Intense negotiations over the Democratic Build Back Better legislation are now underway again, following a week of congressional finagling on Capitol Hill. And that has everybody focused on the legislation’s price tag.
The original proposal from President Joe Biden and party leaders allocated about $3.5 trillion over 10 years toward a variety of purposes including subsidies for electric vehicles, programs for young children and the elderly, and expansions of health insurance coverage.
A very small handful of conservative Democrats have said that $3.5 trillion is too much; Sen. Joe Manchin (D-W.V.), has said explicitly that he would prefer shrinking it to $1.5 trillion.
The vast majority of Democrats in Congress are with Biden and their leaders. That includes progressives, who originally asked for $6 trillion and settled on $3.5 trillion as a politically necessary compromise.
But the party’s slim majorities mean that just three House Democrats or one Senate Democrat could block legislation. That has given Manchin and other holdouts political leverage, prompting more concessions.
At a meeting with House Democrats on Friday, Biden suggested lawmakers consider a bill closer to $2 trillion. If that’s the final number, it could force Democrats to make excruciating choices ― downsizing some of their initiatives, eliminating others altogether.
But the severity of those eventual choices depends on more than the top-line number. It also hinges on how Democrats answer two key accounting questions: whether tax breaks are a version of spending and whether health care spending includes new savings as well as new expenditures.
Key pieces of the Democratic agenda depend on the answers to those questions. So does the well-being of millions of Americans.
Tax Cuts: Does Foregone Revenue Count As Spending?
The fact to remember is that the $3.5 trillion figure everybody has seen or heard in discussions of Build Back Better doesn’t actually represent new spending.
It is simply a way to measure the cumulative impact of everything Democrats propose to do ― some of which is in the form of government spending, but some of which is in the form of tax relief.
Consider the Child Tax Credit, or CTC, which helps families with kids and, in the process, can reduce poverty dramatically. The COVID-19 relief plan passed earlier this year increased the CTC’s value temporarily, as a way to shore up incomes during the pandemic. Biden and Democratic leaders now want to make those changes permanent.
The CTC is “refundable,” which means everybody gets the full value, even if it’s more than they owe in taxes. As a result, some of the money goes out as payments to lower income people who owe little or no income tax. Typically, lawmakers would treat that money as a form of spending.
But another chunk of the CTC money goes to higher-income families, who use the credit to reduce what they owe in taxes. Typically lawmakers would treat that as lost revenue, not new spending.
The same is true for some other tax breaks in Build Back Better. Altogether, the $3.5 trillion includes at least a few hundred billion dollars that’s lost revenue, not new spending, at least according to the usual accounting conventions.
This isn’t a secret. The Washington Post’s Catherine Rampell and American Prospect’s Robert Kuttner wrote about the accounting conventions and their significance in early September.
The question now is how Manchin and the other holdout Democrats feel about this issue. If they don’t consider lost revenue as part of their spending target, then there will be more money for other purposes.
Health Care Spending: Is The Issue Gross Or Net?
On the health care part of the agenda, the key issue is gross spending versus net spending.
Build Back Better envisions three major expansions of health insurance: an extension of temporary measures that made the Affordable Care Act’s private subsidies more generous, a new insurance program for low-income people living in states that have not expanded Medicaid, and new benefits for Medicare ― not just dental, but vision and hearing coverage as well.
Build Back Better also calls for reducing the price of prescription drugs by giving Medicare the power to negotiate lower prices with manufacturers. In addition to providing savings to recipients, the measure would reduce government spending because Medicare would spend less on drugs for seniors.
If Manchin looks only at the gross (or new) outlays, he will see hundreds of billions of dollars, because that’s what it would cost to fund the three expansions of health insurance.
But if Manchin looks at the net effect, taking into account both the spending increase for insurance expansions and the spending reduction from prescription drug reform, he’ll see a much lower number. In fact, party leaders have been hoping to finance new coverage expansions entirely out of prescription drug reform, with every dollar of new spending having an offsetting dollar of savings.
If they can do that, then the net budgetary effect of the health care portions would be literally zero, leaving a lot more money for other purposes ― again, if Manchin and other holdouts can see it that way.
A Semantic Debate With Substantive Meaning
Questions about the meaning of “spending” and differences between net and gross expenditures may seem semantic. But they get to the heart of the debate between party leaders and holdouts.
If the holdouts actually want the legislation to do less, because they think the sheer ambition of Build Back Better is too large, then it’s irrelevant whether initiatives reach people by lowering their taxes or giving them benefits. It’s also irrelevant if prescription drug savings offset the cost of the new health care initiatives.
If, on the other hand, Manchin and other moderates simply want to limit the size of government and outlays from the Treasury, then they should not count some of the tax breaks toward their top-line total and instead focus on the net increase in government spending. That would mean considering how prescription drug savings offset the proposed new spending.
(It’s also worth remembering that the legislation is supposed to be deficit neutral: Democratic leaders have pledged to offset the full cost of the plan with either new revenue or spending cuts elsewhere.)
There is no right or wrong answer to these questions, obviously. But if the focus is on government spending specifically, then the two sides may not be as far apart as it seems. Or, to put it another way, the $1.5 trillion figure Manchin has floated would be closer to the $3.5 trillion plan that is commonly understood.
It would still be short of what Democratic leaders have been seeking, and they would still have to make some tough choices about where to scale back. But the choices would at least be easier, because the leaders wouldn’t have to cut as much.
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