How Arizona senators Kyrsten Sinema, Mark Kelly shaped the Inflation Reduction Act
For several hours on Sunday, it looked like Democrats' Inflation Reduction Act of 2022 might be in jeopardy.
The mammoth $430 billion climate and health care bill, which was ultimately passed via a 51-50 all-Democratic majority, was in the final stages of a reconciliation “vote-a-rama.”
Senators had pulled an all-nighter to get through a series of mostly Republican-sponsored amendments meant to impose politically painful votes on Democrats.
It was the only way the GOP could hope to prevent the bill's final passage, by garnering just enough votes from vulnerable moderates to attach an amendment that would render the IRA untenable for other Democrats.
Democrats stuck together initially. And then, they broke apart.
Senator John Thune, R-S.D., pushed forth an amendment exempting portfolio businesses that had partnered with private equity companies from the bill's 15% corporate minimum tax on corporations making more than $1 billion in annual profits.
Without it, Thune said the Inflation Reduction Act could cut profits for up to 18,000 American small- and medium-sized businesses, who employ almost 12 million workers.
Arizona's two senators, Kyrsten Sinema and Mark Kelly, joined five other Democrats in supporting Thune's motion.
Sinema's opposition to any budgetary measure that could raise taxes on small businesses is well-documented, even if it took until the eleventh hour for the implications to be felt Sunday.
“Kyrsten has been clear and consistent for over a year that she will only support tax reforms and revenue options that support Arizona's economic growth and competitiveness,” Pablo Sierra-Carmona, Sinema press secretary, told The Arizona Republic Monday.
“At a time of record inflation, rising interest rates, and slowing economic growth, disincentivizing investments in Arizona businesses would hurt Arizona's economy and ability to create jobs.”
Kelly's camp became more attuned to the budgetary issues within the bill in the run-up to the reconciliation vote.
“During this process, Senator Kelly heard from Arizonans who were concerned about how this could unintentionally impact some small businesses, which is why he supported a bipartisan solution to ensure that Arizona small businesses will not have their taxes raised,” a spokesperson for Kelly told The Republic Monday.
“This bill is going to close tax loopholes and strengthen enforcement to make sure that the wealthiest and most profitable corporations pay their fair share.”
But Thune's amendment threw the Senate chamber into temporary chaos.
Thune proposed extending the $10,000 limit on state and local tax deductions for taxpayers, a deal-breaker for senators such as Majority Leader Chuck Schumer, D-N.Y., who represent states where even middle-class properties can have steep property taxes.
Democrats went back to the drawing board. Sen. Mark Warner, D-Va., replaced Thune's proposal with a two-year extension of rules capping the amount of money pass-through businesses can deduct from taxes each year.
That funding source preserved united Democratic support, and the measure passed on party lines.
The result: the country's largest-ever investment in clean energy, a $300 billion outlay on tax credits and the production of renewable energy infrastructure that will bring greenhouse gas emissions down 40% by the end of the decade.
In health care, the bill allows Medicare to negotiate the prices of certain prescription drugs and institute drug price caps for seniors.
The Inflation Reduction Act will be paid for by a 15% minimum tax on corporations reporting more than $1 billion in annual earnings, and by increased surveillance and enforcement by the IRS, among other measures.
All told, Sen. Joe Manchin, D-W.Va., and Schumer's bill will raise well over $700 billion in revenue, with $300 billion going to down payments on the national debt.
The carried interest loophole
Sinema helped reshape the bill, which surprised many in Washington. When Manchin and Schumer announced in late July that they'd agreed on the bill's framework, attention immediately turned to Sinema's reaction.
With Manchin aboard, many Democrats worried Arizona's senior senator, who was reportedly only notified of the agreement when it was announced publicly, would join Senate Republicans in opposing it.
“Senator Sinema is reviewing the text and still needs to review what comes out of the parliamentarian process,” Sierra-Carmona told The Republic July 29.
At the core of Sinema's apparent reluctance to immediately back the bill was the planned elimination of the carried interest loophole, a budgetary mechanism that allows hedge fund managers and private equity to tax income at the capital gains rate of 20% rather than the normal income tax attributed to the country's highest earners of 37%.
It's a maneuver that makes private equity partners millions of dollars a year in extra earnings.
Sinema agreed to back the bill in part once the carried interest loophole was allowed to stay on the books, replaced by a 1% excise tax on stock buybacks, which actually will fund billions more in Inflation Reduction Act-related revenue each year than any carried interest mechanism. She had two other requirements: changes to the structure of corporate minimum and, critically, drought funding.
On Friday, the eve of the reconciliation vote-a-rama, Kelly, as well as Sens. Catherine Cortez Masto, D-Nev., and Michael Bennet, D-Colo., announced that they'd reached an agreement with leading Democratic framers to include $4 billion of drought funding in the IRA.
Sinema wasn't included in the press statement, but it is widely known she conditioned her support of the bill on targeted funding to combat droughts in the western United States.
Arizona is currently mired in a 27-year long-term drought, one that has left the state's water supply at low levels never before seen. The reservoirs at Lake Mead and Lake Powell, two critical water resources for much of the American Southwest, are today half empty, according to the Glen Canyon Institute. And there are doubts they'll ever be full again.
So extra drought funding in the coffers of the Bureau of Reclamation was critical for Kelly and Sinema. Kelly, who played a leading role in landing $8.3 billion in Western water infrastructure funding from the 2021 Bipartisan Infrastructure Law Sinema wrote and sponsored, was earlier this month recognized by the National Ground Water Association for his drought advocacy.
“As we face a historic drought, our work to secure Arizona’s water future is more important than ever," Kelly said while receiving the award. “I’m grateful to National Ground Water Association for their shared commitment to this priority. I’ll keep working in the Senate to ensure Arizona communities have the water resources they need to grow and prosper.”
Gregory Svirnovskiy is a Pulliam Fellow at the Arizona Republic. You can follow him on Twitter @gsvirnovskiy or reach him by email at firstname.lastname@example.org