PRESIDENT BIDEN’S AMBITIOUS AGENDA has hit some turbulence. He won approval of the $1.9 trillion Covid aid bill last month, but a dominant theme over the long Easter break was that members in both parties are getting uneasy over the price tag of the next bills — and the threat of higher taxes.
IS A MASSIVE NEW INFRASTRUCTURE BILL NEEDED? We continue to believe that something close to full employment is possible by winter. The prospect of a red-hot economy has Republicans worried about their 2022 electoral prospects, so they are determined to obstruct Biden’s bills.
THE GOP HAS MOUNTED A FURIOUS assault on the three remaining components of the Biden agenda, which will cost so much money that even some Democrats are grumbling.
Our handicapping of the next three Biden components:
1. Infrastructure: More spending has decent support in Congress; who doesn’t like new bridges and smoother highways? But Biden’s $2.25 trillion proposal may get a haircut; maybe he’ll get a mere $1.75 trillion over eight years for a wide range of infrastructure projects — for boosting the power grid, getting cleaner water, funding electrical outlets at filling stations, etc.
2. Tax hikes: Republicans appear to be unanimous in their opposition to any new taxes, and Democrats are beginning to waver. Congress may not want to mess with the estate tax, or taxing capital gains as ordinary income.
And Joe Manchin, the moderate Democrat, is opposed to raising the top corporate tax to Biden’s proposed 28%; Manchin might settle for 25%. He claimed yesterday that “six or seven” other Democrats have serious objections to Biden’s pending proposal.
The public wants to hike taxes on the very wealthy and large corporations, but Biden’s proposal is likely to face a major haircut during negotiations this spring. He may get some tax increases, maybe half of what Progressives want; the markets can probably can live with that outcome.
3. A wide range of safety net spending — for community colleges, child tax credits, etc. — has little to do with Covid, but is part of the Democrats’ enormous progressive laundry list. Prospects of enactment are shaky at best; the safety net provisions simply may be too expensive.
ONE BIG COMPLICATION: Biden will be lucky to get 60 or 70 percent of what he wants — but first he will have to cut a deal with representatives from high-tax states like New York and California who are determined to restore tax deductions for state and local taxes. But the left will howl that only wealthy taxpayers would benefit.
STILL ANOTHER COMPLICATION is whether Biden will seek to combine these three provisions into a huge package via the budget reconciliation process (a dramatic change in the filibuster rules seems unlikely).
AN IMPORTANT RULING by the Senate parliamentarian yesterday would allow the Democrats to use reconciliation twice more this year, not just one more time, which could mean that infrastructure might pass separately, then tax hikes, with safety net spending perhaps coming later this year, or in 2022, or never.
BUT EVEN RECONCILIATION WOULD require all Democrats to vote for it — and that suddenly that looks a little less likely than before the Easter break. The Democrats can’t afford to lose even one of their votes, which is why Manchin is so pivotal.
OUR BOTTOM LINE: A haircut seems inevitable. Less spending than Biden wants — plus only a modest tax hike — wouldn’t be a bad scenario for the financial markets, which can live with a “haircut” scenario on taxes and spending.
IT MAY TAKE UNTIL LATE SPRING to get clarity on this legislation, but there’s little doubt about one crucial factor — an increasingly strong economy is baked in the cake, regardless of what Congress passes, as long as the Federal Reserve stays accommodative.
THE FED WILL KEEP ITS FOOT ON THE ACCELERATOR at least into the fall, even though the economy is sizzling already; the labor market, now tightening, will be nearing full employment by year-end.
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