Discerning the Signal from the Noise
An Update Regarding Key Federal Climate and Energy Provisions in the Build Back Better Act
Written by: Jim Kennerly, Director, Policy Analytics Practice Lead; and Cal Brown, Analyst, Policy
Publish Date: January 19, 2022
Estimated Read Time: 12 Minutes
In the past several weeks since our most recent blog post regarding the Build Back Better Act, there have been multiple developments on the prospects of the Build Back Better (BBB) Act, a budget reconciliation bill containing climate change and social spending measures. We provide a summary of these developments now that the situation has been somewhat clarified but note that many elements remain in flux.
Senator Manchin’s Announcement of Opposition to House-Passed (and Partially Senate-Drafted) Build Back Better Act
As has been reported by many outlets, on December 19, 2021, Senator Joe Manchin (D-WV) announced that “I cannot vote to continue with this piece of legislation… This is a no on this legislation (emphasis added in both cases).” It was initially unclear precisely what Sen. Manchin meant by “this (piece of) legislation” which led many news outlets to prematurely declare that any version of the Build Back Better Act was dead, and thus no climate and energy tax or spending provisions would pass during the current Congress. However, Senator Manchin clarified in the days that followed that he opposes BBB as currently drafted (and having passed the House of Representatives on November 19, 2021), rather than an absolute opposition to the passage of any form of the proposed climate and social spending bill.
The reaction to his comments was swift and acrimonious, and included a statement from the White House press secretary that publicly questioned the Senator’s integrity and motives regarding the legislation.
Though the timing and manner in which he announced it was somewhat surprising, in general, the Senator’s opposition to core aspects of the House-passed legislation is consistent with his public statements made over a number of months. Though he has mentioned his desire to avoid inflation, his most consistent vector of skepticism and/or opposition to the House-passed (and aspects of the initial Senate-drafted) version(s) of BBB related to inflation and fiscal policy has been the structure of the spending itself and its impact on the federal budget.
Specifically, Senator Manchin has opposed the use of permanent tax increases in the bill to pay for time-limited spending provisions that would be open to reauthorization in future years. In regular comments to Capitol Hill media, Senator Manchin’s oft-stated view has been (and remains) that such a design would result in increases in the bill’s costs not captured by official cost analyses under base budgetary conditions, and would thus drive inflation and debt. As a result, one of Senator Manchin’s stated “red lines” for the bill is that any longer-term spending programs be funded for at least the 10-year term of the Congressional Budget Office’s (CBO’s) budget window (or potentially on a permanent basis, if the provisions are tax-related provisions that can be offset within the confines of a given bill title, per budget reconciliation rules).
Nevertheless, the House-passed bill did not follow the permanent financing-style approach favored by Sen. Manchin, and most Democrats (incorrectly) believed that his view regarding the permanence or long-duration nature of programs funded in the Act was not as firm as it turned out to be.
Developments Relevant to Climate and Energy Tax and Spending Provisions of Build Back Better Act Following Senator Manchin’s Announcement
Despite the acrimony between Senator Manchin and his colleagues (and the Biden White House) that erupted after his comments on December 19, 2021, there have been several recent indications that Senator Manchin supports most of the climate change and clean energy tax and spending provisions of the bill as passed by the House on November 19, 2021.
- According to the Washington Post, Manchin submitted a confidential counteroffer to the Biden White House less than one week prior to announcing his opposition to the House bill that reportedly included $500B to $600B in climate change spending (which matches closely with the ~$550B included in the initial Build Back Better framework) released in late October 2021.
- In public comments that appear to substantiate this private offer, Senator Manchin told reporters on January 4 that “the climate thing (apparently referring to the climate and energy provisions in the Build Back Better Act) is one that we probably can come to an agreement much easier than anything else,” and signaled general support for renewable energy tax credits, hydrogen, nuclear, and carbon capture policies.
We note that his general positivity towards these provisions is not particularly surprising, especially in view of the fact that (as discussed in our most recent blog post on the House version of the Build Back Better Act) the climate and energy tax provisions are structured as a mix of temporary tax provisions that phase into new, permanent, resource-neutral programs designed to last a minimum of 10 years (and potentially much longer, depending on the timing of the achievement of certain emissions thresholds in the electric power sector).
As for the next steps in the negotiation process, Sen. Manchin has signaled his willingness to continue negotiating with the White House and Senate leadership regarding the Build Back Better Act (or successor legislation) on the condition (as reported by Axios) that they commit to making major cuts to (if not outright remove) a long-term extended version of the expanded Child Tax Credit passed in March 2021, as part of the American Rescue Plan Act (ARPA).
It is our understanding from both public and confidential sources (and substantiated by reporting from The 19th) that despite Senator Manchin’s stated denials on January 4, 2022 that no negotiations have taken place “at this time”, White House and Congressional staff have (either before that time, or since that time) resumed preliminary discussions with the Senator and his staff about the shape of a more streamlined version of the Build Back Better Act (or a similar bill under a different name), and are preparing a new offer for his consideration.
Changes Expected to Climate and Energy Tax Provisions in Future Legislative Iterations
Despite Senator Manchin’s emerging public positivity towards the climate and energy tax provisions as the basis for a streamlined bill, we believe it to be unlikely that these provisions will remain completely unchanged from the ones passed by the House, for the following reasons:
Tax Credit Structure/”Byrd Rule” Scrutiny: On December 11, 2021, the Senate Finance Committee released updated text for the Senate Finance title of the Act. The new Senate Finance section hews closely to the House-passed bill but includes (mainly technical) changes to the climate and energy tax provisions (including an expansion of eligibility to upgrades to hydroelectric projects). However, we previously did not summarize this new draft for subscribers to our Northeast Eyes and Ears subscribers because the Senate Parliamentarian’s scrutiny of the climate and energy tax provisions under the Byrd Rule could drive major changes to the basic structure of the tax credits themselves. We plan to undertake such a summary once the Byrd Bath is completed.
As a reminder, the U.S. Senate’s Byrd Rule stipulates that for a bill to be allowed to pass with 50+1 votes (and thus bypass a 60-vote cloture requirement on the motion to proceed or cut off debate), a reconciliation bill’s provisions must not have a “merely incidental” impact on the federal budget. This means that any provision’s purpose must be to spend money and raise revenue, and thus cannot create new regulations or strictures unrelated (or even mostly unrelated) to raising revenue or spending money. The Senate Parliamentarian decides what passes the Byrd Rule test in a series of private sessions, informally known as the “Byrd Bath,” which is currently ongoing. Because of the confluence of factors where the language of the bill is still in flux, and the language has not yet been vetted by the Senate Parliamentarian, it is unclear when the bill will come up for a floor vote. In terms of the clean energy tax provisions, the Senate parliamentarian has yet to decide whether the following provisions’ budget impact are “merely incidental” (and thus subject to a budgetary point of order that would remove the provision from the bill:
- The base and bonus structure of many of the clean energy tax credits if eligible taxpayers pay prevailing wages and meet a minimum number of apprenticeship hours; and
- Phased domestic content requirements (for which a voluntary bonus 10% credit is available for various production and investment credits).
We note that while technically, 50 votes plus the vote of Vice President Kamala Harris would be sufficient to overcome a budgetary point of order under the Byrd Rule, both Senator Manchin and Senator Kyrsten Sinema (D-AZ) have publicly stated on more than one occasion that they are unwilling to vote to overrule the Parliamentarian in any instance, seeing such a vote as a violation of U.S. Senate norms.
Senator Manchin’s Objections to Certain Electric Vehicle (and Potentially Other) Provisions: In addition to the unresolved Byrd Rule issues described above, it is our understanding that Senator Manchin has expressed concerns with several of the electric vehicle tax credit elements, particularly the bonus credit for union-made vehicles and the House-passed (and Senate Finance proposed) adjusted gross income (AGI) caps for credit eligibility for the proposed new vehicle credit. In terms of these provisions, the bill, as having passed the House and proposed by the Senate Finance Committee, would, if enacted:
- Provide up to $5,000 in additional credits (in the form of refundable, direct-to-taxpayer rebates) for vehicles assembled with union labor and/or undergoing final assembly in the United States; and
- Set AGI caps for new electric vehicles of $250,000 for individuals, heads of household and married couples filing separately, and caps of $500,000 for married couples filing jointly, as well as vehicle manufacturer suggested retail price (MSRP) caps ranging from $55,000 to $80,000.
However, as most recently discussed in Digest 90, Senators Manchin and Sinema previously voted for a GOP-sponsored (non-binding) amendment to the initial Build Back Better budget resolution establishing a maximum MSRP cap of $40,000 and AGI cap of $100,000 (though it was unclear which type of tax filers this cap pertained to). We note that there could be other provisions that, as of this writing, Sen. Manchin may wish to remove, but we are not immediately aware of them.
Potential Enhancements to the Climate and Energy Provisions Intended to Clinch Sen. Manchin’s Support: In addition, there appear to be some areas in which enhancement of certain climate and energy provisions could increase the odds of Sen. Manchin’s supporting the climate and energy provisions, including (as reported by Bloomberg News) Sen. Manchin’s stated desire to increase the production tax credit for existing nuclear units from 6 years to 10 years.
Our Outlook on the Build Back Better Act (or Potential Successor Legislation)
Since summer 2021 (and through the highly acrimonious, topsy-turvy and complex intra-party negotiation that has played out since that time), we continue to expect that all 50 Democratic U.S. Senators intend to reach a deal on a reconciliation bill that includes major changes to climate and clean energy tax credits and new renewable energy market spending relevant to the Northeast, We are also confident that Senator Manchin will be one of these 50 if and only if the bill conforms closely to the signed agreement sketched out between Manchin and Senate Majority Leader Charles Schumer (D-NY) in late July 2021. In that agreement, Senator Manchin indicated his support for an extension of clean energy tax credits so long as fossil fuel-focused credits were also included and/or extended. Given that the climate and energy provisions that are currently included in the House version of BBB (and the Senate Finance version prior to its “Byrd Bath”) conform with these requirements, we do not expect the climate provisions in the bill to undergo major structural revisions that appear increasingly likely to befall the non-climate and energy provisions of the Act.
Another strong piece of evidence that indicates Senator Manchin wants to pass a bill with significant climate and energy tax and spending provisions included is how far through the process Senator Manchin has continued to deal and negotiate with other Democrats and the White House, despite clear and compelling home-state political incentives not to. As a Senator from a state with an economy dominated by manufacturing and the coal and natural gas extraction industries, Senator Manchin could have easily used the climate and energy provisions of the recently-enacted Infrastructure Investment and Jobs Act (coupled with West Virginia’s strong support for fossil fuels) to justify a position of unqualified opposition to not only further climate and energy provisions, but also any reconciliation bill not requiring GOP support. However, the politics surrounding this bill, and his relationship with President Biden, appear more intricate and complex than such an analysis would suggest. Evidence of this complexity comes in the form of comments from influential in-state industries and constituencies strongly endorsing key climate, energy, and mining-related provisions of the Act, including:
- The Edison Electric Institute (EEI), which has several investor-owned utility members with extensive infrastructure in West Virginia (including longtime Manchin friend and collaborator Nick Akins, CEO of American Electric Power, Inc.); and
- The United Mine Workers of America (UMWA), which strongly supports key domestic clean energy manufacturing provisions and a long-term extension of an excise tax on coal to pay for benefits for miners with black lung disease included in the House version of BBB.
As such, it appears the greatest potential uncertainties and/or obstacle to final passage of a major reconciliation bill (be it called Build Back Better or something else) appear to be:
- How quickly Democrats other than Sen. Manchin can agree on what other 10-year programs can fit within a $1.75 trillion maximum 10-year spending target endorsed by Senator Manchin (and thus make what are likely to be difficult decisions about what provisions must be removed to meet Senator Manchin’s strictures); and
- The time by which Democrats return to a debate surrounding the Build Back Better Act or a new piece of budget reconciliation legislation (and related “Byrd Bath” activities) following a debate about voting rights expected to conclude in mid-January. We note the modest risk that a Democratic Senator from a state with a Republican governor could be forced from office, and thus preclude the majority necessary to pursue the bill.
- The degree to which the debate around what to omit from the legislation does not return to the acrimony of late December 2021.
Therefore, much of the uncertainty comes down to the speed with which (and degree to which) Democrats are willing to give Senator Manchin the things he has asked for, and do so without substantial acrimony. If they choose not to, or do not do so during a time in which they possess the Senate majority, we do not believe legislation with major climate and energy tax and spending provisions will pass in any form.
Given the current path (and the political conditions described above), final passage appears likely to occur no earlier than February, and no later than the first half of the second quarter of 2022 (though not likely far into that quarter, given the encroachment of primary and general election activities for many Representatives and Senators).