Last month, in my weekly market update, I covered the "we have a deal" announcement from President Biden, flanked by lawmakers in the White House lawn as he triumphantly announced the framework for a bipartisan infrastructure deal. This deal initially included provisions for things such as electric vehicle infrastructure, broadband for everyone and general improvements to get us off the floor of the infrastructure grading system. However, since the announcement, the bill has taken several blows that now threaten its survival. Let's break them down:
What's In The Bill?
While it's surprising that we the public have yet to see any formal language coming out of the announcement nearly one month ago, it's even more surprising to hear that apparently neither have Senate Democrats. CNN is reporting this week that Senate Majority Leader Chuck Shumer (D-NY) headed to Washington on Monday to get two pieces of legislation in front of his group: the bipartisan infrastructure agreement, and the U.S fiscal budget. The budget is a whole other conversation, so we'll leave that to the side for now. Let's chat infrastructure.
I've previously mentioned the sticker shock surrounding the bipartisan agreement. Originally, Biden pushed for a $2 trillion plan over the next 8 years, partially based on the assessment of the American Society of Civil Engineers that gave America's current infrastructure a C- grade and said it would take $2.6 trillion in investment over the next decade to get it up to passable. Republicans, some Democrats and newly-anointed God-King of Congress Joe Manchin balked at the price tag of the deal, considering the recently deployed stimulus checks. So, over a table full of pizza, lawmakers got to work on a compromised deal, which was announced in late-June. The plan includes:
$312 billion for transportation improvements, including roads, bridges, passenger and freight rail and public transit
$15 billion to electric vehicle infrastructure
$266 billion in non-transportation infrastructure
$73 billion for power
$65 billion for broadband
$55 billion for water
This resulted in a newly-reduced-but-still-oh-my-god number of $1.2 trillion, with around $600 billion in net-new spend. The mystery remained, though, of how this was actually going to get paid.
Mo' Money Mo' Problems
The Biden administration, as well as the bipartisan panel that came up with this bill, essentially threw out four options to pay for the infrastructure work:
A corporate tax hike from 21% to 28%. This number was previously 35% under President Trump prior to his tax bill, so this is a "meet-in-the-middle" number.
A global minimum tax rate for corporations of 21% to effectively eliminate tax havens around the globe.
Tax on book income, which is an incredibly convoluted tax on the biggest companies numbers in investor reports, rather than the numbers reported to the IRS. This is meant to close loopholes in revenue gained vs revenue reported.
A corporate inversion crackdown to prevent U.S based companies from merging with foreign companies to take advantage of foreign tax rates. This feeds back into point number two and the global minimum corporate tax rates.
Finally, we have the IRS. Part of the payment plan for this act was to "invest" in the IRS. Effectively, the federal government would carve out a portion of this plan, somewhere in the "billions," which would have theoretically given the IRS a war chest to go after unpaid taxes. The initial versions of this plan estimated that this tactic would have generated "between $60 and $100 billion" which could be used to pay for the infrastructure developments. So why was this not included in the package? If you've got "partisan bickering" as your answer, congratulations! Top of the class.
Senator Rob Portman (R-OH) told CNN this week that, while the IRS plan was part of the initial proposals, the bipartisan committee had "push back" while discussing plan terms over the weekend.
"Well, one reason it's not part of the proposal is that we did have pushback. Another reason is that we found out that the Democrats were going to put a proposal into the reconciliation package, which was not just similar to the one we had, but with a lot more IRS enforcement," - Sen. Portman to CNN's Dana Bash
The back-and-forth from both Republican and Democratic negotiators is starting to worry other lawmakers. Shumer is expected to enact cloture on the vote this week, before anything's actually been written down. When asked if he would vote on legislation that didn't exist yet, Senator Mitt Romney (R-UT) said it would be a "dereliction of duty" to vote. The Congressional Budget Office, a part of Congress that evaluates how proposed legislation will affect the federal government's bottom line, hasn't even weighed in yet, which is reportedly a stumbling block for many Senate Republicans.
Do Democrats Need Republicans for This?
Technically, no. Practically? Yes, they do. Buried deep in the archives of 2020 are the results of the House and Senate elections as the nation's attention was wrapped in the throws of the presidential election for nearly a week. The truth from that night is: Democrats didn't have a great night. The expected "blue wave" didn't quite crest as strategists on that side had hoped, and so while the Dems walked away with a majority in Congress (later decided by the two Senate runoff votes in Georgia), it wasn't commanding. So now we fast forward to the present, and we're seeing the ramifications of the election results.
Democrats are attempting to push through two financial pieces of legislation at the same time: the aforementioned infrastructure proposal, as well as the yearly federal budget. The budget proposal from Democrats is currently clocking in at an eye-watering $3.5 trillion, which includes funding for a number of Biden initiatives:
free pre-kindergarten programs for 3-4 year olds
free community college
moves towards furthering green initiatives
health care subsidies
As we've learned from the past 245 years of American history, there is a 0% chance that Republicans would approve this plan, so Democrats are relying on a congressional budgetary loophole called "budget reconciliation." Essentially, this is a mechanism that allows for a simple majority to push through a piece of budgetary legislation, meaning the need for Republican votes wouldn't exist. However, this magical piece of accounting wizardry has limits. Democrats used it in March to force through the latest round of economic stimulus payments, but they only have one bullet left in the chamber this fiscal year, so the decision looms: use the budget reconciliation for the budget? Or infrastructure? Well, since the dollar amount looms large in the budget and is full of non-Republican friendly components, Democrats are aiming the reconciliation gun squarely at the budget. However, this isn't a foregone conclusion.
Remember I mentioned Joe Manchin earlier? He's a moderate democrat, which is an extremely powerful place to be when you're essentially the only one. This makes him, inadvertently, the most powerful person in the Democratic party. The slim majority held by the left really hangs in the balance of whichever way Manchin decides to vote. This leads to the strategy Europe took with Germany in the 1930's: appeasement. The Democrats are forced to appease Manchin's whims, and one of those was backing the number down from the initial $6 trillion proposal from Sen. Budget Committee chair Bernie Sanders (D-VT). Manchin, along with fellow fence-sitter Senator Jon Tester (D-MT), have the power in their hands to reconcile, or to force long strings of filibusters.
How Does This Affect Me?
Quite a lot, actually. Let's start with the most obvious one, which is the budget. If the budget is not the subject of reconciliation and is forced to go to a vote, further concessions will need to be made in order to get Republican votes. These could include the slashing of things like the proposed vision and dental care for those on Medicaid, free community college or the removal of paid leave. This would bring the total budget number down to a more manageable number, but it would gut the bill and potentially remove programs that you, the end user, could have taken advantage of. If concessions are not made and we move into a horrible string of vote, decline, amend, filibuster, amend, vote, veto, etc, then we could be headed to a government shutdown. With a shutdown, federal office jobs are furloughed, public works stop, teacher's jobs are cut and public sanitation services stop, among other things. This is a worst case scenario.
Let's move to infrastructure. I don't want to get political here, but the cost of not investing in American infrastructure could be far more detrimental than raising the corporate tax rate in order to pay for it. The bill is looking to upgrade roads, bridges and public areas for the health of the nation. Being an Atlanta resident, I see first hand the shoddy roads that have claimed more than a few car tires and axles. Literally five days ago, a truck crashed into a bridge on I-16 in south Georgia and ended up moving the whole concrete bridge six feet off its posts.
That's not even to mention fixing what is the continually ongoing water crisis in Flint, MI, where citizens have been without potable water for years. The nationwide upgrades proposed in the package could put a stop to this happening again, potentially with greater implications if it hits a greater populous. There's also the benefit of setting ourselves up for the future. Part of the infrastructure spending proposal is allocated to car charging stations, helping to make them as ubiquitous as gas stations. Sure, maybe the only electric car in your life is your neighbor Paul who is kind of a douche and drives a Model 3 to "save the environment," but he's not alone. Tesla is shipping record numbers of cars, Ford's Mustang Mach-E has been a success and GM has splashed the cash on advertising their new electric car platform, featuring a curious appearance from Malcolm Gladwell.
This bill is expensive, yes, you're right. But it's an investment. If you learn anything from this blog, it should be that any investment worth making is likely a bit expensive, but the dividends you see from that investment should make you forget about your initial outlay.
What do you think about the infrastructure bill? Keep it civil in the comments! Remember, we're all here to get rich together, so same team people. Don't forget to sign up for my email list so you get these as soon as they post. Thanks for reading!