Publish Date

Apr 07, 2021

Congressional Groundhog Day: Return of the Reconciliation

A&M Tax Advisor Weekly

While the first three months of this year have been filled with many twists and turns, yesterday was remarkable even by 2021 standards. Because yesterday’s events have required us to revise our thinking regarding how Democrats’ major legislative priorities may be processed the rest of the year, we want to provide you with our latest insights. Recent developments affecting our analysis include yesterday’s ruling from the Senate parliamentarian that Democrats may have at least two more reconciliation bills this calendar year; yesterday’s release of Senate Democrats’ international tax reform proposal; and Senator Manchin’s rejection of President Biden’s proposed 28 percent corporate income tax rate.

Three or More Reconciliation Bills in 2021

Democrats continue to suggest they would like to work across the aisle to pass President Biden’s $2 trillion infrastructure plan, discussed previously here. However, despite their public statements, Democrats have never been bullish about their chances of winning at least 10 Senate Republican votes in support of any more progressive part of the President’s agenda. That is why, even before the enactment of the American Rescue Plan Act, which is discussed in greater detail here, Democrats began exploring novel ways to produce additional opportunities to advance legislation with a simple majority.

Yesterday, these efforts paid major dividends when the Senate parliamentarian ruled that Democrats may use reconciliation at least twice more this calendar year. Pursuant to the parliamentarian’s decision, Democrats may amend the fiscal 2021 budget resolution, the same budget resolution used to move the American Rescue Plan Act earlier this year, so that it may be used to advance all or part of the President’s infrastructure package. Any remaining infrastructure provisions could then be addressed in the fiscal 2022 budget resolution, or the first 2021 budget resolution could be revised a third time. While the exact legislative path forward is still uncertain, the Senate parliamentarian’s ruling sets the stage for at least three reconciliation packages to be enacted this calendar year.

A&M Insight: The Senate parliamentarian, although technically nonpartisan, serves at the pleasure of the Secretary of the Senate, who is appointed by the majority leader. The current Senate parliamentarian had come under tremendous pressure after ruling against the Democratic majority’s attempt to include a $15 minimum wage in the last reconciliation bill. If the Senate parliamentarian had decided against the majority a second time, there would have been renewed calls for her replacement. While we do not know what effect, if any, the current political climate had on her decision-making, it is interesting to note that during the last 50-50 Senate, the Republican majority asked the parliamentarian to resign after receiving two adverse rulings related to the consideration of tax legislation under reconciliation.

Side-by-Side Comparison of White House and Senate Democrats’ Tax Proposals

Following the White House’s release of the Made in America Tax Plan last week, yesterday, Senate Democrats unveiled their own international tax reform framework. The framework, which was authored by Senate Finance Committee Chairman Wyden and committee members Senators Brown and Warner, tracks fairly closely the international tax reforms that the Biden Administration has proposed, with a few notable exceptions. The following table highlights the key similarities and differences between the two proposals:




A&M Insight: While largely similar, the two proposals differ when it comes to their reforms of FDII, GILTI, and the BEAT. Interestingly, the Senate Democrats’ proposal appears to have left openings to impose a softer version of calculating GILTI on a CbC basis and to retain some version of the FDII. These openings may be welcome developments for taxpayers and the few Republicans who may be in a position to accept some tax reforms in exchange for infrastructure spending.

In addition, although we cannot say which provisions will be adopted in the final bill, we can say with increasing certainty that major tax law changes are coming down the pike. It is important to note that these changes will also have to coordinate with the tax reforms, if any, Treasury agrees to make as part of the OECD Inclusive Framework on Base Erosion and Profit Shifting.

The Manchin Effect

As anticipated, during the American Rescue Plan negotiations, Senator Manchin quickly emerged as a power broker, helping establish the outer limits of what could or could not be accomplished at a simple-majority threshold. Manchin’s role as the key Democratic swing vote is expected only to grow as negotiations over the infrastructure plan and accompanying tax reform legislation continues.

To date, Manchin has already drawn one red line related to the negotiations, indicating that he will not support increasing the corporate tax rate to 28 percent, as proposed by President Biden. Noting that his opposition is shared by six or seven other Democrats, including reportedly framework co-author Warner, Manchin said he would, nevertheless, support raising the corporate tax rate to 25 percent.

A&M Insight: In arriving at his preferred rate, Manchin cited competitiveness concerns. One recent comparison may be to the United Kingdom, which is increasing its top tax rate on corporations to 25 percent starting in April 2023. If the United Kingdom is an important basis for Manchin’s concerns, then in addition to the tax rate, it will be interesting to see his position on the effective date of the tax rate increase.

Manchin’s “leverage,” as he has called it, could significantly influence the course of many Democrat priorities. He has already expressed concerns over the exclusion of Republicans from the most recent COVID relief package, which he believes could have been bipartisan with only a few concessions. He has also stated he would not “do” infrastructure through reconciliation, going so far as to threaten to block the next package if Republicans are not included.

A&M Tax Says

Robert the Bruce would be proud of the Democrats’ new mantra of “If at first you don’t succeed reconcile, reconcile and reconcile again.” As a result of the new mantra, which has effectively been approved by the Senate parliamentarian, enactment of sweeping international tax reform legislation has become increasingly likely this year. However, moderate Democratic Senators, including Manchin, will continue to have a disproportionate influence over the provisions included in any future tax legislation.

Please contact your trusted A&M Tax adviser if you have any questions regarding proposed international tax reforms, including whether and how they apply to your particular situation.