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TAX TAKE: Surprise, Surprise: Manchin and Schumer Reach Budget Reconciliation Deal

Tax Alert

Last week turned out to be a very eventful one in Congress. First, with significant bipartisan votes, the Senate and House of Representatives passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act and sent it to President Biden's desk for signature. The legislation seeks to spur the semiconductor manufacturing sector and enhance U.S. competitiveness with China. CHIPS includes a 25 percent investment tax credit for advanced manufacturing facilities that produce semiconductors or semiconductor manufacturing equipment.

In a stunning turn of events, last Wednesday Senator Joe Manchin (D-WV) and Majority Leader Chuck Schumer (D-NY) announced an agreement on a slimmed-down budget reconciliation package: the Inflation Reduction Act (IRA) of 2022. The legislation focuses on Affordable Care Act (ACA) subsidies, energy security and climate change, prescription drug pricing reform, and deficit reduction. From a tax perspective, the IRA proposes to apply a 15 percent book income minimum tax, increase the taxation of carried interests, and increase funding for IRS enforcement. This package caught policymakers and Washington by surprise and a flurry of activity has begun around these proposals. So, what should you watch out for this week on the IRA?

Timing. Senator Schumer wants the Senate to vote on the IRA this week. The Senate is scheduled to start its summer recess on August 8, and the House is already in recess for the month. However, because this package is a top priority for the White House and Congressional Democrats, expect the Senate to delay the start of the August recess if necessary and potentially go into next week to consider the IRA. In addition, the timing of the Senate vote may be impacted by health issues, given that Senator Patrick Leahy (D-VT) is recovering from hip replacement surgery and reports that several senators are dealing with COVID-19. If and when the Senate passes the bill, expect the House to be called back from recess to vote on the package.

Next Legislative Steps. A number of steps still must take place for the IRA to be ready for floor consideration in the Senate and House. While the legislative text of the Manchin-Schumer compromise was released last week, both chambers, including the relevant Congressional committees, are reviewing the legislation for potential substantive and technical modifications. On a parallel track, the Senate Parliamentarian is reviewing the legislation to ensure it complies with the budget reconciliation rules. Additionally, the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) are preparing cost estimates of each proposal, which is necessary to begin floor consideration. These tasks take time, and ultimately will determine the timing of floor consideration of the package.

Senator Sinema and the House. Senator Kyrsten Sinema (D-AZ) is the wild card who will determine the IRA's fate. At press time, Senator Sinema still had not indicated whether she would support the Manchin-Schumer deal. Her support is critical for Democrats to achieve the 50-vote threshold in the Senate to pass the package. Last year during the consideration of the broader Build Back Better legislation, Senator Sinema expressed opposition to several tax proposals, so expect her to advocate for changes to the IRA given her prior concerns regarding the scope of the 15 percent book income minimum tax and prior opposition to changes to the taxation of carried interests. Additionally, while the initial negotiations have occurred in the Senate, it is important to also track developments in the House as key House members are likely to advocate for changes to the Manchin-Schumer deal, particularly moderate House members who have prioritized relief from the state and local tax (SALT) deduction cap limitation. That said, Speaker Nancy Pelosi (D-CA) has expressed support for the Manchin-Schumer deal, which significantly increases the legislation's prospects in the House.

The political and policy atmosphere for considering the IRA remains fluid this week. The coming days will be pivotal with more surprises possible as active negotiations continue. It will be important to monitor these developments closely and stay engaged. #TaxTake

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