What will it take for Democrats to enact their plan to invest trillions of dollars over 10 years in a wide variety of social programs, ranging from universal preschool and free community college to expanded Medicare services and tax cuts for electric vehicles? In a note to clients Monday, Goldman Sachs economist Alec Phillips says the Democratic effort hinges on five key issues, all of which need to be resolved before their proposals can become law. Here’s a summary of Phillips’s analysis:
1) How much deficit spending? The budget resolution passed last summer that unlocked the current Democratic effort authorized deficit spending of as much as $1.7 trillion over 10 years, but resistance from conservative lawmakers to the size and scope of President Joe Biden’s Build Back Better agenda makes it likely that the final number will be much smaller. The ultimate deficit tally could be a bit squishy, though, with lots of wiggle room provided by estimates of the projected revenues associated with the legislation.
“This is more of a subjective test than it might seem,” Phillips writes, noting that dynamic scoring of the bill could produce a variety of more or less generous estimates that could be used to reduce its cost, at least on paper.
2) What’s the top line? Democrats have spoken about their $3.5 trillion plan, but the total cost could be measured in a variety of ways, given the potential savings and revenue flows that could offset the spending.
For its part, the White House has been saying the plan will have no cost, once all the offsets are accounted for. “The cost of the Build Back Better Agenda is $0,” the White House tweeted Sunday. “The President's plan won't add to our national deficit and no one making under $400,000 per year will see their taxes go up a single penny. It's fully paid for by ensuring big corporations and the very wealthy pay their fair share.”
But that claim is unlikely to satisfy centrist and conservative Democrats, who might object to overly generous revenue estimates. This could be a crucial issue given Sen. Joe Manchin’s (D-WV) warning that he won’t support spending above $1.5 trillion – a number Democrats could hit with some mixture of program cuts and offsetting revenues.
One thing lawmakers will have to figure out is which programs to trim or eliminate, and which revenues can be cited as offsets that reduce the total cost. And, crucially, how much of the spending is Manchin willing to ignore, as long as it’s offset?
3) How much in tax hikes? The Biden plan includes a number of tax increases, focused on corporations and high-income households. But some Democratic lawmakers have made it clear that they won’t support aggressive tax hikes. Manchin says he’ll support an increase in the corporate tax rate only to 25%, less than the 26.5% in the House proposal, while Sen. Kyrsten Sinema (D-AZ) has reportedly told administration officials she won’t support any increases in tax rates.
Phillips assumes many of the proposed tax increases will make it into the final bill, but revenues will likely fall short of current projections as lawmakers trim their size and scope. If Sinema maintains her opposition to increased tax rates, Democrats would have to find nearly $1 trillion in revenues elsewhere, in policy areas such as corporate cross-border taxes, the treatment of pass-throughs and estate taxes.
There are many options for finding new revenue, but, as always, the devil will be in the details.
4) What about non-tax revenues? Democrats plan to reduce federal spending by giving the government the power to negotiate lower drug prices – a move they say would provide $700 billion in savings over 10 years. Although the plan is widely popular with the public, some Democratic lawmakers have indicated they don’t support the proposal. House Speaker Nancy Pelosi (D-CA) appears to have accepted the fact that the proposal will not be enacted in full. “We’ll get something of that, but it won’t be the complete package that many of us have been fighting for a long time,” she said.
Phillips says it will be difficult for Democrats to replace those lost savings.
5) How big can Democrats go? Given pressures to reduce the overall size of their spending plans, Democrats may look to eliminate entire programs from their bill. As Pelosi put it last week, they may have to do “fewer things well.”
Alternatively, they could aim to do enact key programs, but for a shorter period of time, sunsetting them in a few years to reduce the total cost. Phillips says that it’s likely that many of the programs included in the Democratic bill will be temporary.
The bottom line: Democrats appear to be headed for a compromise bill in which many of their proposed programs expire in just a few years. In Phillips’ analysis, Democrats could end up with a reconciliation bill worth about $2 trillion over 10 years. Adding in the bipartisan infrastructure bill and a competitiveness bill that contains some elements of Biden’s American Jobs Plan, and the total for Democrats’ social and economic agenda over the next decade comes to roughly $2.8 trillion.
