With Congress set to depart DC for the next two weeks, there’s been a notable increase in chatter regarding the status of BBB negotiations:

  • On Friday, Politico reported that Schumer and Manchin met twice last week.  They’ve only met six times this whole Spring, so that suggests the pace of discussions is ramping up.
  • Monday, Bloomberg published an article suggesting that talks were making progress, including a specific agreement on EV tax credits.
  • Yesterday, Bloomberg reported that a new fee on methane emissions from oil and gas operations is going to be part of the package.
  • And just today, there are competing articles highlighting how the expiring Obamacare subsidies could be the catalyst necessary to get a package done.

What does this all mean? The increased frequency of meetings is significant and suggests that efforts to craft a compromise are picking up, but the so-called progress on EV credits is less than meets the eye.  Apparently, the EV provision in question has been “out” for months.

The same skepticism should apply to the methane fee.  How does the Senate adopt a new gas tax at the same time the Biden Administration is calling for a suspension of the existing one?

And finally, while talks are definitely taking place, this report from Punchbowl speaking directly with Senator Manchin makes clear there’s no deal on ACA subsidies and they are still a long way from agreeing to a specific plan overall.

So we spoke to Manchin about Obamacare premium subsidies last night. Manchin was pretty non-committal. In fact, he was borderline negative. Here’s Manchin:

“I understand the conditions that we have and the challenges people have and everything. That’s something that, you know, in a perfect world, you want to do everything you can do. But the bottom line is, we’re strained right now. It’s a big strain. So I can’t tell you anything, you know, people are gonna do what they want to do.”

We then asked Manchin directly if he would support extension of the tax credits.

“There’s a lot of ifs there. That has not been discussed at all. Any discussions I’ve been involved with, it has not been discussed, no.”

Wait a second, what? ACA premiums are going to soar as much as 50% in January if the expanded tax credits expire and no one has presented Manchin with a proposal to remedy that? On a bill that would only require a simple majority vote? So we continued. Would Manchin support ACA subsidies in reconciliation if Democratic leadership and the White House proposed it?

“The most important thing, if they’re going to do anything, take this inflation as seriously as you can take it because it’s the most serious thing we have going right now. And you have to get your house in order and get that under control. And it’s paying down debt. That means you gotta start paying down debt.

“You don’t have a lot of options to do a lot of other things. So you have to be realistic about what you got. … And I supported [ACA subsidies] in the regular bill. But the bottom line is there’s only so many dollars to go around. And the rest of it – you saw the big package and the wish list they have on climate. I don’t know what they’re going to do.”

We’ll leave it to you. Does this sound like someone who is going to support extending ACA subsidies in the reconciliation package? And, by the way: Manchin said a reconciliation deal between him and Senate Majority Leader Chuck Schumer isn’t particularly close.

So once again, we’re stuck having to discern real progress from lots of wishful thinking.

The bottom line is that the odds of a deal remain low. There are numerous policy challenges to overcome and the time remaining to strike a deal is shrinking.  Were something to move, it would be significantly slimmed down from the bill that passed the nearly eight months ago.

That said, even a slimmed-down BBB represents a significant threat to Main Street, as it could include the proposed expansion of the Net Investment Income Tax (NIIT) and adverse changes to the TCJA’s NOL-Loss Limitation rules.  Both of these provisions are massive tax hikes, both would be shouldered exclusively by pass-through businesses, and both should be rejected by Congress.  Here’s why.

NIIT Expansion

The NIIT expansion would raise tax rates on family businesses by 3.8 percentage points. Advocates argue that’s necessary to close a longstanding “loophole” and help fund Medicare.  Neither is true.

Excluding active owners from the NIIT is not a loophole.  When the NIIT was enacted by the Obama Administration back in 2010, their goal was to level off the tax treatment of wages and unearned income.  The income of owners who work at their businesses is active income, however.  Moreover, the sponsors wanted to avoid the charge that their new tax would hit small businesses, so they deliberately excluded the income of active owners of S corporations and partnerships from the new tax.

Meanwhile, NIIT revenues don’t fund Medicare.  The NIIT is often described as funding Medicare, but that’s simply not true.  NIIT revenues go to the general fund, not the Medicare trust fund.  There’s no connection between the NIIT and Medicare.

The bottom line is the NIIT expansion is nothing more than a 3.8 percentage point rate hike on pass-through businesses. If you’re worried about raising rates on employers at the same time the odds of a recession are rising, then you’ll want to avoid this tax hike.

Main Street Advocacy Kit: 

Loss-Limitation Rules

Since the origination of the income tax, Congress has allowed businesses to carryback losses to reduce their overall tax liability and generate refunds.  The benefit is mostly one of timing.  Any refunds received while the economy was slow would be paid back in the form of higher taxes when the economy regained its strength.

This long-standing approach was complicated when the TCJA eliminated Net Operating Loss (NOLs) carrybacks and imposed a new, $500,000 cap on the active business losses a pass-through owner could use to offset other forms of income, such as wages and investment income.

The House-passed BBB would complicate matters further by making the loss-limitation rules permanent and tightening the rules. Under the TCJA, excess losses realized in year one are treated as NOLs in year two. Under the House bill, however, they would be treated as excess losses indefinitely.  The result is to treat pass-throughs worse than C corporations and create the possibility that some businesses never recoup their losses, no matter how many years they carry them over.

With the odds of a recession rising every day, these limitations present a serious obstacle to pass-through owners trying to keep their businesses afloat.  Past treatment of losses was counter-cyclical and good tax policy.  The loss treatment embraced by the House bill is pro-cyclical and will make a bad situation even worse.  Congress should fix this now, before the economy goes south.

Main Street Advocacy Kit: 

Conclusion

While the odds that the Senate successfully resurrects and passes a slimmed-down BBB remain low, the threat to Main Street businesses is large and justifies our continued vigilance.  Prices are rising, workers are hard to find, and the threat of a recession is growing.  This is not the time to hike taxes on employers.  Both of these provisions would do just that, and Congress should reject them.