The Build Back Better reconciliation bill (H.R. 5376) passed by the House earlier this month calls for a wide array of spending proposals across the economy. The new spending is subject to the existing budget rules imposed by prior Congresses, including sequestration, an across-the-board cut in the amounts otherwise provided for a program.
The Ways and Means Committee reconciliation submission to the Budget Committee provided exceptions to the sequester rules for a few high-priority items. Those protections were removed hours before the House voted on final passage “to comply with Senate procedural requirements.” Specifically, the exceptions were not in the jurisdiction of the Ways and Means Committee.
The 2011 bipartisan legislative agreement (PL 112-25) to increase the statutory debt limit directed a Joint Select Committee on Deficit Reduction—the so-called “supercommittee"—to negotiate a $1.5 trillion reduction in projected deficits. To incentivize the supercommittee to reach a deal, the legislation also imposed for the next decade tight statutory caps on annually appropriated—discretionary—spending and sequestration of mandatory programs if the supercommittee did not agree on sufficient savings. The committee failed to produce any agreement and the caps and sequester went into effect.
While the discretionary spending caps expired as scheduled in 2021—after regular increases to the levels set in 2011—Congress extended the expiration of the mandatory sequester six times to offset new spending. It is currently set to expire in 2030. The rate of the sequester is 2% for Medicare and certain other health programs and 5.7% for nonexempt non-defense mandatory programs.
Nonexempt mandatory spending consists of all mandatory spending included in the current law baseline of the President’s Budget for that year that is not explicitly exempt under current budget law. Programs created by the Build Back Better legislation clearly are not included in the list enumerated by the Deficit Control Act of 1985, and Sen. Bernie Sanders (I-Vermont) asked the Office of Management and Budget, or OMB, to “predetermine” whether certain programs would be subject to the 5.7% cut on Oct. 1, 2022.
OMB replied to Sanders’s request on Nov. 10. OMB indicated that both green energy tax credits and incentives for colleges that create environmental justice programs would be subject to sequester.
Green energy credits give businesses the option to classify the benefit as the cash payment of tax liability rather than a business tax credit. This payment would be classified as spending under the usual budget accounting, and therefore sequesterable. The Ways and Means Committee language authorizing this option explicitly provides for the “gross-up of payments in case of sequestration,” which effectively allows green energy businesses to receive the full amount in a tax refund. Other businesses must wait until they have tax liability to offset with tax credits.
The protection from the sequester included by the Ways and Means Committee extends not only to the eight new green energy credits created by the Build Back Better Act—including a seemingly unrelated credit for the manufacture of semiconductors or semiconductor tooling equipment—but also to credits that had been enacted previously. This gives an additional benefit to users of the production tax credit, which provides a subsidy to utilities that produce electricity from renewable sources as well as users of the alternative fuel vehicle refueling property credit, which subsidizes businesses that erect recharging stations for Teslas.
The qualified environmental justice program credit provides selected colleges and universities a credit of up to 30% of the cost of establishing such programs. The credit would not work without the option to receive a direct payment from the government since colleges are tax-exempt—they do pay tax on unrelated business income. The environmental justice credit includes the same “gross-up” language included for the—mostly—green energy credits, so schools that create programs to “address or improve data about qualified environmental stressors,” such as the effects of toxic pollutants in low-income areas, will not receive the automatic 5.7% cut.
Many other newly created programs in Build Back Better will be cut by the sequester. OMB’s predetermination letter indicates that childcare and early learning, universal preschool, and comprehensive paid leave would be subject to sequester. Other programs like affordable housing and workforce development may also be subject to sequester since OMB’s letter does not address all programs in the bill.
Under the reconciliation language submitted by Ways and Means, businesses that opt for the advance payment of green energy incentives would receive the full amount promised, as would colleges that receive the nod to create new programs in environmental justice. The “gross-up” language that made this possible was removed by the additional manager’s amendment deemed adopted by the revised rule voted on previously (H. Res. 803).
The Senate’s Byrd Rule, section 313 of the Congressional Budget Act, provides a 60-vote point of order against extraneous matter in a reconciliation bill. Most extraneous matter does not have a budgetary effect or is not in the jurisdiction of the reporting committee. The rules relating to budget enforcement are in the jurisdiction of the Budget Committee, and not the jurisdiction of the Ways and Means Committee.
While the language could legitimately be removed because it is not in the Budget Committee’s jurisdiction, it is curious that it was not removed in Chairman John Yarmuth’s (D-Ky.) original managers amendment (H. Res. 774). The jurisdictional infringement may have been missed during the initial scrub—known as a Byrd Bath—but it might also simply have been removed as a policy matter to provide equal treatment of social spending and green energy provisions instead of preferential treatment for green energy businesses and universities. Either way, it is likely that green energy and environmental tax credits will be subject to sequester like other programs if this bill becomes law.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Ike Brannon is a senior fellow at the Jack Kemp Foundation and president of Capital Policy Analytics, a consulting firm in Washington DC. He was formerly a senior economist at the Senate Finance Committee, U.S. Treasury, and the House Energy and Commerce Committee.
Dan Kowalski is the owner of Wizard of OZ, a bespoke consultancy focused on helping companies utilize Opportunity Zones. He is also an advisor to Belpointe OZ, Eazy Do It. Inc., and the Redivider Blockchain OZ Fund. Previously, he was Counselor to the Secretary at the U.S. Treasury Department from 2017 until January of 2021. Prior to Treasury, Kowalski was Deputy Staff Director of the Senate Budget Committee and Director of Budget Review for the House Budget Committee.
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