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Understanding the $3.5 Trillion Dollar Reconciliation Bill

Since taking office, President Joe Biden has repeatedly underscored the importance of certain key priorities in tackling challenges related to areas such as climate change, education, healthcare, and infrastructure.

However, this new Democratic Reconciliation Bill is facing strong opposition from the Republican Party, along with two Democratic senators, Joe Machin and Krysten Sinema, because of the $3.5 trillion price tag. If passed, the proposed bill would cement President Biden’s “Build Back Better” vision with two free years of community college, child care assistance, extended child tax credits, and much more. It’s important to note that this bill is in addition to the $1 trillion infrastructure bill, passed with bi-partisan support, in August 2021 to provide funding for rebuilding infrastructure, broadband internet, water and sewer infrastructure, and much more.

In this article, we will take a closer look at both spending bills and how the expenditure will trickle down to local and state economies.

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Expanding the Social Safety Net for Americans

Unlike the $1 trillion infrastructure bill that entailed rebuilding American infrastructure along with modernizing its cyber, electric, and public utility sectors; the Reconciliation Bill’s opposition is due to its price tag.

The Democratic Party is trying to push the spending bill through a budgetary process called reconciliation that needs all Democratic senators to be on board to bring this process to fruition. It’s primarily focused on enhancing a wide range of social benefits for Americans. It’s also important to note that the total price tag on this bill will be incurred over a 10-year period and the proposed funding will come from a newly proposed tax plan.

  • Free Community College: This bill proposes a combined spending of roughly $190 billion to provide two years of free community college regardless of the family’s income and will add funding for various grants, available for students, to pay for the increased cost of attending college.
  • Child Care and Medicare Expansion: The proposed plan allocates roughly $450 billion to lower the childcare cost for families and it’s estimated to keep the overall childcare cost at or below 7% of most families’ income. Furthermore, the plan would expand the Medicare cost to include dental, vision, and hearing services.
  • Child Tax Credit and Family Leave: The plan proposes the expansion of the tax credit that was first enacted through 2021 to help families receive additional funds per child based on their income. If expanded, the plan will keep the same structure through 2025 as “families receive $3,600 per child under age 6, and $3,000 per child aged 6 to 18. Most families receive monthly payments of either $250 or $300 per child. The full expanded child tax credit is available to individuals making up to $75,000 or married couples making up to $150,000.” Another enhancement to this plan includes paid family and medical leave that is estimated to cost $225 billion; this provision would entail 12 weeks of paid family and medical leave.
  • Combating Climate Change: The efforts to reduce carbon emissions and promote the use of renewable energy sources have always been at the top of the priority list; this spending plan focuses on incentivizing utility companies to reduce their carbon footprint and use renewable energies. The “clean electricity performance program” that allocated roughly $150 billion for this objective sets a benchmark for utility companies to either meet to qualify for incentives or pay penalties for not meeting the required standards. The total expenditure under this item also highlights the need for better forest management, incentives for electric vehicles, and construction of more charging stations.

The Sources of Funding for this Plan

The funding for the 10-year expenditure plan would primarily come from an increase in tax brackets for high earners and an increase in the corporate tax rate. The plan proposes a corporate tax rate hike from 21% to 26%, which was brought down under the last presidency. Furthermore, the marginal income tax rate for individuals earning over $400,000 would increase from 37% to 39.6% and an increase in capital gains tax is proposed.

The Bottom Line

The overall support for key priorities and fundings under both the infrastructure bill and social safety bill gives investors an insight on where both parties stand on the future of these large issues. While the infrastructure plan garnered bi-partisan support, the same support will likely not be afforded to this bill and both parties have taken hard stands on the issues highlighted in this article.

We will likely see all provisions of this plan come to a negotiated agreement before President Biden signs off.

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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.

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Oct 08, 2021