The CBO score that centrist Democrats are waiting on was supposed to come tomorrow, giving us one more day of suspense. But CBO is the rare federal agency that finishes ahead of schedule. And so, buckle up.
CBO will publish a complete cost estimate for H.R. 5376, the Build Back Better Act, this afternoon. CBO has published 11 estimates for individual titles of the bill and will publish estimates for the remaining two titles this afternoon. https://t.co/KzSexvC8bo
— U.S. CBO (@USCBO) November 18, 2021
Pelosi is predicting a vote as soon as this evening, assuming other procedural niceties related to reconciliation can be ironed out in time. But does she have the votes?
Read this post from Monday if you missed it. Democratic moderates are willing to vote for the House’s Build Back Better package despite the fact that it’s going nowhere in the Senate as part of their deal with progressives. The progs backed the bipartisan roads-and-bridges bill that the centrists wanted, now it’s time for the centrists to return the favor by backing the social-welfare bill that lefties want — if, if, if it’s fully paid for. Biden has insisted all along that it is — the bill costs “nothing,” he tells us, amid snickering from the public — but a report earlier this week claimed that CBO is about to undermine him. The White House believes that by beefing up the IRS the feds can extract more revenue from wealthy tax cheats, to the tune of $400 billion over the next 10 years. Not so, CBO (allegedly) believes. As the IRS gets more aggressive about enforcement, the rich will get more aggressive about shielding their assets. CBO estimates just $120 billion in extra revenue over the next decade.
That’s a difference of more than a quarter trillion dollars, a big pill for centrist Dems to swallow after pledging that they won’t support a package that isn’t paid for.
Enter Lawrence Summers, riding to Team Biden’s rescue. Summers famously warned this past spring that if Democrats passed another $1.9 trillion in COVID relief they’d be risking inflation. The party ignored him to its and the country’s detriment. Now Summers is leveraging his credibility to tell Democratic centrists to be skeptical of CBO’s lowball estimate of how much extra revenue a bulked-up IRS might recoup. Summers thinks the White House’s estimate is not only closer to the truth is but that $400 billion may significantly underestimate how much revenue is out there.
Finally, and perhaps most important, official estimates leave out the large impact of increased enforcement on taxpayer behavior, due to the CBO’s belief that greater enforcement scrutiny will increase voluntary compliance “only modestly.” Even Treasury is extremely conservative in accounting for deterrence, suggesting that the indirect effect of additional spending on the IRS will be about half of the direct effect. This flies in the face of academic research: Indeed, a recent study from Tulane’s James Alm notes that the magnitude of these spillover effects are in the range of 4 to 12…
Cumulatively, these three adjustments would be sufficient to raise the CBO estimate above Treasury’s $400 billion measure. My judgment is that even Treasury is far too conservative. This estimate is less than half of what I concluded, in work with Natasha Sarin (who is now at the Treasury Department), can be generated by an infusion of resources into the IRS of about the same size as proposed by the Build Back Better Act. And while my estimates are much higher than those of Treasury, they are just less than half what other experts, including former IRS commissioners Fred Goldberg and Charles Rossotti, conclude can be generated by a robust attack on the tax gap.
That may give moderates a shot of courage to vote yes even if CBO ends up saying the bill isn’t paid for. It sounds like they’re already primed to overlook the discrepancy:
i explicitly asked moderate House Dems about this last night. and lawmakers including Gottheimer and Murphy told me that they acknowledged the gap in scores and were not troubled by it. we'll see how everything ultimately fares. https://t.co/BFc5JsaXF4
— Tony Romm (@TonyRomm) November 16, 2021
Of course, there’s an easy way for Democrats to plug any revenue holes in the bill, one that requires them to do nothing at all. They can simply stick with the cap imposed on the state and local tax (SALT) deduction that was imposed by Republicans when they passed the Trump tax cuts in 2017. Unfortunately for the caucus, though, there are enough Democrats from wealthy blue states like New York and California — including Nancy Pelosi — who support raising the cap to give their rich blue-state donors a tax cut that the bill likely can’t pass without it. Pelosi herself stood by the new provision raising the cap from $10,000 to $80,000 at her weekly press conference today:
Nancy Pelosi defends the massive tax cut for mega-rich residents of blue states tucked into the Democrats' $1.75 trillion tax-and-spending scheme. pic.twitter.com/Mh6XGNqmIz
— RNC Research (@RNCResearch) November 18, 2021
All but the richest of the rich in high-tax jurisdictions will be able to deduct their entire state and local tax burden from their federal taxes under the Democrats’ bill, a strange development for a party that styles itself as champions of the working class. But not so strange in light of political reality:
The *most expensive provision* in the BBB over 5 years is a tax cut that gives 84% of its benefits to the top-earning 10% of households. Inequality rhetoric aside, it reveals the real Democratic party constituency today – the coastal and urban professional class.
— Brian Riedl 🧀 (@Brian_Riedl) November 18, 2021
The suspense over reconciliation during the past two weeks has had to do with whether the critical mass of centrists whom Pelosi needs will ultimately vote yes, even if the CBO score disappoints. But the growing progressive upset over the SALT provisions raises a new worry for Dems: Are they sure they have the votes they need on the left for this bill? Watch this.
WATCH: Bernie Sanders blasts the Democrats’ own $1.75 trillion tax-and-spending scheme for giving tax cuts to millionaires in blue states.
“It’s bad politics. It’s bad policy.” pic.twitter.com/KX5Gc3Luee
— RNC Research (@RNCResearch) November 18, 2021
Progressives have championed Build Back Better from the start. My guess is that they’ll grit their teeth and vote yes tonight, SALT and all, just to move the bill forward and put Joe Manchin back on the hot seat to make a deal. But raising the SALT cap is a bitter pill to swallow for a populist niche that’s supposed to be committed to “distributive justice.” And it’s not just progressives who are having trouble digesting it. Some Dems in swing districts are already imagining what the GOP will do next fall with attack ads about Schumer and Pelosi giving back billions to rich liberals in their home states. Democrat Jared Golden represents a R+6 district in Maine and is already running scared.
Proponents have been saying that the BBB taxes the rich. But the more we learn about the SALT provisions, the more it looks like another giant tax break for millionaires.
The fact that more people and orgs on the Democratic side aren’t up in arms about this is wild.
— Congressman Jared Golden (@RepGolden) November 17, 2021
Is the party divide over SALT going to tank the bill? Again, I think not: Knowing that the bill is doomed in the Senate and that the final compromise version — if there is a final compromise version — will alter the SALT provisions might give the Goldens and AOCs in the caucus enough comfort to push it through tonight. But this issue will be a headache for Democrats throughout the rest of the reconciliation process, assuming Manchin doesn’t kill the reconciliation package entirely.