On June 24, President Biden and a bipartisan group of 21 U.S. senators announced that after weeks of negotiations, they had agreed to a framework to spend $1.2 trillion over eight years on traditional infrastructure such as roads, bridges, the electrical grid, and digital infrastructure. While only about $580 billion of that is new spending above and beyond what Congress is already penciled in to spend, the bipartisan agreement is nevertheless a significant accomplishment for a deeply polarized Washington. The bill would be “paid for” by a combination of previously appropriated CARES Act money, 5G spectrum sales, and narrowing the tax gap.
But, but, but …
Note, however, that a framework is very different from legislative text, and while the support of 21 senators is a strong start, it takes the votes of 60 senators and 218 representatives in a narrowly divided House to send a final bill to President Biden’s desk. While observers and legislators on both the progressive left and the conservative right are voicing concerns, we believe the infrastructure framework has a lot going for it politically:
- It does not include any poison pills for either the left (e.g., no gas tax) or the right (e.g., no undoing of the Trump tax cuts).
- It will go through “regular order,” not the “reconciliation” process, which is important as it would allow for “earmarks” – special member-driven projects that enable both Republicans and Democrats to bring funding home to their districts.
- Hard infrastructure – roads, bridges, sewers, electricity – is simply good politics, according to national polling.
‘One cannot be done without the other’
Even though a bipartisan package is gaining momentum, we don’t expect this will be a “one and done” deal: Additional spending and tax increases are still very much likely. Indeed, our view has been that a bipartisan deal would receive sufficient support from Democrats only if they are assured it will be quickly followed by a partisan bill that includes other “human capital” infrastructure priorities (child tax credit, some climate priorities, etc.), funded by tax increases. Senate Majority Leader Schumer, House Speaker Pelosi, and President Biden simply stated this out loud in the days following the deal’s announcement.
To be sure, we do not believe the Democratic-only bill following the bipartisan bill would be anywhere near as large as progressives would like. Our view is that it will likely represent spending of $1 trillion – $1.5 trillion, which is in addition to the roughly $1 trillion bipartisan deal over eight years.
Implications for tax policy
As mentioned, we still believe tax increases will be part of a likely follow-on reconciliation bill, but they likely would be watered down in their final form and be prospective, not retroactive. Specifically, we expect the top individual tax rate to increase, some relief on state and local taxes (SALT), the corporate tax rate to land at 25%, and the GILTI tax to land at 15% (GILTI stands for “global intangible low-taxed income” and these taxes target assets held in offshore tax havens). There could also be some tweaks to the capital gains tax, but that is a bigger political fight, though we note Democratic Senator Joe Manchin recently suggested he could support a 28% capital gains tax rate. Depending on how much spending Democrats are trying to fund, they may very well not need to touch capital gains (which would preserve the step-up in basis as well).
Outlook, timing, and debt ceiling
Congress will likely spend the rest of the summer on both the infrastructure deal and on a Democratic budget that will need to pass both chambers (with simple majority votes) to unlock the partisan reconciliation process. September is probably the earliest for a bipartisan infrastructure deal to pass Congress. Partisan human capital infrastructure spending plus tax increases are not likely to be considered until fall or early winter.
It does not appear that a debt ceiling increase will be included in the bipartisan infrastructure bill, but is more likely to be included in a 2022 funding bill that must pass before September 30 to avoid a government shutdown.
When all is said and done, we estimate total spending in the range of about $2 trillion – $2.5 trillion (partly offset by tax increases) regardless of how it gets passed – via a bipartisan bill and a partisan bill or one big partisan bill, and if a deal is struck today, that view is still intact. There are, of course, still obstacles to passage, and passing both a bipartisan bill and a partisan bill will require Congress to tread thoughtfully. But as is often the case in Washington, the impossible becomes inevitable very quickly when the political motivations are in place. Regardless, it will be a long, hot, and busy summer for Congress.
For insights into the outlook for fiscal and monetary policy globally, please read PIMCO’s latest Cyclical Outlook, “Inflation Inflection”.
Libby Cantrill heads public policy at PIMCO and is a regular contributor to the PIMCO Blog.