After Senator Says No, Build Back Better Plan Appears Dead

Last week, both President Joe Biden and Senate Majority Leader Chuck Schumer (D-N.Y.) began to acknowledge Democrats’ Build Back Better bill might not get a vote in the Senate in 2021 due to ongoing opposition from Sen. Joe Manchin (D-W.Va.) and Sen. Kyrsten Sinema (D-Ariz.).

On Saturday, December 18, the Senate adjourned for the year without holding a final vote on the plan and then on Sunday Sen. Manchin said for the first time publicly that he would not support the legislation.

While that announcement means Democrats definitely do not have enough votes to get the bill passed in the Senate, it is likely President Biden and Sen. Schumer will try to resurrect negotiations in the new year. In fact, Sen. Schumer has said he will bring a “slimmed-down” bill up for a vote in January. (He did not offer specific details of what would in that bill.)

The president had faced serious headwinds all week regarding the bill, including a new nonpartisan economic estimate that showed the long-term cost of the legislation would be close to $5 trillion over the next decade. As readers are aware, this legislation includes significant tax increases on businesses, families, and individuals to pay for that new spending.

The U.S. House of Representatives has approved the legislation, but the Senate had planned to make several changes to it, including to the tax provisions. Indeed, early last week, Senate Finance Committee Chairman Ron Wyden (D-Ore.) released revised text for the tax portions of the bill. According to MSCI’s partners at the National Association of Manufacturers, Chair Wyden’s proposal updates several provisions that have concerned the business community, including:

• Book Tax:The Finance Committee text includes the House-passed book tax, but it adjusts it with respect to defined benefit pension plans. This change would allow a company’s financial statement income to be adjusted to disregard any income, cost, or expense in connection with a defined benefit plan.
• Section 163(n) Interest Limitation: The Finance Committee text would allow companies to elect out of section 163(n)’s EBITDA test and into an assets test, which would generate a ratio comparing the “aggregate adjusted bases of the assets” of a U.S. entity to those of the rest of its international financial reporting group. This ratio would provide the entity’s allocable share for the interest limitation under section 163(n). Research and development expenses would be treated as an intangible asset for purposes of this test (amortized over five years), and the assets test election would be irrevocable for five years.
• BEAT (Base Erosion Anti-Abuse Tax): The Finance Committee text would apply the House bill’s changes to the cost of goods sold exception with respect to the three percent base erosion percentage test. Accordingly, the change in the COGS treatment would now apply in 2022 and 2023 (as opposed to 2024 in the House bill).
• Dividends Received Deduction (DRD) 245A: Unlike the House bill, the Finance Committee text would still allow for a 245A dividends received deduction from a specified 10 percent owned foreign corporation (as opposed to the House bill which would limit the DRD to controlled foreign corporations).

While this text reflects Chair Wyden’s current thinking, these proposals are not considered final — especially given Sen. Manchin’s opposition and the need to get him to reconsider.

Overall, the Senate Finance draft includes approximately $1.5 trillion in tax increases on corporations, small businesses, and families.

Senators also are contemplating changes to the energy provisions in the bill, including:

• A proposal to increase the fee for oil and gas drilling on federally owned lands and waters; raise offshore drilling royalty rates from 12.5 percent to 14 percent; and increase onshore oil and gas production royalty rates to more than 16.5 percent from the current rate of 12.5 percent. (The House legislation would raise that rate to 18.75 percent.) Read more here.
• The House and Senate bills both include a methane fee that would begin at $900 per ton for emissions reported in 2023 and ramp up to $1,500 in 2025. That measure also includes $775 million for grants, rebates and loans available to operators to help them deploy technologies to stop methane leaks. Read more here.

These are not the only potentially problematic energy provisions in the bill. The White House also wants to offer a tax credit for American-built electric vehicles — an idea to which U.S. allies are opposed. In fact, last week Canadian Deputy Prime Minister Chrystia Freeland wrote  to top U.S. senators threatening to suspend parts of the U.S.-Canada-Mexico free trade agreement and to impose tariffs on U.S. goods if the tax credit is approved. In the letter, Freeland and Canadian International Trade Minister Mary Ng said, “The proposal is equivalent to a 34 percent tariff on Canadian-assembled electric vehicles” and “is a significant threat to the Canadian automotive industry and is a de facto abrogation of the USMCA.”

Earlier in the week, Canadian Prime Minister Justin had proposed a compromise by which Canada would pass its own, equivalent tax credit for electric vehicles built in the United States and Canada. Any alterations that the Senate makes to the Build Back Better plan means House lawmakers will have to vote again — when (and, more likely, if) the Senate acts in the new year.

As noted previously in Connecting the Dots, MSCI opposes the tax and labor provisions contained in this legislation. Click here to learn how you can oppose these provisions too.