All Signs Still Point to an Increase in the Corporate Business Tax
The political back-and-forth on tax increases isn't likely to change the outcome.
Back in April, we laid out our expectations that, as part of a major infrastructure package, Congress would raise the corporate business tax rate from the current 21% rate, with a probability-weighted average of an increase to 26%. We also predicted that such an increase would deliver mid-single-digit impacts on average equity valuations.
Despite some reporting that the infrastructure package may be significantly altered, we stand by our view: Democrats have a strong incentive to go it alone if they cannot get Republican support, and they cannot get sufficient Republican support for a regular order bill. Therefore, we think the final package will be similar to what Biden proposed, particularly with regards to the tax increase.
We think that over the next few weeks we will hear about the White House offering significant concessions on taxes and spending as part of an effort to win over Republicans. We also think these efforts are largely for show and that these efforts will fail. The two sides are simply too far apart, and Republicans have little incentive to give Democrats a policy win before the midterm elections.
Left with no choice but to pass a bill through reconciliation--which only requires a simple majority--Democrats will increase the corporate business tax on their own to pay for other priorities. Ongoing negotiations will get a lot of news coverage--particularly leaks (or “leaks” designed to send a message without embarrassing key legislators or the administration)--but they are unlikely to change the final package very much.
To quantify how unlikely it is that such negotiations will result in a true bipartisan compromise, remember that Democrats need 10 Republican votes to avoid reconciliation. Without 10 Republicans, Democrats have little reason to give away much because they do not need Republicans if using the reconciliation process. (Keep in mind, they already used this reconciliation maneuver for the American Rescue Plan on a straight party-line vote, so there is a recent precedent for going it alone.)
Looking at voting patterns, such a bipartisan vote through regular orders seems impossible. Using DW Nominate rankings, which calculate the partisan lean of members of Congress, we can see the 60th vote in order of party lean for any legislation is Sen. Mike Rounds. He is very conservative. (Note that the rankings list includes Kamala Harris’ votes as vice president, but her votes do not help with breaking the filibuster.)
Simply put, we do not believe that there are 60, or even 55, votes for virtually any Senate bill that contains Democratic priorities. We do not believe Democrats will make big concessions for a few symbolic Republican votes. Finally, we do not believe Democrats will fail to act during a rare period of unified government. With those sets of beliefs, we continue to believe there is a high probability of a corporate business tax increase this year, unless a member of the Democratic coalition (including two independents) were to die.
There is one piece of news that changes our view on the possible timing of the corporate business tax increase. Democrats had assumed they would get two more reconciliation bills this year and could use one for infrastructure and one for family support, such as permanently increasing the child tax credit. With just one package, they may need to put all their priorities in one bill, somewhat slowing it down. There is also chatter about splitting up the infrastructure pieces, but again, we do not see 60 votes for anything that the median Democratic member would be willing to support.