remains fluid. 

Even if Democrats were to strike a deal on a Build Back Better framework before the end of this week, it could still take weeks or months to turn principles into legislative text. And, if there is compromise between progressives and moderates in the days ahead, it remains uncertain whether a blessed reconciliation framework will be enough to release the bipartisan infrastructure bill from captivity. The one thing this week has made more evident is that the political boost Democrats need ahead of next year’s midterm elections may hinge on their ability to pass these two bills. 

Debt Limit 

On Monday, Treasury Secretary Janet Yellen sent a letter to Congressional leadership on the debt limit. While an increase to the debt limit was signed into law last week, Secretary Yellen expressed that there is a need for Congress to either increase or suspend the debt limit in a way that allows for long-term certainty that the government will satisfy its obligations. As you know, the recent increase provides only a temporary reprieve, forcing Treasury to use extraordinary measures beginning around December 3. By some estimates, these tactics might allow the U.S. Government to avoid default until sometime in February.

For the sake of the markets, lawmakers anticipate they will have to raise or suspend the debt limit again by early December, but they have only a vague idea when the deadline will actually arrive, due to possible fluctuations in coronavirus-relief spending, tax revenues, and a possible funding boost for the Highway Trust Fund. For example, if the infrastructure bill is passed by the Senate and it becomes law before December, the accrual of debt could be accelerated due to a transfer of Treasury funds to the Highway Trust Fund, leading to an increase of the debt by $118 billion, almost one quarter of the $480 billion increase to thedebt limit. On COVID spending, the debt could be majorly impacted by the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), federal aid for state and local governments, and federal funds for unemployment insurance. On tax revenue, the main source of fluctuations in revenue will come through tax withholdings. 

If a deal does not happen to address the debt limit as a standalone measure in early December, there could be other legislative vehicles that become candidates for a debt limit fix later in the month, particularly expiring authorizations. As an example, the $3,000-$3,600 per year child tax credit is set to expire on December 31. Currently, Democrats plan to extend the tax credit as part of the Build Back Better Act, but if the measure has not become law by then, an extension could be on the table. Another potential vehicle is the continuing resolution (CR) or some other spending bill, although Republicans rejected this approach earlier this month and Leader McConnell has made clear that Democrats will be forced to act alone come the end of this year. Using reconciliation to raise the debt limit also remains an option, although some moderate Democrats have signaled objections.

In the past few days, Democrats have also become more vocal about identifying a longer-term solution for the debt limit that avoids future games of political chicken. One proposal that has seen some more discussion is Rep. Brendan Boyle’s (D-PA) bill that would allow the Treasury secretary to raise the debt limit without any action required by Congress. Senate Republicans are now saying they will reject this bill. As 60 votes would be needed in the Senate to end debate, we anticipate a prolonged standoff between the two parties over the debt limit ahead of the first week of December. 

Budget/Appropriations

As you are aware, earlier this week Senate Appropriations Committee Chairman Patrick Leahy (D-VT) released the Senate’s remaining nine FY22 appropriations bills. All the bills comply with the topline spending allocations in the FY22 budget resolution. Though the committee reported its Energy and Water, Military Construction and Veterans Affairs (MilCon-VA), and Agriculture Appropriations Bills in August, this latest development does little to move Congress to funding a deal to avoid a government shutdown on December 3, with Republicans demanding that lawmakers agree on overall defense and non-defense spending totals before marking up the bills. That said, we are expecting the bills that were posted on Monday to be the vehicles that are ultimately used to go to conference with the House, although the timeline for action is unclear.

With a tight legislative agenda, it is uncertain appropriators will be able to reach consensus on an omnibus package by the December 3 deadline. It is a possibility that another CR is needed at that time to keep the government funded and we are hearing rumors that such a CR could extend until right before Christmas or even carry over into early next year. It also remains possible that some bills can be negotiated in time, while others will be funded on another CR. For some of the more controversial spending measures, we cannot yet rule out that those agencies will operate on a year-long CR. 

NDAA

As we approach the end of the year, the FY22 National Defense Authorization Act (NDAA) has yet to be considered on the Senate floor. We had been expecting theNDAA to be on the Senate floor this week, but that timeline has now been pushed back, in part because we understand that Congressional leadership is seeking more time to hammer out a deal on U.S. Innovation and Competition Act (USICA)/CHIPS Act funding that can hitch a ride on the final NDAA. We learned this week that there is Senate Armed Services Committee (SASC) staff delegation trip this week, which does not bode well for the NDAA being on the Senate floor next week. In all likelihood, we are looking at the NDAA being on the Senate floor during the first week of November, at the earliest. SASC Chairman Reed has indicated he is expecting the bill to be passed by the Senate before Thanksgiving. 

In the House, Armed Services Committee Chairman Smith has expressed displeasure that the Senate has stalled debate on its version of the NDAA. He has warned that the later the bill gets pushed, the less time there will be for lawmakers to negotiate a final conference report, which will again face competition for floor time, before the end of the year.

Voting Rights

This week saw another voting rights showdown in the Senate, as Leader Schumer brought the Freedom to Vote Act up for a vote on the Senate floor. The bill would have made election day a public holiday, ensured nationwide same-day voter registration, and set federal standards on absentee voting. On Wednesday, a procedural cloture motion failed by a vote of 49-51, with Leader Schumer switching his vote to allow Democrats to bring the bill back to the floor in thefuture. The vote is likely to ramp up conversations on tweaking the filibuster rule in the Senate.

Political Tidbits

As you are likely aware, following in Rep. John Yarmuth’s (D-KY) footsteps, Reps. Mike Doyle (D-PA) and David Price (D-NC) announced on Monday that they will not seek reelection in 2022. Rep. Price, who won his seat in 1996, will be leaving the House Appropriations Committee while Rep. Doyle, a close ally of Speaker Pelosi, will be leaving House E&C, where he chairs the Communications and Technology Subcommittee. We anticipate additional Democratic retirements will be announced in the weeks ahead.