BREAKING DOWN THE MAJOR SPENDING PROVISIONS IN THE RECONCILIATION BILL
We thought you might appreciate seeing a summary of some of the provisions in the budget bill now being considered in Washington. This is a very large bill, and amazingly, if Congress keeps to its schedule they will have presented, considered, amended, and voted on it in less than 30 days. Because this bill is so large in size and broad in scope, we believe it will affect many parts of the economy. We believe it may also have an impact on portfolio returns and taxes, and hence will affect us all. As you become familiar with this spending bill, we suggest you contact your U.S House Representative and U.S Senator to voice your support or objection to these proposals.
Over the weekend, we received two big pieces of information regarding the $3.5 trillion spending package. The first was what we define as a large portion of the “candy,” which includes tax cuts for the social safety net, clean energy, housing, and infrastructure bonds, as well as some of the health care reimbursement cuts. That release was followed on Monday morning with the release of $2 trillion in tax increases (the spinach) that will pay for a good portion of the spending. These proposals are moving targets and likely to change. But at this point, we have a good sketch of what a $3.5 trillion package looks like. Consistent with our view, there is too much “spinach” and the size of the package will likely need to come down in size. Our sense is that the political system has enough capacity for roughly $1.5 trillion in offsets over the next 10 years.
A HEALTH CARE BILL BIGGER THAN THE ACA
The health care portion of the reconciliation bill will be larger than the Affordable Care Act (ACA) and pays for new health spending by cutting pharma reimbursements. These drug pricing changes amount to $700 billion in spending cuts on one industry. To put that in context, the bill has $900 billion of total corporate tax increases for ALL US companies. Pharma and biotech are working to reduce these cuts. Still, the legislative process is a rushed and closed one, potentially negatively impacting the industry’s ability to make changes.
Health Care Coverage:
- ACA Premium Tax Credits: Makes permanent the American Rescue Plan’s expansion of the ACA premium tax credits, which increased eligibility for the premium tax credits to those earning above 400% of the federal poverty level and spending more than 8.5% of their income on premiums, and made the premiums more generous.
- Medicaid Coverage Gap: Provides access to ACA premium tax credits for individuals in states that have not expanded their Medicaid programs to buy insurance through the ACA through 2024 or when the federal government has set up a federal Medicaid program.
- State Reinsurance Programs: Provides $10 billion a year to states to establish state reinsurance programs or to reduce patients’ out-of-pocket costs. Requires CMS to establish a temporary reinsurance program in states that do not do so.
- Continues To Allow Unemployment Insurance Recipients To Be Eligible For The Most Generous ACA Subsidies: Extends through 2025 the American Rescue Plan provision that provides full premium tax credits in order to buy ACA coverage for individuals receiving unemployment insurance.
- Additional Medicare Benefits: Expands Medicare to include vision, hearing, and dental benefits. Vision and hearing benefits would go into effect in 2022 and 2023, respectively, while the more expensive dental benefits would go into effect in 2028.
- Medicaid Home And Community-Based Services: Includes $190 billion (rather than the $400 billion proposed) to provide Medicaid home and community-based services for seniors and individuals with disabilities to receive care at home.
- CHIP: Extends the Children’s Health Insurance Program permanently.
- ARPA-H: Provides $3 billion to establish the Advanced Research Projects Agency for Health to invest in breakthrough technologies.
NEW HEALTH CARE SPENDING IS LARGELY PAID FOR BY IMPOSING PRICE CONTROLS ON PRESCRIPTION DRUGS
It is very rare for Congress to completely revamp an entire industry, especially one the size of the pharma and biotech industry. But that is what is on the table in the initial proposal. This is the first real attempt since Hillary Care in 1993 to revamp the reimbursement structure for pharmaceuticals. Our sense is that some of these proposals are likely to conflict with the budget reconciliation rules and might be tossed out of the bill. At the same time, we expect pharma to water down these provisions. Our view is that pharma will walk out of here with a major hit to its earnings, but largely retain its pricing structure. If so, there is a lot of bad news already priced into the stocks.
- Medicare Price Negotiation: Allows for Medicare price negotiation of prescription drugs and sets a limit on what the government can pay for a drug to be no more than 120% of the volume-weighted average of the price of the drug paid in Australia, Canada, France, Germany, Japan, and the UK. The program would begin negotiation with at least 25 brand-name drugs that lack price competition in 2025 and 50 drugs in the years following. A tax would be imposed on manufacturers that do not adhere to the negotiation.
- Drug Inflation Rebates: Requires drug manufacturers for certain Medicare Part B and certain Medicare Part D drugs that raise prices faster than the rate of inflation to pay rebates back to the Medicare program for the portion higher than the rate of inflation. The rebates would begin on July 1, 2023. Drug manufacturers that do not pay the rebates would receive a monetary penalty.
- Medicare Part D Redesign: Sets an annual $2,000 out-of-pocket limit on prescription drugs beginning in 2024. Reduces the government’s responsibility in the catastrophic phase of the Part D program from 80% to 20%, converts the current coverage gap discount program into a benefit-wide responsibility, and requires manufacturers of single source drugs to contribute 10% of the cost of coverage in the initial benefit phase and 30% in the catastrophic phase.
- Allows Medicare Enrollees To Spread Out Prescription Drug Cost-Sharing: Allows enrollees in Medicare prescription drug plans and MA-PD plans who meet the out-of-pocket cap with a single prescription to spread out those costs throughout the year.
- Repeal of the Trump Rebate Rule: Although the bipartisan infrastructure bill delays the implementation of the Trump rebate rule, targeting pharmacy benefit managers (PBMs), until 2026, the reconciliation bill would repeal that rule to prevent it from going into effect.
CLEAN ENERGY IS A KEY FOCUS OF THE RECONCILIATION BILL
The reconciliation bill is an opportunity to take action on climate change by moving away from fossil fuels and toward renewable energy. The goal of the Democrats’ strategy is to subsidize and mandate renewable energy while taxing and regulating fossil fuels. The purpose of this is to make renewable energies more cost competitive relative to fossil fuels and accelerate the transition to a clean energy economy. Interestingly, the House tax bill did not include tax increases on oil and gas. However, the Energy and Commerce Committee is pushing for a methane tax to use the proceeds for clean energy subsidies. The House proposals over the weekend provided larger than expected tax benefits for hydrogen, nuclear, and carbon capture. Other beneficiaries of tax credits include electric vehicles, electric transmission, and biofuels. However, these credits are premised on strict prevailing wage requirements which drive up the cost of projects. Our sense is that most of these tax credits are likely to make it into law, although some are arguing that the nuclear credit achieves the same objective as the Clean Electricity Performance Program and may not make it in the final package to avoid duplication.
MAJOR CLEAN ENERGY PROVISIONS BEING PROPOSED
- Clean Electricity Performance Program: Establishes the Clean Electricity Performance Program, which will provide grants to electricity suppliers that increase the amount of clean electricity they supply by 4% over the prior year, and which will fine those that do not.
- Grid Investment: Invests $9 billion for creating an energy grid capable of providing reliable delivery of clean energy. This is on top of the $75bn of grid investment in the bipartisan infrastructure package.
- Green Federal Procurement: Provides $17.5 billion to decarbonize federal buildings and fleets.
- Drinking Water: Provides $30 billion to replace lead service lines in the drinking water system. This is on top of the $15 billion provided in the infrastructure bill.
- Electric Vehicles/Zero-Emission Vehicles:
- Provides another $13.5 billion in electric vehicle infrastructure.
- Provides $7 billion for the Postal Service and $5 billion for the General Services Administration to electrify their fleets and for charging infrastructure.
- Provides $5 billion to replace heavy-duty vehicles (trash trucks, buses) with zero emission vehicles.
- Creates a refundable income tax credit for new qualified plug-in electric drive motor vehicles, of a base amount of $4,000 with an additional $3,500 provided for vehicles in service by the end of 2026 with a battery capacity of 40 kilowatt hours or better and then for vehicles with a battery capacity of 50 kilowatt hours or better. The credit is increased by $4,500 for vehicles assembled at a unionized US facility, and by $500 if the vehicle model is assembled by a manufacturer with no less than 50% domestic content in component parts and if the vehicles are powered by battery cells manufactured in the US. The credit is limited to 50% of the purchase price. After 2026, the credit is only available to vehicles assembled in the US. The credit does not apply for certain higher priced vehicles, and it phases out after an individual’s modified adjusted gross income exceeds $400,000.
- Provides a refundable credit for the purchase of used plug-in electric cars through 2031, with a base credit of $1,250 and additional credits based on battery capacity. The credit is capped at the lesser of $2,500 or 30% of the sale price. The sale price cannot exceed $25,000 and the model must be at least two years older than the date of the sale. The credit is available to buyers up to $75,000 in AGI.
- Provides a new credit for qualified commercial electric vehicles equal to 30% of the cost of the vehicle, effective 2022 through 2031.
- Extends the credit for the purchase of a qualified fuel cell motor vehicle through 2031, but only for vehicles not of a character subject to depreciation; extends the alternative fuel vehicle refueling property credit through 2031, and expands the credit for zero-emissions charging infrastructure.
- Green Energy Tax Credits: The tax credits have a base rate and then a bonus rate, a higher rate for projects that meet prevailing wage and apprenticeship requirements.
- Provides new tax credits for the basis of qualifying electric transmission property put in service, qualified investments with respect to any zero-emission facility, the production of electricity from a qualified nuclear power facility through 2026, a refundable blenders tax credit for sustainable aviation fuel from 2023 through 2031, and the production of clean hydrogen beginning in 2022 through 2028.
- Extends the production tax credit (PTC) for energy producers using renewable energy resources through the end of 2031 and phases it down to 60% of the applicable rate in 2033 for landfill gas, trash, qualified hydropower, marine, and hydrokinetic renewable energy facilities, and geothermal, and for wind and solar energy. An increased credit for facilities put into service after 2021 is provided if they meet domestic requirements.
- Extends the investment tax credit (ITC) for property for which construction begins by the end of 2032 and then phases down the value of the credit for two years. For solar and geothermal energy property, fiber-optic solar equipment, fuel cell property, microturbine property, combined heat and power property, biogas property, waste energy recovery property, and offshore wind property, the credit is extended through the end of 2031 with a phase down in the next two years. Expands the ITC to include energy storage technology and linear generators. Increased credit is allowed for property that meets domestic requirements. Provides an increase in the energy credit for solar facilities put in service for low income communities.
- Extends the credit for carbon oxide sequestration facilities that begin construction before 2031; extends income and excise tax credits for biodiesel and biodiesel mixtures and for alternative fuels and alternative fuel mixtures and the second generation biofuel income tax credit through 2031.
- Green Energy Publicly Traded Partnerships: Expands the definition of qualified income for publicly traded partnerships to include income derived from green and renewable energy, including energy production eligible for the PTC, property eligible for the ITC, renewable fuels, and energy and fuel from carbon sequestration projects.
- Investment In New Technologies: Provides $7 billion in loan and grant programs at the Department of Energy for innovative technologies and US manufacturing of zero-emission transportation technologies.
- Greenhouse Gas Reduction Fund: Invests $27.5 billion in climate finance institutions for low and zero-emission technologies.
- Green Energy And Energy Efficiency Incentives For Individuals:
- Provides $18 billion in home energy efficiency and appliance electrification rebates
- Extends the nonbusiness energy property credit through 2031
- Extends the credit for the cost of qualified residential energy efficient property expenditures (including solar electric, solar water heating, fuel cell, small wind energy, and geothermal heat pumps), and expands it to apply to battery storage technology, through 2031 with a phase down the following two years
- Expands the energy efficient commercial buildings deduction by increasing the maximum deduction determined on a sliding scale and moving the maximum from a lifetime cap to a three-year cap
- Extends the Section 45L new energy efficient home credit through 2031
- Provides a $2,500 credit for energy efficient single family and manufactured new homes meeting certain energy star requirements for new homes acquired after 2022 and a similar credit of up to $2,500 for multifamily units
- Targeting The Fossil Fuel Industry:
- Establishes a methane fee on pollution from the oil and gas industry
- Imposes a “conservation of resources” fee on fossil fuel companies
- Reduces the length of fossil fuel leases from 20 years to 10 years and raises minimum oil and gas bids from $2 to $10 per acre
- Increases onshore and offshore oil and gas royalty rates from 12% to 20%
- Imposes an annual fee on owners of offshore oil and gas pipelines and an annual inspection fee on onshore and offshore oil and gas operators
- Reinstates the Hazardous Substance Superfund Financing Rate on crude oil and imported petroleum products for 2022 through 2031
- Repeals the provision allowing oil and gas leasing and drilling in the coastal plain of the Arctic National Wildlife Refuge
INFRASTRUCTURE FINANCING PROVISIONS
Our Municipal Bond clients were pleased to see advance refunding and $1 trillion of tax increases on individuals released over the weekend.
- Advance Refunding Bonds: Restores the tax exemption on interest on advance refunding bonds issued by state and local governments that were repealed in the Tax Cuts and Jobs Act. It applies to advanced refunding bonds issued more than 30 days after the date of enactment of the reconciliation bill.
- Build America Bonds 2.0: The House bill revives the idea of Build America Bonds from the 2009 stimulus bill and provides a tax credit equal to a percentage of the interest, determined by the year the bond is issued, for issuers of qualified infrastructure bonds. All of the proceeds of the bond issued must meet the Davis Bacon (prevailing wage) requirements.
- Modifies Small Issuer Exception to Tax-Exempt Interest Expense Allocation Rules For Financial Institutions: Revises the definition of qualified small issuers to issuers that are not reasonably expected to issue more than $30 million in tax exempt obligations during a calendar year (up from $10 million) for purposes of allowing a deduction for interest expense for certain tax-exempt obligations. Treats qualified 501(c)(3) bonds as tax-exempt obligations for purposes of the small issuer exception.
- Exempts Existing Water And Sewage Facilities From The Private Activity Bond Volume Cap: Exempts facility bonds for existing water and sewage facilities from the private activity bond volume cap.
- Exempts Facility Bonds For Zero-Emission Vehicle Infrastructure: Expands the definition of exempt facility bond eligible for tax-exempt private activity bond financing to include any bond issued if 95% or more of the net proceeds are to be used to provide zero-emission vehicle infrastructure.
- Credit For Operations And Maintenance Costs Of Government-Owned Broadband: Creates a 30% tax credit for state, local, and tribal governments for the operations and maintenance costs of government-owned broadband systems. This is to encourage more government-owned broadband.
SOCIAL SAFETY NET PROVISIONS
- Child Tax Credit: Extends the child tax credit and advance payment through 2022 and increases the safe harbor amount to $3,000 ($3,600 for a child under the age of 6) for certain taxpayers when repayment may be required because of excess prior payments. Establishes a monthly child tax credit fully refundable with advance payment through 2025, for children up to age 17. The monthly CTC begins to phase out for households with income above $150,000 for joint filers. Reinstates the child tax credit as fully refundable after 2025.
- Child And Dependent Care Tax Credit: Makes permanent the changes made to the tax credit as part of the American Rescue Plan to make the credit fully refundable and increases the maximum credit rate to 50%. The phase-out threshold is increased to $125,000 and increases the amount of eligible child and dependent care expenses to $8,000 for one qualifying individual and $16,000 for two or more.
- Employer-Provided Dependent Care: Permanently increases the exclusion for employer-provided dependent care assistance at $10,500 (indexed for inflation).
- Paid Leave: Provides up to 12 weeks of universal paid family and medical leave effective July 2023.
- Child Care And Pre-K: Provides $450 billion to help families pay for child care and to provide universal pre-K for three and four-year olds.
- Higher Education: Provides two years of tuition-free community college, increases the value of Pell grants and excludes them from gross income, and provides grant programs for training/hiring new teachers.
- Public Schools: Invests $82 billion in public school infrastructure.
- Child Nutrition: Invests $35 billion in child nutrition programs.
- Retirement Plans: Requires employers without employer-sponsored retirement plans to automatically enroll employees in IRAs or 401(k)-type plans.
- Childless EITC: Makes permanent the American Rescue Plan’s expansion of the eligibility and amount of the childless earned income tax credit (lower eligibility age of 19 and no upper age limit). Doubles the childless EITC credit amount and increases the income threshold at which it phases out.
- Low-Income Housing Tax Credit: Increases the 9% housing credit and the small state minimum by 50% and phases it in over five years. Temporarily reduces the tax exempt bond financing requirement from 50% to 25%. Provides a 50% basis boost for LIHTC buildings that designate at least 20% of their occupied units for extremely low-income tenants and limit rent to no more than 30% of the greater of 30% of the area median income or the federal poverty line.
- Neighborhood Homes Credit: Creates a new federal tax credit to encourage the rehabilitation of deteriorated homes in distressed neighborhoods. The credits are to be used to cover the gap between development costs and sales prices, up to 35% of eligible development costs.
- Historic Rehabilitation Tax Credit: Increases the historic rehabilitation tax credit percentage from 20% to 30% for 2020 through 2025 and then phases it down to 20% in 2028.