The secret agreement announced last week between Senate Majority Leader Chuck Schumer and West Virginia’s Joe Manchin reviving several of the key elements of President Joe Biden’s Build Back Better plan has one of the biggest political surprises that Washington has seen in many years.
Just two weeks earlier, Manchin angered his fellow Democrats by announcing he was walking away from a similar deal he had been negotiating with Schumer, over fears that its tax increases and additional spending on clean energy would stoke inflation and throw the economy deeper into recession.
The collapsed deal between Schumer and Manchin had included $300 billion in new federal tax incentives to further develop clean energy sources, like solar and wind power. It would have empowered Medicare to negotiate with pharmaceutical companies to bring down the cost of a small number of expensive prescription drugs, while capping the out-of-pocket drug costs for Medicare recipients. It would also have extended expiring subsidies for the monthly premiums of Obamacare health insurance for subscribing middle class families.
That Schumer-Manchin deal had been harshly criticized by Republicans, not because of its benefits, which are popular with many voters, but primarily because it would have been paid for by the extension of a 3.8% tax on high income households to the profits of small business owners, which would discourage job creation and new investment at a time when the economy was already slowing down.
Republican Senate Minority Leader Mitch McConnell was also angered that Schumer intended to pass the bill he was negotiating with Manchin with no Republican input or support. Under the Senate’s reconciliation rules, the bill would be immune to a GOP filibuster. Only the votes of all 50 Democrat senators plus the tiebreaker cast by Vice President Kamala Harris would be needed to pass it.
MANCHIN HOLDS BACK
On the night of July 14, when the media was reporting that a firm deal between Schumer and Manchin was about to be announced, Washington was shocked to learn that Manchin was holding back, spooked by the bad news on inflation and the slowing of the economy.
But in a West Virginia radio interview the morning after Manchin told Schumer that the deal was off until news on the economy improved, he insisted that he still supported most of the deal’s provisions, except for its climate change and government spending provisions.
“I want climate. I want an energy policy,” Manchin insisted. “I would not put myself through this if I wasn’t sincere about trying to find a pathway forward to do something that’s good for our country.”
Manchin also said he would reconsider supporting the deal if the next readings on inflation and the economy were to improve, even though there might not have been enough time in the legislative calendar before the end of fiscal year 2022 for the Democrats to revive it. And after more than a year of waiting in vain for Manchin to say “yes” to a reduced version of Biden’s Build Back Better proposal, almost nobody in Washington believed that Manchin was still serious about continuing negotiations at that point.
Democrats were furious. Most of them believed that he had killed their last chance to deliver on key Biden administration’s promises to their voters, which were their best hope to stave off a disastrous defeat in the November midterm elections.
Republicans, on other hand, were confident that Manchin’s latest reversal on the Biden proposal had finally killed it.
NOBODY TOOK MANCHIN SERIOUSLY
But both of them were wrong. Manchin was serious. The West Virginia senator initiated the new round of talks with Schumer during a chance meeting just four days after the previous negotiations collapsed in a series of public recriminations.
Recalling that encounter, Manchin said, “By Monday, we passed each other, [I said] ‘Hey, how you doing, you still upset?’” He then told Schumer, “This is ridiculous, let’s recalibrate and see if something could be done,” and then added apologetically, “You know how our tempers get a little bit ahead of us at times.”
To his credit, Schumer took Manchin at his word and restarted their talks, but this time in secret, to keep them well beneath the media radar. As a result, the announcement of their deal last week came as a complete surprise to almost everyone in DC.
Manchin explained that he had changed his mind because the deal with Schumer was significantly different from the one he had walked away from just two weeks earlier. It contained new provisions to fight inflation, reduce the federal budget deficit, and encourage domestic fossil fuel production. The deal also had a new name.
“The Inflation Reduction Act of 2022 invests in the technologies needed for all fuel types — from hydrogen, nuclear, renewables, fossil fuels and energy storage — to be produced and used in the cleanest way possible. It is truly all of the above, which means this bill does not arbitrarily shut off our abundant fossil fuels,” a statement from Manchin’s office emphasized. “This bill will cut the inflation taxes Americans are paying, lower the cost of health insurance and prescription drugs, and ensure our country invests in the energy security and climate change solutions we need to remain a global superpower through innovation rather than elimination.”
Manchin insists that his deal with Schumer does not include any tax increases, aside from a 15% minimum tax on large corporations which currently pay much less or nothing. But Manchin calls that just closing a tax loophole. The current proposal also eliminates roughly $500 billion in new federal taxes by removing a $3.8% tax rate increase on small business owners that had been in the previous version.
Manchin had been encouraged to resume the talks with Schumer by his colleague, Senator Chris Coons, a Delaware Democrat. He also had consulted with former Clinton Treasury Secretary Larry Summers, who had opposed Biden’s previous spending proposals as inflationary, but who was quick to endorse the new Schumer-Manchin deal reached last week by declaring, “This bill is fighting inflation.”
Speaking on the floor of the US Senate behalf of his fellow Republicans, McConnell condemned the Schumer-Manchin proposal as a “giant package of huge new job-killing tax hikes, Green New Deal craziness that will kill American energy, and prescription drug socialism.”
MANCHIN’S BILL DOES LITTLE TO FIGHT INFLATION
Despite its new name, the Inflation Reduction Act of 2022, its main initiatives are roughly the same as they were three weeks ago, and most of them will do little or nothing immediately to directly lower the current 9.1% rate of inflation.
Like its predecessor, the bulk of the spending in the newly revised deal, $369 billion, is devoted to climate change provisions. However, Manchin argues that it is a major improvement over the previous version, because the deal now includes provisions that will encourage additional domestic production by the fossil fuel industry. Increasing the supply of domestic fossil fuels would provide American consumers with relief from the high cost of gas at the pump and other forms of energy, including household electricity, natural gas, and heating oil.
The deal’s provisions would provide a major boost to the economy of Manchin’s home state of West Virginia. It would make permanent a federal trust fund to support coal miners with black lung disease. It would offer new incentives for companies to build wind and solar farms in areas where coal mines or coal plants have recently closed. It would also provide generous tax credits for Manchin’s favorite energy projects, such as the development of new technologies like carbon capture and storage and low-emissions hydrogen fuels.
Even though most liberal environmentalists remain opposed to any measure which would support the continued use of fossil fuels, many of the country’s biggest environmental groups hailed the Schumer-Manchin deal. They believe that the impact of its measures leading to more carbon emissions from fossil fuels will be dwarfed by the bill’s clean-energy provisions. Overall, the environmentalists believe that the deal will further hasten the decline of the use of coal for generation of electricity in the United States.
RESCUING WEST VIRGINIA’S ECONOMY
Manchin’s West Virginia remains the nation’s second-largest producer of coal, but its mining industry has declined sharply over the past decade as electric utilities nationwide have moved away from the burning of coal to cleaner and cheaper natural gas and to zero-emission renewable sources of power, such as wind and solar. Despite the new benefits for West Virginia’s coal industry in the Schumer-Manchin deal, including support for carbon capture technology that could allow coal or gas-burning power plants to keep operating with lower emissions, coal’s long-term decline as a major domestic source of American energy is expected to continue.
According to Phil Smith, a lobbyist for the United Mine Workers of America, the most crucial pro-coal industry provision in the deal is the tax credits it provides for the further development of carbon capture technology, which has been struggling because of its high costs.
“If we’re going to have coal industry 15, 20, 30 years from now, it is because we have developed carbon capture and deployed it, that’s just the truth,” Smith told the New York Times. “Folks out in the coal fields understand that. And the coal companies understand that.”
Another lifeline for the coal industry in the Schumer-Manchin deal is a $5 billion provision to enable existing coal-fired power plants to meet today’s stricter environmental controls by installing devices called scrubbers which remove pollutants from the emissions of their smokestacks.
FOSSIL FUEL ENERGY TRADEOFFS
The deal with Manchin also scales back, but does not eliminate, a new fee imposed on oil and natural gas well and pipeline owners for leaks of methane, which is a more potent greenhouse gas than carbon dioxide.
Another trade-off in the deal is an increase in the royalties that fossil fuel companies will pay the federal government in return for the Biden administration’s agreement to continuing leasing at least two million acres a year of federal lands and 60 million acres a year offshore in the Gulf of Mexico and Cook Inlet in Alaska for energy exploration. Keeping that commitment to Manchin to permit continued drilling on federal lands will require President Biden to violate one of his key environmental policy promises during the 2020 presidential election.
Manchin, as well as some of the more open-minded environmentalists, recognize the value of nuclear energy as one of the most reliable sources of emissions-free electrical energy available today. As a result, the deal with Schumer also includes a new electricity production tax credit for nuclear reactors to help keep those that are still operating across the country from being shut down prematurely due to pressure from anti-nuclear activists.
Thanks to Manchin, one of the provisions in Biden’s original Build Back Better plan meant to appeal to organized labor, an additional $4,500 tax credit for purchasers of union-built electric cars, was dropped from the current deal.
The $369 billion for energy security and climate provisions is, by far, the single largest expenditure in the Schumer-Manchin deal, but it is still $200 billion less than the amount earmarked for the same purposes in Biden’s original Build Back Better proposal last year.
CUTTING MEDICARE DRUG COSTS
The new Schumer-Manchin deal also carries over previous proposals to enable Medicare to negotiate cheaper prices with drug companies for some of the most expensive prescription drugs. It would then use the projected $288 billion in drug cost savings to cap out-of-pocket prescription drug costs for seniors participating in Medicare Part D to $2000 a year, and extend Obamacare health insurance monthly premium subsidies for middle income families that would otherwise expire at the end of this year. Those subsidies currently lower health insurance costs for 13 million Americans by an average of $800 a year. The premium subsidies were instituted last year as part of Biden’s $1.9 trillion Covid relief package. Under the Schumer-Manchin deal, the subsidies would be extended for three years, beyond the 2024 election, at a cost of $64 billion.
There is, however, a major change on the tax side of the new version of the Schumer-Manchin deal. It does away with the new 3.8% tax on small business owners in the original scheme, and proposes instead to raise $313 billion by imposing a 15% minimum tax the income of all large corporations.
Schumer and Manchin also propose to raise $124 billion by stepping up IRS tax enforcement, which, based upon previous experience, is unlikely to materialize. They also predict additional federal revenues of $14 billion from partially closing the carried interest tax loophole used by private equity and hedge fund managers.
THE CARRIED INTEREST ISSUE
Carried interest has been a favorite Democrat target as an example of unfair preferential federal tax treatment for the wealthy for the past 15 years.
Private-equity investment firms typically reward their managers with both fixed management fees and a percentage of the firm’s profits, which is called carried interest. The management fees are taxed as ordinary income, but the carried interest payment can qualify for reduced long-term capital-gains rates of 23.8%. Most Democrats say this is unfair, because carried interest is really part of the manager’s wages, rather than an investment, which is what the capital gains rate was always intended for.
The carried interest provision in the Schumer-Manchin deal would extend the amount of time that private equity firms would have to hold an investment before their managers qualify for lower capital gains tax rates from the current three years to five years.
While the $14 billion gained from the carried interest provision would represent just 2% of the new tax revenues generated by the deal, it could be a crucial issue for Arizona’s Democrat Senator Kyrsten Sinema, who insisted last year that a similar carried interest provision be dropped from Biden’s original Build Back Better bill.
BIDEN CLAIMS CREDIT FOR SCHUMER’S DEAL
After Manchin’s objections finally killed Biden’s Build Back Better bill last year, amid bitter recriminations from both sides, the president stopped negotiating directly with the West Virginia senator and designated Schumer to take over the talks. But as soon as the Schumer-Manchin agreement was announced last week, Biden was quick to take political advantage of the success by issuing a statement praising the deal as “historic.”
“This is the action the American people have been waiting for,” the statement said. “This addresses the problems of today — high health care costs and overall inflation — as well as investments in our energy security for the future.”
Biden also said, “With this legislation we are facing up to some of our biggest problems and we’re taking a giant step forward as a nation.”
On paper, at least, the Schumer-Manchin proposal would raise a total of $739 billion over the next decade, while spending only $433 billion on the energy security, climate change, an extension of Obamacare insurance premium subsidies, and a $2,000 out-of-pocket cost cap on prescription drugs bought through Medicare Part D. Theoretically, it would yield a net $300 billion federal deficit reduction, which Manchin claims will help to fight inflation.
POTENTIAL OBSTACLES TO FINAL PASSAGE
But “the devil is in the details” of this mix of tax and spending proposals. Some of them could change before the Senate votes on the proposal, which Schumer hopes will take place by the end of this week, when Senate is scheduled to adjourn for its August recess. Even with Manchin’s support, there are still a number of obstacles in its way.
The deal must be turned into legislative language, which then must be reviewed by the Senate’s parliamentarian to make sure that it qualifies for the reconciliation process, which will prevent it from being blocked by a Republican filibuster.
Assuming that all 50 GOP senators will vote against it, the bill would need the support of all 50 Democrats, plus Vice President Harris’ tie-breaking vote, to pass the Senate. Even with Manchin’s support, those 50 votes are not yet assured.
Senator Sinema was not involved in the Schumer-Manchin negotiations, and when their deal was announced, she refused to say whether she will support it. But last year, she did support a 15% minimum corporate tax and additional tax revenues from IRS enforcement as an alternative to the proposed increase in the corporate tax rate which was included in Biden’s original Build Back Better plan, which she had opposed.
New Jersey Democrat Senator Robert Menendez has complained that the Schumer-Manchin deal would leave the current $10,000 cap on SALT (state and local tax) itemized deductions in place, limiting that deduction’s benefits to middle- and upper-income taxpayers in New Jersey and other highly-taxed blue states, such as New York and California. Menendez hinted that unless the SALT cap issue is addressed, he might adopt Manchin’s tactics by refusing to vote for it, denying Democrats the 50 Senate votes they will need to pass it. “Anybody can be Joe Manchin. I can be Joe Manchin right now,” Menendez warned.
The SALT cap was instituted by President Trump to help him pay for his 2017 tax cut bill. The lack of relief for it in the Inflation Reduction Act could make it difficult for Speaker Nancy Pelosi to pass the bill in the House, where it may be opposed by the same small group of moderate Democrats who raised the SALT cap issue last year when the original Build Back Better proposal was being drafted.
Because unlike House members, who can vote remotely, senators are required to cast their votes in person, and Democrats are concerned about their ability to get all 50 of their members to the Senate floor this week to vote on the Inflation Reduction Act, including Manchin and Illinois Senator Dick Durbin, who were diagnosed with Covid last week, as well as Vermont’s Senator Patrick Leahy, who fractured his hip in June.
MANCHIN GAMBLING ON SCHUMER’S PROMISE
Senator Manchin also demanded another concession from Schumer before agreeing to support the deal. It was a promise that President Biden and congressional Democrats would pass a bill before September 30 to expedite the permitting process for energy-related projects, such as drilling in new fields, pipeline construction, and running long distance electric transmission lines. The permitting reforms are necessary to meet this country’s long-term goals to develop new sources of both renewable and fossil fuel energy, but because it isn’t a budget item, the Senate’s budget reconciliation rules will not permit the reforms to be included in the Inflation Reduction Act. They and must be voted upon and passed separately.
That permitting reform promise is a weak point in Manchin’s deal, because once the inflation act is passed with his 50th vote, Manchin will lose his ability to hold Schumer to his promise to pass a permitting reform measure. Because those reforms would mostly benefit the fossil fuel industry, they are also likely to be opposed by the Progressive Caucus of House Democrats. Last year, that caucus held up a House vote on Biden’s bipartisan infrastructure bill for two months because the progressives feared — correctly, as it turned out — that passing infrastructure first would make it more difficult for them to pass Biden’s $3.5 trillion original Build Back Better bill, which was filled with progressive proposals. That could easily happen again with permitting reform.
As a Wall Street Journal editorial notes, “Mr. Manchin is out on a political limb” with his voters back home over the permitting reform issue, because “the Mountain Valley Pipeline, a natural-gas project originating in Mr. Manchin’s West Virginia, is in legal limbo despite being almost 95% complete.” Its continued delay is costing the economically depressed state many valuable jobs.
Both conservatives and liberals have expressed concern about the ultimate impact of the permitting reforms that Manchin has demanded, if they come to pass.
Democratic Congressman Raul Grijalva of Arizona said he worries that permitting reform might be a “euphemism for gutting our most foundational environmental and public health protections, like the  National Environmental Policy Act.”
Republican Senator Kevin Cramer expressed doubt that the Biden administration could be trusted to follow through on Schumer’s promise to Manchin: “We have lots of permitting reform in the infrastructure bill that the Department of Transportation and others just ignore.”
According to the Wall Street Journal editorial, permitting reform is badly needed to streamline the building of all kinds of energy projects, but it is sure to be opposed by “the Democratic Party’s sizable keep-it-in-the-ground caucus bent on killing all fossil-fuel development. Progressives don’t seem to realize that red tape doesn’t spare green plans.”
MANCHIN’S TALKING POINTS
When Schumer and Biden announced their deal last week, they published a one-page summary of the main provisions of the Inflation Reduction Act of 2022, concluding with a list of six talking points describing its main goals:
- Enacts historic deficit reduction to fight inflation
- Lowers energy costs, increases cleaner production, and reduces carbon emissions by roughly 40% by 2030
- Allows Medicare to negotiate drug prices and caps out-of-pocket costs to $2,000
- Lowers ACA [Obamacare] health care premiums for millions of Americans
- Make biggest corporations and ultra-wealthy pay their fair share
- There are no new taxes on families making $400,000 or less and no new taxes on small businesses — we are closing tax loopholes and enforcing the tax code
The first and final points have been disputed by a number of economic analysts. The proposed increases in energy and corporate taxes and the limits imposed on drug price increases would probably help slow inflation, but the increases in government spending on climate and healthcare programs would have the opposite effect. They would roughly cancel each other out, resulting in a very slight increase in inflation until 2024, followed by a very small (0.25%) reduction in the rate of inflation thereafter, according to the Penn Wharton Budget Model devised by economists at the University of Pennsylvania.
DELAYED DRUG PRICE RELIEF
Similarly, the immediate impact of the Schumer-Manchin deal on the cost of prescription drugs would be to keep price increases from exceeding the current overall inflation rate. Consumers won’t see significant reductions in the cost of the most expensive drugs purchased through Medicare Part D until 2026.
However, the part of the Schumer-Manchin proposal that would set a cap of $2000 in annual out-of-pocket prescription medicine costs would result in significant savings for the 1.2 million Medicare Part D participants who paid more than that amount in 2019. Seniors would also no longer have to pay 5% of their prescription drug cost, after their out-of-pocket spending exceeds the Medicare threshold for catastrophic drug spending, which is $7,050 this year.
The biggest beneficiaries of the proposed cap on out-of-pocket costs are those who cannot afford the co-pays on their high cost medicines, and are forced to leave their prescriptions unfilled. According to a study published earlier this year in the journal Health Affairs, 30% of patients who have been prescribed anti-cancer drugs are not taking them due to the high cost, as are more than 50% of those who have prescriptions for drugs to treat their immune system-related disease.
Lobbyists for the pharmaceutical industry had been successful until now in fighting proposals to impose federal price controls on prescription drugs. They argue that consumers would eventually suffer from government prescription drug price fixing because it would eliminate the industry’s profit incentive to continue its high risk, long-term investments in the costly development of lifesaving new medications.
Spending on prescription drugs by Medicare as well as the optional Medicare Part D drug-benefit program represents one-third of the nationwide prescription drug market. But until now, Medicare has been prevented by law from trying to negotiate lower prices from drug manufacturers. The Schumer-Manchin deal would gradually begin to change that. Starting in 2026, Medicare would start negotiating prices for the 10 drugs responsible for the most spending by the Part D program. The drugs also must have been on the market for at least nine years, and have no available low-cost generic equivalents. Some of the prescription drugs which currently meet those criteria include the blood thinner Eliquis, Darzalex for the treatment of multiple myeloma, and the Type 2 diabetes and weight loss drug, Ozempic.
The pharmaceutical companies will have no real choice other than to cooperate. If they refuse to negotiate their drug prices with Medicare, they would then become subject to a 95% excise tax on their drug sales.
In subsequent years, more of the most expensive drugs for Medicare Part D would be subject to price negotiations. In 2028, prices for 20 of the most expensive drugs which must be administered in an outpatient facility, and which are covered under Medicare Part B, would also become negotiable for the first time.
However, one measure in the Schumer-Manchin deal would an immediate impact on prescription drug pricing. It would force drugmakers to provide a rebate if they raise the prices of their medicines above the overall inflation rate.
MANCHIN’S DEAL DOES RAISE TAXES
According to Republicans on the Senate Finance Committee, citing data from the nonpartisan Joint Committee on Taxation (JCT), Americans of all incomes would see their federal taxes rise due to the indirect effects of the bill’s 15% minimum tax on larger corporations. The JCT analysis assumes that companies would pass along the minimum tax they will have to pay to their employees by reducing their after-tax wages and job opportunities. Company shareholders would also take a financial loss, since the value of their stock holdings, including those held by pensions and mutual funds, as well as individual 401K retirement accounts, would likely decline.
The JCT analysis concludes that the Schumer-Manchin deal, if enacted into law, would increase the 2023 tax burden on households with incomes under $200,000 a year by a total of $16.7 billion nationwide.
As free market conservatives have argued many times in response to Democrat claims that corporations do not pay their “fair share” of the cost of government, businesses do not pay taxes; they merely collect them from their customers, shareholders, and employees, who all are eventually forced to share the financial burden. If Manchin’s deal raises corporate taxes, it will ultimately mean fewer jobs, higher prices, or both. Either way, it won’t lower the burden of today’s inflation on the American people.
Similarly, Manchin’s claim that his deal with Schumer is a “deficit reduction package” is speculative at best. If forcing American corporations to pay a new 15% minimum tax makes them less competitive in the marketplace, the Schumer-Manchin deal could result in a net loss of tax revenues rather than a surplus.
As for Manchin’s claim that his deal only calls for the closing of existing tax loopholes, history tells us that the clever accountants and tax attorneys working for the wealthy and the corporate elite will find new loopholes to exploit, and that their lobbyists will use their influence in Washington to carve out new ones.
Another point to consider that such judgements are all in the eyes of the beholder. One man’s tax loophole is another man’s justified tax deduction. As Fox Business News commentator and former Trump economic advisor Larry Kudlow points out, the reason why some profitable corporations paid less than 15% in taxes is because they were responding to tax code incentives designed to encourage them to follow a certain desirable pattern of behavior. These include bringing their profits earned offshore back to the United States, or investing more than they otherwise would in research and development or the purchase and immediate expensing of new equipment. Imposing a 15% minimum tax would defeat the purpose of these tax code incentives and impede the growth of the overall economy.
MANCHIN IN DENIAL
In a CNN interview Sunday, Manchin rejected the JCT analysis and emphasized that the deal that he and Schumer are proposing is “not putting a burden on any taxpayers whatsoever.” In addition, the West Virginia senator declared that the analysis of the Penn Wharton Budget Model of the deal’s impact on inflation was also wrong. “How can it add flames to inflation fires right now if you’re paying down debt?” Manchin insisted.
In a separate interview the same day with Fox News anchorman Bret Baier, Manchin was asked why the American people should believe him now, when he had said last year that Biden’s Covid stimulus package, called the American Rescue Plan, would not lead to inflation. Manchin was quick to admit that he was wrong last year, but then added, “Bottom line, I’ll make sure I didn’t make that mistake again,” regarding his new deal with Schumer.
Manchin told Baier that he had been doubtful that he would ever be able to reach a deal with Schumer, but that when he did reach an agreement, he “made sure there were no tax increases whatsoever.” With regard to the revenue measures in the deal, Manchin insisted that, “all it does is close [tax] loopholes.”
Manchin was also asked about the provision in the bill which would restore a $7,500 federal tax subsidy for couples making up to $300,000 a year who purchase a new electric or hybrid-powered car that costs no more than $55,000. The price limit on trucks, vans, and SUVs is $80,000. Manchin had previously criticized the idea of using tax money from the general public to pay for wealthy Americans to buy expensive vehicles. He had pointed out at the time that despite their high prices, the electric and hybrid cars were already in high demand, so federal incentives were not needed and made no sense.
MANCHIN REVERSES HIMSELF ON ELECTRIC VEHICLE REBATES
Manchin said Sunday that he still feels the same way about tax rebates for the rich, but that the incentives in the current bill were justified because to qualify for the $7,500 tax credit, Americans will have to buy electric cars using batteries and key raw materials — such as cobalt and lithium — built or supplied by companies in the United States or its Western trading partners, rather than in China.
“We shouldn’t be looking for China to make sure that they have a total stranglehold on us and that’s what we’re trying to break. And we’re going to break it as quickly as we can, because we’re incentivizing [US production],” Manchin said.
The Schumer-Manchin deal also contains a new $4,000 federal tax credit for those who buy a used electric or hybrid vehicle from an authorized car dealership, and which is available only to couples making $150,000 or less each year.
Even though the original $7,500 federal tax credit has been available for hybrid cars buyers for more than a decade, the major car manufacturers wanted it extended, because it was only available for the first 200,000 electric vehicles that they sold. Tesla and GM passed that 200,000 threshold years ago, as has Toyota more recently. Because the entire auto industry has been forced by federal climate change policies into a mass conversion to electric vehicles, all the major car makers will soon be affected by the 200,000-vehicle cap, and have been lobbying Congress vigorously for its elimination.
During the first round of negotiations between Schumer and Manchin, GOP Minority Leader McConnell warned Schumer that if he tried to pass his deal with Manchin without any GOP participation, using the Senate’s reconciliation procedures, he would block passage of the CHIPS Plus, also known as the CHIPS and Science Act a bill that members of both parties wanted.
SCHUMER’S CHIP BILL DECEPTION
The bill was primarily designed to strengthen America’s strategically vital domestic semiconductor chip infrastructure and production capabilities, for which it authorized $52 billion. Its broader aim was to restore America’s world leadership in basic scientific research which has been challenged in recent years by China. For that purpose, the bill authorized $100 billion in spending over the next five years, including $80 billion for the National Science Foundation. In addition, it provided tens of billions to support regional technology hubs, and a federal tax credit covering 25% of new investments in domestic semiconductor manufacturing through 2006. As a result, the total cost of the bill grew to $280 billion.
After a year and a half of effort to develop the CHIPS and Science Act, the Biden administration believed that its passage was essential to national defense and to preserve America’s technological edge over an increasingly ambitious and aggressive China.
But three weeks ago, when Manchin publicly refused to finalize his negotiations with Schumer because of his concerns that the rate of inflation reached 9.1% in June, and concerns about the Federal Reserve continuing to raise interest rates, threatening a recession, all of Washington was convinced that the Schumer-Manchin deal was dead.
Even McConnell was convinced, and dropped his threat to block a Senate vote on the CHIPS and Science Act, allowing it to pass the Senate last week by a 64-33 margin, including 17 Republican votes. The very next day after that rare legislative victory for Biden and the Democrats, Schumer and Manchin revealed their nasty surprise — their deal had been secretly resurrected, and now that McConnell could no longer block passage of the CHIPS bill, Manchin’s Inflation Reduction Act would go forward under reconciliation rules, passing the Senate with Democrat support only.
In response, Republican House Minority Leader Kevin McCarthy belatedly tried to carry out McConnell’s threat, by urging House GOP members to vote against the CHIPS bill. But that battle had already been lost. The House passed the bill by a vote of 243-187, with 24 Republicans defying McCarthy by crossing over to vote in support the legislation.
MAKING REPUBLICANS LOOK FOOLISH
Conservatives reacted with despair, claiming that McConnell had been deceived by Manchin and outmaneuvered by Schumer. They recognized that a critical shortage of foreign-made computer chips was a major factor in the supply chain issues which have been hobbling America’s manufacturing sector, and they supported the effort to make the country self-sufficient again in the production of computer chips.
In 1990, the US had produced 37% of the worldwide supply of computer chips. Today that percentage has dropped to just 12%, with 80% of computer chips used in US-manufactured products being made in Japan, South Korea, Taiwan, and, increasingly, mainland China. The chips are essential to a wide variety of US manufactured products, from autos to home appliances to the most sophisticated weapons in the US military arsenal, which is why reliance on foreign chip producers has become a national security issue.
Some of the Senate Republicans, such as Florida’s Marco Rubio, who voted against the CHIPS measure last week, said that it lacked adequate “guardrails” to prevent some of the funding in the bill from winding up in China’s hands. Others argued that the funding the bill provided to stimulate domestic chip production was not nearly enough to make the US competitive once more against the world’s leading Asian chipmakers.
Some conservatives also felt that most of the new spending measures in the $280 billion CHIPS bill amounted to corporate welfare for a highly profitable industry that doesn’t need government help. In a rare instance of agreement, so did Vermont’s socialist Senator Bernie Sanders, the elder statesman of progressive Democrats, who condemned an earlier Senate version of the CHIPS act as a “$53 billion blank check to profitable microchip and semiconductor companies.”
MANCHIN TRICKED EVERYONE, INCLUDING HIMSELF
But the real problem for conservatives was that Manchin and Schumer had made McConnell and Senate Republicans who were tricked into enabling the CHIPS act to pass look naive and incompetent, while giving the struggling Democrats a significant political victory that has revived their hopes for surviving the November midterm elections with fewer House losses than expected, and just possibly maintaining their control of the Senate.
It wasn’t just McConnell and Senate Republicans who had let their guard down and were caught by surprise when Manchin reached an agreement with Schumer. An army of Washington reporters, lobbyists, and hangers-on had also been deceived.
The concessions which Schumer received in return for his agreement to support the core elements of Biden’s Build Back Better plan may benefit West Virginia’s fossil fuel-based economy. But Manchin is fooling himself if he really believes that Biden and the Democrat progressives will keep Schumer’s promise to pass legislation reforming the permitting process for fossil fuel projects after Manchin casts his decisive 50th vote, enabling the essence of Biden’s Build Back Better to finally pass the Senate.