Build Back Better heads to Senate

Bonds

The House on Friday passed the Build Back Better Act, teeing up a fresh round of work in the Senate that municipal market advocates hope will offer a chance to further amend the bill to include muni priorities.

The $1.7 trillion, 2,100-page measure, President Joe Biden’s signature social and climate spending package, passed to cheers on the House floor after months of negotiations. It comes the same week that Biden signed into law a $1.1 trillion infrastructure bill that’s considered the companion bill to Build Back Better.

“This bill is monumental, it’s historic, it’s transformative, it’s bigger than anything we’ve ever done,” House Speaker Nancy Pelosi said at a news conference after the passage.

House Speaker Nancy Pelosi said the Build Back Better Act, which the House passed Friday after months of debate, is “bigger than anything we’ve ever done.”

Bloomberg News

The measure features investments in universal pre-K, childcare, clean energy, affordable housing and lower prescription drug costs. It’s paid for in part with stepped-up Internal Revenue Service enforcement and a new corporate tax policy.

The Congressional Budget Office Thursday released a highly anticipated score that estimated the bill would cost $1.635 trillion through 2031 and generate $1.268 trillion in revenues, leading to a $367.1 billion gap.

But the estimate does not include revenues generated by increased IRS enforcement.
In a separate document, CBO estimated that the funding for tax enforcement activities provided by the bill would increase outlays by $80 billion and revenues by $207 billion, thus leading to a net impact of decreasing the deficit by $127 billion through 2031.

The White House, in contrast, has said the additional IRS enforcement would bring in $480 billion over the next 10 years.

The final vote was 220-213 along party lines, with one Democrat, Rep. Jared Golden of Maine, voting against the bill due to the state and local tax deduction cap provision, which he called a “tax giveaway to millionaires.”

HR 5376 now heads to the Senate, where it is widely expected to undergo changes and could take weeks to debate. Senate Majority Leader Chuck Schumer said Wednesday that he hopes to vote on the bill before the end of 2021.

House leaders Friday morning minimized the differences with the Senate over the bill. “They may make it better, so that’s nothing for us to be all that concerned about,” Rep. Jim Clyburn said at the post-passage news conference. “The Senate will do what it thinks it can do and we’ll all come together on behalf of the American people.”

“The biggest challenge was to meet the vision of President Joe Biden,” Pelosi said, who added that Biden had called to congratulate her after the vote.

For the municipal bond market, key provisions include the SALT deduction cap and a 15% corporate minimum tax that some market participants worry could dampen institutional demand for munis.

In a note Friday, Morgan Stanley said the corporate minimum tax may hurt demand but more clarity on the proposal is needed.

The market’s top priorities, including tax-exempt advance refunding, a direct-pay bond program and expanded bank qualified debt, were cut from an earlier version as the House trimmed the size of the bill from $3.5 trillion.

Muni lobbyists are now pushing for the Senate to restore at least some of their wish list.

A SALT overhaul is important for state and local governments who argue the cap cramps their own tax-raising flexibility. But buysiders say lifting or suspending the cap could hurt demand for tax-exempt bonds, especially paper from high-tax states like California, New York and New Jersey.

The House SALT provision would raise the deduction cap to $80,000 through 2030 and then return it to the current cap of $10,000 in 2031 before eliminating it in 2032.

The current law caps the deduction at $10,000 and expires in 2025.

Sen. Bernie Sanders has proposed keeping the $10,000 cap in place but only for families with an annual income of at least $400,000. Schumer has proposed eliminating the cap for five years but reinstating it in 2026 at the current $10,000 cap.

New Jersey Rep. Josh Gottheimer, along with a group of other House Democrats from high-tax states, had withheld their votes until the SALT deduction cap was written in.

“Months ago, I said, ‘No SALT, No dice,’” Gottheimer said in a statement after the vote. “Today’s New Jersey’s middle-class families won big.”

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