The Manchin–Schumer Reconciliation Bill Won’t Cut the Budget Deficit

S enator Joe Manchin (D., W.Va.) shocked the world by once again giving life to the “Build Back Better” negotiations this week. The bill he worked on in secret with Senate majority leader Chuck Schumer (D., N.Y.) is a combination of tax hikes, IRS audits, prescription-drug-price controls, Obamacare-premium subsidies, and a grab bag of “Green New Deal” tax credits.

One of the key rationales Manchin gave for supporting the deal was to reduce the deficit and to pay down the national debt. “In practical terms, the Inflation Reduction Act of 2022 would dedicate hundreds of billions of dollars to deficit reduction by adopting a tax policy that protects small businesses and working-class Americans while ensuring that large corporations and the ultra-wealthy pay their fair share in taxes.” Unfortunately for Manchin, he appears to have been hoodwinked.

The Committee for a Responsible Federal Budget (CRFB) released an unofficial score of the Manchin–Schumer agreement’s provisions. We can expect this score largely to reflect whatever we eventually see out of the official scores from the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT). The CRFB score is pretty much the Beltway establishment gold standard on unofficial budget scores.

The CRFB analysis shows a net deficit reduction of $305 billion over the ten-year budget-scoring window. This is the amount Manchin has been hanging his hat on. It’s important to note that over a third of the savings, in dollar terms, is achieved by jacking up IRS tax audits on Main Street, family-owned small businesses.

However, there is a giant asterisk in this score. The bill schedules the super-sized subsidy for Obamacare premiums only through 2025. Being an honest broker, CRFB provides an alternative net-deficit-reduction estimate of $150 billion, on the assumption that this “temporary” Obamacare subsidy gets continually extended or made permanent. That’s very likely to happen, so half of Manchin’s deficit savings goes up in smoke.

But there’s more reason to be skeptical. Buried in the score is $120 billion in savings from repealing the Trump “rebate rule.” The contents of that rule are beyond the scope of this article, but suffice it to say that this regulation was never going into effect. It was abandoned by the Trump administration and was never going to be implemented by the Biden administration. Any “budget savings” achieved by congressional repeal of this stillborn regulation is a pure gimmick. It’s exactly the type of budget shenanigans Manchin himself has been opposed to this whole time.

Control for both the probable permanence of the Obamacare subsidies and the budget gimmick of the rebate rule repeal, and deficit savings is down to a mere $30 billion over a decade. So we’re basically looking at a budget-neutral document — hardly something that will make a dent in inflation, especially since there is so much front-loaded spending in the inflationary years of 2022–25.

And that still isn’t the end of the story. Senator Kyrsten Sinema (D., Ariz.) will have her say. She is expected to demand an easing of the tax increases agreed to in the Manchin–Schumer deal. In particular, the corporate alternative-minimum tax (AMT) is a de facto repeal of the full business-expensing provisions of the Tax Cuts and Jobs Act. That’s right — at a time when productivity and supply chains are down, Congress is getting ready to raise taxes on business fixed investment. This is about the worst possible fiscal policy you can think of.

If Sinema gets even a tweak or two in tax changes, the bill will no longer be a deficit-reducing exercise. When combined with a realistic score on Obamacare subsidies and removal of the rebate rule gimmick, a Sinema–Manchin–Schumer reconciliation bill is likely to increase the budget deficit and the national debt, making inflation worse. Senator Manchin should have listened to the better angels of his nature, and let the sleeping dog lie.