Democrats get ready to raise taxes just in time for 2022 midterm elections

WASHINGTON—Democrats are hoping quiet negotiations between Senate Majority Leader Chuck Schumer and Sen. Joe Manchin can quickly produce an agreement to advance key elements of President Biden’s economic agenda before a narrowing window to pass ambitious legislation ahead of the midterm elections closes.

Mr. Manchin, a Democrat from West Virginia, and Mr. Schumer, a Democrat from New York, have held a series of meetings in recent weeks on a package focused on lowering prescription drug costs, raising taxes and bolstering energy production in the U.S.

While the substance of those conversations remain closely held, some Democrats and outside analysts now expect a possible agreement could raise roughly $1 trillion in revenue and spend about $500 billion over a decade. With roughly half the new revenue dedicated toward reducing the deficit, the spending would focus on tax incentives for reducing carbon emissions and some support for fossil fuels, as well as an extension of subsidies for purchasing health insurance under the Affordable Care Act.

Such a package, if agreed to, would represent a dramatic drop from the roughly $2 trillion in spending on healthcare, education and climate initiatives that Democrats in the House approved last year. But after Mr. Manchin killed that effort in the 50-50 Senate, where Democrats need his support to approve the legislation along party lines, party lawmakers are now desperate to reach an agreement with the centrist holdout as the midterms near.

As the top-line amount of revenue and spending in the package shrinks, Democrats may drop some of the tax increases they included in the House-passed package, including a surtax on very high-income Americans. Revenue measures in any deal would likely include a new minimum tax on the profits of large companies and expanded funding for enforcement by the Internal Revenue Service, which would help net more taxes owed to the government.

Efforts to resuscitate the centerpiece of Mr. Biden’s agenda have proceeded in fits and starts all year, though talks in recent weeks have become more substantive, according to Democratic lawmakers and aides. Democrats have strained to avoid last year’s public, sometimes confrontational negotiations over the bill that ended with the White House and Mr. Manchin trading acerbic accusations, and White House officials haven’t directly engaged in the recent talks.

Mr. Schumer told Senate Democrats during a party meeting Tuesday that negotiations with Mr. Manchin were going well, according to an attendee, though Mr. Schumer didn’t guarantee they would reach a deal. Mr. Manchin recently said at the World Economic Forum in Davos, Switzerland, that he thought a deal was possible.

“There’s a responsibility and opportunity that we can do something,” Mr. Manchin said.

Because Sen. Kyrsten Sinema (D., Ariz.) agreed to many of the provisions in the House-passed package last year, Democrats believe she would sign on to any eventual deal with Mr. Manchin. Ms. Sinema, another critical centrist in the talks, helped negotiate the tax and drug-pricing provisions last year, while also lending her support to climate measures. Her office didn’t respond to a request for comment.

Other Democrats, still smarting from almost a year of unsuccessful talks, were skeptical that the party would finally reach a breakthrough. Democrats are using a party-line process called reconciliation to pass the bill in the Senate, where Republicans unanimously oppose it.

“Clearly, there is a real prospect for reconciliation. But there’s also a real prospect of failure,” said Sen. Sheldon Whitehouse (D., R.I.).

Democrats believe they will need an agreement in hand in the coming weeks to have enough time to convert it into a bill that can pass both the House and Senate before August, when Congress leaves town for the month and lawmakers begin to focus more heavily on their reelection efforts.

“The question really is timing. We’re really running up against the clock,” Energy Secretary Jennifer Granholm said.

Since negotiations collapsed last year, Mr. Manchin has sketched out the contours of a bill he is willing to accept. He has said it should raise taxes and empower the government to negotiate lower drug prices and dedicate half of that revenue toward reducing the deficit, a step he has said could help curb inflation by pulling money out of the economy. The remaining revenue should be put toward energy spending, with Mr. Manchin saying that the bill should support both clean and fossil-fuel energy sources.

“We have so much more that we can do, but you can’t do it by abandoning the fossil industry that gives us the ability to have reliability and security, not just for our nation but what the world is needing today,” Mr. Manchin said in Davos.

As the talks between Messrs. Manchin and Schumer have progressed, Democrats are pushing for the potential agreement to include an extension of subsidies of health insurance premiums under the Affordable Care Act.

The current set of subsidies is set to expire later this year, meaning consumers could see sharp premium increases when they start shopping for plans in October and picking them in November, right as the midterm elections are happening, said Emily Gee, coordinator for health policy at the Center for American Progress, a Democratic-aligned think tank.

“The timing of the subsidy expiration could not be worse,” she said. “It is something that’s going to be highly visible to consumers.”

On many other priorities, Democrats acknowledge that many of their earlier ambitions for the legislation aren’t in the running for a possible agreement. The House-passed package had included funding for universal prekindergarten, monthly payments of an expanded child tax credit and child-care subsidies that are all set to remain on the chopping block, among other proposals.

While lawmakers spent much of last year pushing for their favored priorities to be included in the agreement, Democrats largely recognize now that they risk failing to pass any package before potentially losing control of Congress in November, which they fear would hurt them politically and defer their priorities for years. Many Democrats are prepared to accept whatever agreement Messrs. Manchin and Schumer can work out, hoping to make progress on areas that can earn 50 votes.

“I’m always hopeful that Congress will do what makes sense, although there’s a lot of evidence that that doesn’t always happen,” said Sen. Elizabeth Warren (D., Mass.).