Sen. Kyrsten Sinema (D-Ariz.) announced Thursday evening that she has reached a deal with Senate Majority Leader Charles Schumer (D-N.Y.) that could pave the way for Democrats to pass their budget reconciliation package.
The deal would remove a provision closing the so-called carried interest loophole from the package announced last week by Schumer and Sen. Joe Manchin (D-W.Va.).
Sinema said she and Schumer have also reached agreement on protecting manufacturing from the impact of a proposed 15 percent corporate minimum tax, which business leaders in Arizona warned would dampen economic growth.
The announcement paves the way for Sinema to vote Saturday for a motion to proceed to a budget reconciliation package that would reform the tax code, tackle climate change, reduce the cost of prescription drugs and shrink the federal deficit.
“We have agreed to remove the carried interest tax provision, protect advanced manufacturing, and boost our clean energy economy in the Senate’s budget reconciliation legislation,” Sinema said, signaling that she plans to vote to begin debate on the bill.
“Subject to the parliamentarian’s review, I’ll move forward,” she said.
A Democratic source familiar with the agreement said it would include a new excise tax on stock buybacks that would bring in more than enough revenue to cover the removal of the carried interest provision.
The Democrat said the bill will still reduce the deficit by $300 billion, citing a number that Schumer and Manchin have touted over the past week.
Senate Democrats had waited anxiously for days for a positive sign from Sinema, whom they feared was angry after being left out of a final round of talks.
With Sinema’s vote, Democrats now have the support of all 50 members of their caucus to pass what would become President Biden’s biggest domestic legislative achievement. It would reduce the federal deficit by between $100 billion to $300 billion, according to various estimates, an accomplishment Democrats can pitch to voters at a time of 40-year-high inflation.
“I am pleased to report that we have reached an agreement on the Inflation Reduction Act that I believe will receive the support of the entire Senate Democratic conference,” Schumer said in a separate statement confirming the deal.
He said the agreement “preserves the major components” of the deal he announced with Manchin last week to lower drug costs, fight climate change, close tax loopholes and reduce the deficit.
“The final version of the reconciliation bill, to be introduced on Saturday, will reflect this work and put us one step closer to enacting this historic legislation into law,” Schumer said.
Biden called for Senate Democrats to pass the package as soon as possible following Sinema’s announcement.
“Tonight, we’ve taken another critical step toward reducing inflation and the cost of living for America’s families,” Biden said in a statement.
“The Inflation Reduction Act will help Americans save money on prescription drugs, health premiums and much more,” he continued.
Democrats expect to vote to begin debate on the more-than-700-page bill sometime Saturday afternoon.
That will begin up to 20 hours of floor debate followed by an open-ended series of amendment votes, known as a vote-a-rama, and then a vote on final passage of the legislation.
Sinema in her statement promised to work with colleagues to address the carried interest preferential tax rate, which allows asset managers to pay a 20 percent capital gains rate on income they earn from advising clients on profitable investments.
“Following this effort, I look forward to working with Sen. [Mark] Warner [D-Va.] to enact carried interest reforms, protecting investments in America’s economy and encouraging continued growth while closing the most egregious loopholes that some abuse to avoid paying taxes,” she pledged.
The announcement capped off several days of intense discussions between Sinema, Schumer and Manchin.
Democratic senators said Sinema wasn’t happy about being left out of the secret negotiations Schumer and Manchin held last month to add sweeping tax reform and climate provisions to the budget package.
The Arizona senator had previously made clear that she opposed eliminating the carried interest tax rate as well as reforms that would effectively raise corporate taxes and threaten economic growth. Those priorities appeared to be somewhat overlooked in the Schumer-Manchin deal.
Sinema held back her support for the legislation and insisted on changes to soften the tax hit on manufacturers from a 15 percent corporate minimum tax, according to sources familiar with the negotiations.
Manchin held at least two long conversations with Sinema on the Senate floor in recent days to win her over.
Multiple people familiar with the issue said Sinema wanted to exempt U.S. manufacturing companies from the 15 percent corporate minimum tax that Schumer and Manchin inserted in the Inflation Reduction Act. That bill caught almost every senator — including Sinema — by surprise when it became public last week
Exempting manufacturing companies from the book minimum tax would cost about $45 billion over ten years, according to one Senate estimate floated this week.
Book is a tax accounting term that in effect would make it harder for companies to avoid declaring profit and therefore increase what they would pay in taxes.
Sinema also told colleagues that she opposed closing carried interest loophole, which critics say allows wealthy money managers to pay a lower effective tax rate than many middle-income Americans.
And the Arizona senator wanted $5 billion in drought resiliency funding for her home state, according to two Democratic senators.
The statements released by Sinema and Schumer Thursday evening made no mention of drought relief. However, her pledge to vote to move forward indicates her concerns on the corporate minimum tax structure, carried interest and drought have been satisfied.
Sinema declined to answer reporters’ questions when she emerged from her Capitol basement hideaway Thursday afternoon.
She came under heavy pressure from business leaders in Arizona to oppose the corporate minimum tax.
“In the face of record-high inflation, supply chain backlogs and a major labor crunch, now is not the time to hammer manufacturers with new taxes,” Arizona Chamber of Commerce and Industry President Danny Seiden said in a statement earlier Thursday.
“Arizona job creators will continue to urge lawmakers to reject this manufacturers tax and instead focus on policies that encourage job growth and strengthen our state and economic competitiveness,” he said.
The Schumer-Manchin deal would have established a 15 percent minimum tax for corporations with more than $1 billion in annual profits, though it exempted green-energy and microchip manufacturing tax credits from getting wiped out by that minimum tax threshold.
Republicans said that proposal would have hit manufacturing companies especially hard by superseding a key reform of former President Trump’s 2017 Tax Credits and Jobs Act allowing companies to fully expense capital expenditures for a given year.
Full expensing under the Tax Credits and Jobs Act is due to phase out over the next four years.
Sinema told the Arizona Chamber of Commerce in April that she would be “unwilling to support any tax policies that would put a break on … economic growth, or stall business and personal growth for America’s industries.”
She made clear to senior White House officials and Senate Democratic colleagues early during the negotiations over the budget reconciliation bill that she would not support increasing the 21 percent corporate tax rate, a key achievement of the 2017 tax reform law.
“The entire country knows that I am opposed to raising the corporate income tax. That was true yesterday and it is true today,” Sinema told the Arizona Chamber of Commerce earlier this year.
Republican critics of the Schumer-Manchin deal said that preventing full and immediate expensing of capital expenditures would effectively increase taxes on many corporations.
Sen. Rob Portman (R-Ohio), who worked closely with Sinema in drafting last year’s $1 trillion bipartisan infrastructure law, warned in an op-ed for The Wall Street Journal that it would “essentially” place a “tax on manufacturing.”
He pointed out that the bipartisan Joint Committee on Taxation estimates that nearly 50 percent of the new tax would hit manufacturers.
“Imposing this new tax on U.S. companies, and restricting certain U.S. manufacturers from writing off investment costs immediately, would make America less competitive and drive investments and jobs overseas,” he warned.
Sinema’s request for $5 billion in drought resiliency funding also loomed as a potential problem, sources warned.
Guaranteeing access to more water to states lower in the Colorado River basin such as Arizona, Nevada and California may come at the expense of upper-basin states such as Colorado, Utah, Wyoming and New Mexico.
“We are facing historic drought in Colorado. The state has had the worst wildfires in our state’s history. There is very little water in the Colorado River. And I think it would be great if we could do something on drought, but it has to be something that meaningfully improves the situation in Colorado and in the upper basin of the Colorado River,” said Sen. Michael Bennet (D-Colo.), who is up for reelection in November.
Bennet warned that any drought resiliency language must provide an “enduring solution to the problem, otherwise it’s not worth doing.”