Update-Outlook

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Washington Update and Outlook

Click on the following links for recent developments on:

Healthcare: ACA Repeal-and-Replace
FY 2018 Appropriations
FY 2018 Budget
Energy & Environment
Financial Regulation and Dodd-Frank
Infrastructure
Economy
International Trade
Debt Ceiling
Action on Regulations and Executive Orders
Congress, the Presidency, and the Courts

Healthcare: Affordable Care Act Repeal-and-Replace

FY 2018 Appropriations

  • This week House leaders are hoping to bring to the Floor an appropriations “minibus” that combines 4 bills: Defense; Energy-Water; Legislative Branch; and Military Construction-VA.  A last minute effort by some Members to combine all 12 bills into an omnibus measure appears to have failed.  Regardless of the outcome, the minibus or omnibus measure is largely a political exercise and a procedural placeholder.  All appropriations bills will have to be revised following bipartisan negotiations to re-set overall funding levels for FY 2018 defense and non-defense discretionary spending.  Neither Republicans nor Democrats are willing to live with the current spending caps that require cuts below FY 2017 levels for both defense and non-defense spending.Negotiations on revised caps have not yet begun and a government shutdown is possible on October 1, 2017 if negotiations do not proceed swiftly in September.   In the meantime, here is the status of defense and non-defense spending (in billions of dollars):Defense (base funding):  $551b appropriated for FY 2017 (without war funding); the statutory cap is $549b; Administration requested $603; House placeholder bill provides $621.5b; and the Senate bill is at the $551b cap level.

    Non-Defense:  $518.5b appropriated for FY 2017; the statutory cap is $515.4b; Administration requested deep cuts to $462b; House placeholder bills restore most cuts, providing $511b; and the Senate is at the $518.5b cap level.

    Understanding the Caps:  The statutory defense cap includes funding in the Defense appropriations bill, as well as defense-related funding in the Energy-Water and Mil Con-VA bills. Additional defense funding is appropriated outside of the statutory cap through “Overseas Contingency Operations.”   Most cap-exempt-OCO funding goes to the Defense Department, but some goes to State and other agencies.

  • See FedWeb’s Appropriations Portal for details (summaries, report language, bill text) on each of the 12 appropriations bills.
  • 50 Votes vs. 60 Votes: The annual Budget Resolution can advance tax and entitlement reforms with 50 votes in the Senate, due to the filibuster-proof budget reconciliation process. However, appropriations bills require 60 votes — and bipartisan support — in the narrowly divided Senate (52-48).  The latter point — 60 votes for appropriations — is particularly important because Democrats and Republicans strongly disagree on the defense and non-defense statutory spending caps for FY 2018 that were put in place by the 2011 Budget Control Act (BCA).
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FY 2018 Budget

  • The FY 2018 Budget Resolution passed the House Budget Committee (HBC) July 19, 2017 on a mostly party-line vote 22-14.  However, doubts about the budget plan passing on the House Floor were expressed by Freedom Caucus chairman Mark Meadows due to concerns of conservatives about a possible Border Adjustment Tax (eliminating corporate deductions on imports) to pay for tax rate cuts.  Highlights and analysis of the HBC budget plan:
  • Medicaid Cuts: HBC budget proposes $1.5 trillion in Medicaid and other health programs over 10 years.  Medicaid is the joint federal-state health coverage program for low-income elderly, families, and disabled Americans.  FedWeb Medicaid page
  • Medicare Cuts: HBC plan proposes Medicare reductions of $487 billion over 10 years.  FedWeb Medicare page
  • Unspecified Cuts in Other Entitlement Programs:  HBC budget calls for $2.5 trillion over 10 years in unspecified entitlement cuts; reductions of this size would likely impact food stamps (SNAP) and child nutrition programs, Earned Income (EITC) and Child Tax Credits, Supplemental Security Income (SSI), Temporary Assistance to Needy Families, Pell Grants and student loans, and federal retirement programs. FedWeb entitlements page
  • Sharp Increases in Defense: HBC budget calls for a 13% ($72 b) single year increase in defense spending above the statutory cap level for FY 2018, and $929 billion in increases over 10 years.  Ironically, these sharp increases come at a time when the Administration is calling for allies to carry more of the defense burden. (The U.S. currently spends more on defense than the next eight countries combined — China, Russia, Saudi Arabia, India, France, UK, Japan, Germany).  FedWeb Defense page
  • Cuts in Non-Defense Discretionary (NDD):  HBC budget calls for $1.3 trillion in cuts to non-defense discretionary programs over 10 years. (Non-defense discretionary spending includes  government functions such as law enforcement, veterans’ healthcare, homeland security, education, disease and epidemic control, infrastructure, food and drug inspection, disaster relief, and health research.)  By 2027, total NDD would be 44% below 2010 spending levels after adjusting for inflation and, as a percent of the economy, spending on domestic discretionary programs would be at the lowest level since before the Depression.  FedWeb NDD page
  • No New Infrastructure Investment:  HBC budget plan proposes no new federal funds over the next 10 years for infrastructure investment.
  • Tax Cuts:  HBC budget promises tax cuts will be fully paid for by repealing unspecified current deductions and credits.  If the House GOP tax plan released in 2016 is used as a template for the proposed tax cuts, 96% of the cuts would go to households with incomes over $1 million once the tax plan is fully phased in, according to the nonpartisan Tax Policy Center.  HBC budget plan proposes to combine the tax cuts and entitlement spending cuts into a single Reconciliation bill,which could jeopardize the tax cuts.
  • Dubious Deficit Claims: HBC budget, in total, calls for $5.8 trillion in deficit reduction over 10 years, however, most of the budget savings are dubious:
    – Rosy Scenario:  $1.5 trillion is claimed from assuming economic growth rates significantly higher than the nonpartisan CBO which uses an average of private sector projections.
    – Entitlement Cuts “Assumed” but not required:  HBC budget “assumes” $2.5 trillion in non-health entitlement cuts but requires congressional committees to report legislation making less than 10% of the cuts ($203 billion over 10 years).
    – $1.3 trillion in unspecified non-defense discretionary cuts are assumed.
    – $700 billion in budget savings is assumed from setting up a commission to look for ways to reduce improper Medicare, Medicaid, and EITC payments.
  • Click here for a list of entitlement cuts proposed in the Trump Budget.
  • July 14, 2017:  The Office of Management and Budget released the FY 2018 Mid-Session Review.  Principal finding: “The 2017 deficit is now projected to be $702 billion, $99 billion higher than the $603 billion deficit estimate in the Budget. As a percentage of GDP, the 2017 deficit is projected to be 3.7 percent, up from the Budget projection of 3.1 percent.  This increased deficit projection is driven in large part by lower projected receipts.”
  • 50 Votes: The annual Budget Resolution can advance tax and entitlement reforms with 50 votes in the Senate, due to the filibuster-proof budget reconciliation process. (However, appropriations bills require 60 votes — and bipartisan support — in the narrowly divided Senate (52-48).
  • For the last four fiscal years (FY 2014 – 2017), Congress has — on a bipartisan basis — raised the defense and non-defense spending caps, to accommodate budgetary requirements.
  • Another Bipartisan Budget Act?  Eventually Republicans and Democrats may resolve the appropriations stand-off with a new Bipartisan Budget Act — similar to 2013 and 2015 — which raised the defense and non-defense caps by equal amounts.  But it may take a lengthy shutdown for the two sides to reach this point. Notably, President Trump and OMB Director Mulvaney have both indicated they would welcome a shutdown.
  • Appropriations Portal
  • Background on Government Shutdown
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Tax Reform

  • The prospects for tax reform this year received a major setback when the President’s FY 2018 Budget, released on May 23, 2017, contained no detailed tax plan.  The President’s Budget simply reiterated the short list of principles laid out in the April 26, 2017 one-page outline of “2017 Tax Reform for Economic Growth and American Jobs.”  No detailed revenue estimates were provided — which is highly unusual for an Administration Budget. Tax Reform Webpage
  • If a tax plan is eventually completed and transmitted to Congress, the tax cuts must be deficit neutral or expire in 10 years. Reason: using the filibuster-proof Budget Reconciliation process means the tax legislation must comply with the Senate’s Byrd Rule which prohibits any deficit increases beyond the 10-year budget window. Therefore, the cost of the tax cuts will have to be fully offset, or the tax cuts will have to expire after 10 years – similar to the 2001 Bush tax cuts.  See Reconciliation and the Byrd Rule
  • April Tax Outline calls for reducing the top individual tax rate from 39.6% to 35% and repealing the 3.8% Net Investment Income Tax, the estate & gift tax, and the Alternative Minimum Tax — all benefiting upper income taxpayers.
  • Proposals with broader impact would double the standard deduction and provide unspecified tax relief for families with child and dependent care expenses.
  • Business tax reform goals in the outline aim to reduce the corporate rate from 35% to 15%; and shift to a “territorial tax system” where only domestic profits would be taxed while profits from offshore would be tax-free, unlike the current system where taxes on off-shore profits are deferred, but taxed when brought back to the U.S..
  • Reduction of the corporate rate to 15% has been estimated by Tax Policy Center to cost $2.4 trillion in the first 10 years alone.
  • The outline proposes to tax “trillions of dollars held overseas” but offers no details and makes no mention of using repatriation tax revenues for infrastructure-a trial balloon floated earlier in the year.
  •  See Tax Reform Webpage.   [Return to Top of Page]

Energy & Environment

Financial Regulation and Dodd-Frank

  • Outlook:  The Administration can scale back regulations that implement Dodd-Frank, but enactment of the House repeal bill is unlikely because 60 votes are required in the Senate to bring the measure to a vote (and Republicans have a slim 52-48 majority).
  • June 15, 2017: Treasury releases the the first of several reports critically reviewing Dodd-Frank regulations. The report: calls for loosening restrictions on bank traders; easing annual stress tests of  banks’ ability to withstand financial shocks; advising regulators to rethink capital requirements; and reducing independence of the Consumer Financial Protection Bureau.
  • On June 8, 2017 the House voted 233-118, largely along party lines, to pass HR 10, a bill to repeal much of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.  Dodd-Frank is aimed at preventing the types of practices that led to the 2008 financial crisis and the recession it triggered.
  • Proponents of the House-passed legislation argue that implementing regulations have stifled economic growth, asserting that small banks have been unable to provide credit due to costly regulatory compliance. Opponents argue that repealing Dodd-Frank would unleash the same behavior on Wall Street that led to the 2008 financial crisis.
  • On June 6, the Administration released a statement endorsing the legislation, highlighting provisions that “affirm the President’s authority to remove the Director of the Consumer Financial Protection Bureau (CFPB) at will.”
  • Key provisions of the legislation would:
    • repeal the Orderly Liquidation Authority for winding down large failed banks, instead opting for conventional bankruptcy proceedings;
    • replace regulations with enhanced penalties for fraud and deception;
    • roll back independence of the Consumer Financial Protection Bureau (CFPB) by making funding subject to annual appropriations and affirming the President’s authority to remove the CFPB Director;
    • repeal the “Volcker Rule” which bars federally insured commercial banks from trading with depositor’s money;
    • increase congressional oversight of the Federal Reserve by making its bank supervisory functions subject to appropriations;
    • waive regulatory oversight of banks that choose to maintain $1 of equity capital for every $10 in assets; and
    • repeal the Labor Department’s fiduciary rule, a requirement that broker-dealers put clients’ interests ahead of their own when providing retirement advice.

    Link to FedWeb’s Financial Regulation Webpage for continuing coverage.
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Infrastructure

  • Transportation Secretary Chao said on June 15 the Administration is still deciding how to pay for the $200 billion proposed for infrastructure over the next 10 years.  She said the promised $1 trillion refers to combined public and private spending over 10 years, and a full infrastructure plan would not be unveiled until the Fall.
  • The prospects for a 10-year “trillion dollar” infrastructure initiative this year received a major setback when the President’s FY 2018 Budget, released on May 23, 2017, contained no appropriation request for infrastructure investment.
  • For infrastructure, the President’s Budget states, “while the Administration will propose additional funding for infrastructure, those funds will be focused on incentivizing additional non-Federal investments.” The Budget then claims a 10-year investment of “$200 billion in outlays related to the infrastructure initiative” but this turns out to include only $5 billion in FY 2018 — and does not include a specific appropriation request.  This is an “infrastructure investment” without the investment. Infrastructure Webpage  President’s Budget
  • In its 3/9/2017 quadrennial report card, the American Society of Civil Engineers, gave U.S. infrastructure a cumulative grade of D+ which means “in poor condition” and a “strong risk of failure.”   Infrastructure rated at risk of failure include: U.S. roads, airports, dams and levees, water and wastewater systems, public schools and parks, transit systems, hazardous waste sites, and inland waterways. Infrastructure rated as “mediocre and requiring attention” include: bridges, ports, and solid waste facilities.  No U.S. infrastructure was rated as “fit for the future,” and only the rail system was rated as “adequate for now.”  Link to Infrastructure Webpage. [Return to Top of Page]

Economy

  • The nonpartisan Congressional Budget Office (CBO) reported in March a perilous long-term outlook if current programs and policies remain unchanged: annual deficits steadily rising from 2.4% of GDP in 2018, to 5.0% of GDP in 2027; and federal debt (owed to the public) rising from 77% of GDP in 2018 to 89% in 2027, 113% in 2037, and 150% of GDP in 2047.
  • CBO cites the aging of the U.S. population, growing healthcare costs, and mounting debt as the chief driver of our fiscal woes, with Medicare growing from 3% of GDP to 4.2% over 10 years; Social Security from 5.0% to 6.0%; and net interest from 1.5% to 2.7%.
  • Within 10 years, annual federal net interest payments will exceed three-quarters of a trillion dollars, underscoring the need for long-term stabilization of debt as a percent of GDP. Link to Economy/Real-Time Numbers for up-to-the-minute data on the fiscal and monetary policy. [Return to Top of Page]

International Trade

  • President Trump told reporters on 4/27 that he decided to renegotiate the North American Free Trade Agreement (NAFTA), rather than terminate participation in the US-Canada-Mexico framework adopted more than 25 years ago.  However, on 4/24, the Trump Administration imposed tariffs (up to 24%) on five Canadian lumber firms exporting to the U.S..  U.S. lumber companies argue that Canadian firms benefit from unfair government subsidies — a point of contention going back to the 1980s.  The tariffs are preliminary; a final determination will be made in September. The tariffs were imposed after trade talks with Canada on dairy products collapsed. International Trade and Finance Issues for the 115th Congress [Return to Top of Page]

Debt Ceiling Taking Center Stage  

  • July 13, 2017:  In announcing the Senate would shorten its traditional August recess by two weeks, Senate Majority Leader McConnell hinted he may try to address the debt ceiling in August.  CBO has estimated Treasury could run out of “extraordinary measures” to meet cash flow needs by early October – in which case the U.S. could default on legal and financial obligations without an increase in the ceiling.
  • OMB Director Mulvaney said on June 15, 2017 he sees the filibuster-proof Budget Reconciliation process as a possible vehicle for raising the Debt Ceiling. This would require adoption of an FY 2018 Budget Resolution including instructions to the House Ways & Means and Senate Finance Committees to report a Reconciliation Bill raising the debt limit. However, it remains unclear when the House and Senate will be able to adopt a Budget Resolution, given disagreements among Republicans on discretionary spending levels and entitlement cuts for FY 2018.
  • On March 15, 2017, the Statutory Limit on the Public Debt was automatically re-set at current debt levels (on that day) as prescribed by a previous law.
  • Despite the new debt ceiling, Treasury is meeting legal requirements for redemption of bonds, payment of benefits, and payment of contractors by managing cash flow and dis-investing certain Federal trust funds.  
  • These “extraordinary measures” can pay the bills through mid-summer, but Treasury Department is requesting that Congress raise the debt ceiling before they depart for August Recess.  
  • As reported by Congressional Quarterly, there is internal dissension in the Administration, with Treasury Secretary Mnuchin requesting a “clean” debt ceiling, and OMB Director Mulvaney suggesting the debt ceiling could be used to drive spending and debt reforms. The House Freedom Caucus and Ways and Means Chairman Brady are siding with Mulvaney, calling for deficit reduction measures attached to the debt ceiling. 
  • House Speaker Ryan will have to find votes for passage on the GOP side of the aisle.  “I don’t have any intention of lifting the debt ceiling to enable the Republicans to give another tax break to the wealthy in our country,” said House Minority Leader Nancy Pelosi, D-Calif. on June 2d, Congressional Quarterly reports.
  • A similar debt ceiling impasse in 2011 took the Treasury to the brink of default, and eventually led to enactment of the Budget Control Act, which placed tight (and unsustainable) spending caps on defense and non-defense discretionary spending for each year through 2021. These “sequester caps” on spending are widely regarded as a major blunder, and the caps were subsequently loosened by bipartisan legislation in 2013 and again in 2015.
  • Bottom line: a U.S. default would have grave consequences for the nation and the global economy.  Treasury must have the ability to honor financial commitments to our citizens and holders of U.S. bonds. Congress should either use a filibuster-proof Reconciliation bill to pass a clean debt ceiling or repeal the debt limit altogether. A great nation does not repeatedly threaten default. This financial “Groundhog Day” must end.  Link to FedWeb’s Debt Ceiling webpage for nonpartisan coverage.
  • Link to Debt Ceiling Webpage.   [Return to Top of Page]

Action on Regulations and Executive Orders

  • “Mexico City” abortion policy expanded: On May 15 the Administration announced it will expand the so-called “Mexico City” policy barring U.S. funds from going to foreign NGOs that provide abortions.  The ban, which been limited to family planning programs, will now apply to all global health programs–potentially impacting the healthcare of millions of recipients.
  • Major regs written by the Obama Administration, and overturned by Congress and the new Administration, would have: (1) required energy companies to disclose payments to foreign governments; (2) limited pollutants from coal mines into local streams; (3) prevented people at risk of self-harm due to mental illness from buying firearms; (4) required federal contractors to comply with fair pay and worker safety laws; (5) required employers to keep records of worker injuries and illnesses; and (6) prevented broadband internet providers from requiring consumers to share private information.
  • Congressional Review Act: empowers Congress to overturn recent regulations by means of a filibuster-proof legislative process.
    • In order to be eligible for the “fast track” procedures for Senate consideration, that body has to act on a disapproval resolution during a period of 60 days of Senate session which begins when the rule is received by Congress and published in the Federal Register.
    • If a joint resolution of disapproval is enacted, the CRA provides that a rule may not be issued in “substantially the same form” as the disapproved rule unless it is specifically authorized by a subsequent law.  The CRA does not define what would constitute a rule that is “substantially the same.”
    • In addition, the CRA prohibits judicial review of any “determination, finding, action, or omission under this chapter.”   Link to Regs and Exec. Orders Webpage.  [Return to Top of Page]
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