Update-Outlook

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Washington Update and Outlook

Click on the following links for significant developments on:

Healthcare: ACA Repeal-and-Replace
FY 2017 Omnibus Appropriations
FY 2018 Budget
Financial Regulation and Dodd-Frank
Tax Reform
Infrastructure
Economy
International Trade
Debt Ceiling
Action on Regulations and Executive Orders
Congress, the Presidency, and the Courts

See FedWeb’s updated Budget Process in a Nutshell © 

Healthcare: Affordable Care Act Repeal-and-Replace

  • CBO:  Congressional Budget Office expected to release its scoring on the House-passed ACA repeal bill the week of May 22.
  • Senate: Action on ACA repeal-and-replace moves to the Senate, where it is protected from filibuster (as a fast-track Budget Reconciliation Bill) and requires only 50 votes for passage.  The Senate will have to modify the bill to secure 50 votes (for example, mitigating Medicaid cuts, restoring protections for pre-existing conditions, and increasing tax credits to purchase insurance). In addition, any legislation brought to the Senate Floor under the fast-track Budget Reconciliation process must strictly comply with the Senate’s Byrd Rule which prohibits non-budgetary provisions.   There are two groups working on health reform in the Senate:
    • A Leadership-appointed Republican-only task force including Majority Leader McConnell and 3 other members of the leadership, Senators Cornyn, Thune, and Barasso; 3 committee chairman, Senators Hatch (Finance), Alexander (HELP), and Enzi (Budget); conservative Senators Cruz, Lee, and Cotton; and several Senators from States that have expanded Medicaid — Senators Gardner, Portman, and Toomey.
    • A recently-formed bipartisan group initiated by Senators Susan Collins (R-Maine) and Bill Cassidy (R-LA), and including Joe Manchin (D-WVa).
  • House-Passed Bill:  The House on Thursday, May 4, narrowly approved 217-213 a revised bill (HR 1628, “American Health Care Act”) to repeal and replace the Affordable Care Act (Obamacare), although the measure faces uncertainty in the Senate. The House passed the bill without CBO estimates of how many Americans are likely to lose health insurance coverage or the legislation’s overall cost. Click here for details of the House bill and current law.  
  • Current Law: Obamacare is aimed at providing universal access to healthcare:   (1) by expanding Medicaid to cover all Americans up to 138% of the federal poverty level (FPL); (2) providing subsidies on a sliding scale to people between 138% and 400% of FPL to purchase private insurance through health exchanges; (3) providing additional subsidies to cap out-of-pocket costs; and (4) broadening the private insurance pool through individual and large-employer mandates.
  • Phasing Out Medicaid Expansion and Replacing Subsidies w/ Smaller Tax Credits: The House-passed bill would phase out the Medicaid expansion; replace the insurance subsidies with limited tax credits of $2000 to $4000; and eliminate the subsidies for out-of-pocket costs.  
  • Capping Medicaid:  In addition to phasing out the Medicaid expansion, the House bill would make large cuts in projected Medicaid expenditures, by imposing new per capita caps. Under the caps, federal reimbursements to States for enrollee health expenses would no longer be open-ended, but would grow more slowly than projected medical inflation.  Total Medicaid cuts, from (i) phasing out the expansion; (ii) capping the underlying program; and (iii) eliminating penalties for the individual mandate would amount to $880 billion in cuts over 10 years (as initially estimated by CBO). 
  • Mandates Repealed:  Bill would repeal penalties for individual and employer mandates, but instead require insurance companies to charge a 30% penalty up to 12 months for people who haven’t maintained “continuous coverage,” i.e., people who let coverage lapse for more than 63 days.
  • 24 Million to Lose Insurance (Under Original Version):  Nonpartisan Congressional Budget Office and Joint Committee on Taxation analyzed the original version of the bill, estimating that in 2018, 14 million more people would be uninsured, rising to 24 million losing health coverage by 2026.
  • Tax Cuts Benefiting Upper Income Taxpayers: Cuts taxes by $592 billion, primarily benefiting upper income taxpayers.  The two largest tax cuts would eliminate a 0.9% increase in payroll taxes for couples earning over $250,000, and a 3.8% surcharge on several types of investment income.  Also repealed: the annual fee on health insurance providers. 
  • Permits States to Opt-Out of Pre-Existing Condition Protection:  Permits States to opt-out of pre-existing conditions protections — allowing insurers to set higher rates for patients who have pre-existing conditions, proposing instead controversial “high-risk pools.”
  • Repeals Essential Health Benefits Guarantee: Current law requires insurance plans to cover 10 categories of essential health benefits, such as maternity care, mental health treatment, and preventive care.  The bill would shift to States the responsibility to establish essential health benefits standards.  
  • Higher Premiums for Older Americans: Allows insurers to charge older Americans under 65 up to 5 times as much as young adults (compared to 3 times under the ACA). 
  • Abortion:  The bill would bar Federal funding for Planned Parenthood, and prohibit the use of tax credits to purchase health insurance plans that cover abortion services.
  • Link to our Healthcare Reform Webpage.    [Return to Top of Page]

FY 2017 Appropriations 

FY 2018 Budget: Major Clashes on Appropriations, Tax Cuts, Entitlements Cuts, Debt Ceiling, Possible Shutdown

  • President’s FY’18 Budget:  Administration will release the President’s FY 2018 Budget on Tuesday, May 23, launching a contentious and consequential debate over America’s priorities. OMB Director Mulvaney will testify at House Budget Committee on 5/24 and Senate Budget Committee on 5/25.  Next steps: hearings, submission of committee “views & estimates” to Budget Committees and mark-up of the FY 2018 Congressional Budget Resolution by the House and Senate Budget Committees.
  • Five Major Pieces to this Year’s Contentious Budget Debate:
    1. Appropriations Impasse or a New Bipartisan Budget Deal? 
    2. Cutting Entitlements $500 – $800 billion over 10 Years
    3. Individual and Business Tax Cuts, Reforms
    4. Balancing the Budget vs. Investment & Infrastructure
    5. Debt Ceiling

[1] Appropriations Impasse or a New Bipartisan Budget Deal?   

  • The Budget divides all spending into two broad categories. About 30% of federal spending is called “discretionary spending,” because the amount of spending flows from annual funding decisions by Congress’ Appropriations Committees. (The other 70% of the budget is called “mandatory spending” — because outlays flow from mandatory federal obligations in statute — mostly entitlement programs.)
  • About half of discretionary spending is defense; the other half is non-defense (mostly domestic programs, and a small percentage for international obligations).
  • On March 16, the Trump Administration released an FY 2018 spending outline (“skinny budget”) that calls for (i) keeping total appropriations flat, and (ii) shifting $54 billion from domestic and other non-defense programs into the defense budget — the result being a 10% increase in defense spending, and major cuts in non-defense programs.
  • The Trump spending plan would scale back federal support for health research, environmental protection, job training, education, rural programs, low-income energy and housing assistance.  See our 3/16 blog: Trump Budget Outline Calls for Massive Shift in Spending Priorities
  • Appropriations bills require 60 votes in the Senate (unlike filibuster-proof budget reconciliation bills for tax and entitlement changes).  Therefore, Senate Democrats can block the proposed cuts in domestic and other non-defense programs, and insist on equal increases in defense and non-defense programs — similar to the 2-year bipartisan deal that was struck in 2013 (following a government shutdown) and again in 2015.
  • The FY 2018 spending caps were set by the Budget Control Act of 2011 at $549 billion for defense and $515 billion for non-defense — a $5 billion decrease from the combined FY 2017 caps.
  • Outlook — Shutdown Possible: another shutdown is quite possible — even likely — this October with two eventual outcomes: (1) another bipartisan budget deal (similar to 2013 and 2015) that raises both defense and non-defense spending for FY 2018 and 2019; or (2) an ongoing series of continuing resolutions that maintain defense and non-defense programs at current levels of spending.
    • House Appropriations Ranking Democrat Nita Lowey told Congressional Quarterly referring to the proposed $54 billion in non-defense cuts: “I want to make that clear: no chance this could happen,” Lowey said. “So if you want to shut the government down, keep talking about this skinny budget.”
    • See also May 17 letter from Senate Appropriations Democrats seeking parity in defense and non-defense cap increases.
    • OMB Director Mulvaney told Face the Nation, “the appropriations, the spending process, Congress using the power of the purse has been broken here in Washington for more than 10 years. And I think a `good shutdown’ would be one that could help fix that.”

[2] Cutting Entitlements $500 – $800 billion over 10 years:  

  • Congressional Quarterly reports that both the Administration and the House GOP will call for big cuts in entitlement programs. The President’s Budget may include $800 billion in cuts over 10 years, with the House Budget Committee looking at up to $500 billion in entitlement cuts.
  • Social Security, Medicare, Medicaid: The largest entitlements are Social Security, Medicare, and Medicaid, which together comprise nearly half of the federal budget. President Trump during his campaign pledged to “save Medicare, Medicaid and Social Security without cuts. Have to do it.” However, last month the President endorsed the House ACA repeal-and-replace bill that calls for major cuts in Medicaid of $880 billion over 10 years (as initially estimated by CBO).
  • Entitlement Programs: It remains to be seen, which entitlement programs may be targeted for cuts. Other major entitlement programs in the federal budget include military and civilian retirement, SNAP (food stamps), the refundable portions of Earned Income Tax Credit and Child Tax Credit, the mandatory portion of Pell Grants for low-income college students, Supplemental Security Income, unemployment compensation, Temporary Assistance for Needy Families, farm payments, child nutrition, and veterans’ compensation and pensions (although veterans benefits are unlikely to be cut).  Background on Entitlements.
  • Filibuster-proof Budget Procedures Face Timing Challenge: As a procedural matter, entitlement cuts and tax cuts can be advanced as part of filibuster-proof Budget Reconciliation legislation — a procedure that can be launched by Congress’ FY 2018 Budget Resolution. Debate on Reconciliation bills is limited by statute (preventing a filibuster) and require only 50 votes for Senate passage. The GOP has a 52-48 Senate majority.
    • However, Congressional Quarterly reports that Senate Budget Committee Chairman Enzi has been advised that the FY 2017 ACA repeal-and-replace reconciliation bill may have to be completed before the FY 2018 Budget Resolution can proceed. 
    • In plain English: an FY 2018 budget reconciliation bill to cut taxes and entitlements may have to wait until ACA repeal-and-replace has been completed–and that faces an uphill battle.
  • Highly Contentious: As a political matter, cuts in entitlement programs will be highly controversial and securing 50 votes in the Senate could be difficult. In addition to Democratic and moderate Republican opposition, some GOP governors may oppose cuts to low-income entitlements.  See House Budget Committee minority analysis of means-tested entitlements; see also CBPP analysis calculating that spending for low-income programs, outside of healthcare, remain at their average level for the past 40 years.

[3] Individual and Business Tax Cuts, Reforms:

  • Filibuster-proof Budget Reconciliation bill is also likely to incorporate major tax cuts, in addition to the entitlement cuts referenced above.
  • The Administration released on April 26, 2017 a one-page skeletal outline of “2017 Tax Reform for Economic Growth and American Jobs” proposing major individual and business tax cuts and reforms.
  • Individual tax reforms in the Trump outline include major tax cuts for upper income taxpayers: cutting the top rate from 39.6% to 35% (about $1.5 tr), and repealing the 3.8% Net Investment Income Tax ($145 b), the Estate Tax ($174 b), and the Alternative Minimum Tax ($413 b). Provisions with broader taxpayer impact would double the standard deduction and provide unspecified tax relief for families with child and dependent care expenses. According to Treasury Secretary Mnuchin, most itemized deductions would be eliminated except for mortgage interest and charitable contributions.  (Only an estimated 80 small farms and closely held businesses will pay any estate tax in 2017.) 
  • Business tax reforms in the April tax 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. 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. Reduction of the corporate rate to 15% has been estimated by Tax Policy Center to cost $2.4 trillion in the first 10 years and $3.5 trillion in the second 10 years.
  • Tax Cuts Likely to Expire after 10 Years: A major consequence of using the filibuster-proof Budget Reconciliation process is the Senate’s “Byrd Rule” — which prohibits Reconciliation legislation increasing deficits in the out-years (i.e., years beyond the 10-year budget window). Under the Byrd Rule, either the tax cuts will have to be fully paid for by eliminating existing deductions and credits, or the tax cuts will have to expire at the end of 10 years (like the Bush tax cuts enacted in 2001, PL 107-16and 2003, PL 108-27). House Speaker Ryan has said he wants the bill permanent and paid for — but coming up with trillions of dollars from repealing deductions and credits would be challenging, and Senate Majority Whip John Cornyn told CQ Rollcall in early May, tax cuts “probably won’t be as comprehensive, and certainly not permanent.”
  • BAT: Also receiving attention in Congress is a form of Border Adjustment Tax (BAT) called a “destination-based cash flow tax (DBCFT) advocated by House Speaker Paul Ryan and Ways & Means Chairman Kevin Brady. The proposal would transform the corporate income tax into a consumption tax, under which goods and services destined for domestic consumption (including imports) are taxed, interest payments are no longer deductible, and goods and services destined for other countries (exports) are not taxed. One objective is to raise revenue by taxing imports and using the revenues to reduce corporate rates; another objective is to remove the incentive for corporate inversions (moving overseas) because taxation would be based on where goods and services are consumed, not where they are produced. However, the proposal has drawn strong opposition from various sectors, especially importers and retailers.
  • “Dynamic Scoring”:  Anticipate a robust debate over how tax cut estimates are scored, with pressure on the Treasury Dept. and Joint Committee on Taxation to estimate economic growth effects of proposed tax cuts.  Link to Tax Reform WebPage.

[4] Balancing the Budget vs. Investment & Infrastructure: 

  • Budget hawks in the House are calling for the FY 2018 Budget Resolution to balance the budget over 10 years.
  • There is broad disagreement on whether a “balanced annual federal budget” is the correct prescription for the economy. Many analysts argue that stabilizing accumulated Federal debt as a percentage of GDP is the more appropriate metric for fiscal stability, although there is little agreement on what level of debt would yield long-term stability.
  • While deficit hawks like to point out that most States require a “balanced budget,” State budgets are fundamentally different from the Federal budget.  States typically require balanced “operating budgets,” but have separate “capital budgets” that are permitted to borrow funds (i.e. deficit-spend) for long-term investments.
  • By contrast, the Federal government, has a unified budget that includes all current operations and capital investments, lumped together.
  • Requiring an annual, balanced federal budget that includes all long-term investments (as well as current operations) would place severe limitations on the nation’s ability to invest in infrastructure, R&D and other vital areas.
  • Imagine the devastating impact on U.S. investment if States, localities, and businesses were barred from issuing debt in order to finance long-term investments.  That is essentially what an annual balanced federal budget requirement calls for.
  • Impossible Math: If the House GOP decides to press for annual balanced federal budgets within 10 years, the math is daunting, if not impossible.
  • Annual federal deficits, under current policies, are projected by CBO to increase from nearly $500 billion in FY 2018, to $1 trillion in 2022, to $1.4 trillion in 2027.
  • Reversing the rapidly rising deficits, and getting on a downward trajectory to achieve a balanced budget within 10 years, would require $8 trillion of deficit reduction over 10 years (spending cuts and/or tax increases).
  • The proposed $500 – $800 billion in entitlement cuts would barely make a dent in projected deficits.
  • The math gets even more challenging if trillions of dollars in new tax cuts, $1 trillion for infrastructure investment; a 10% increase in defense, and at least $20 billion for a border wall are added to the mix.

[5] Raising the Debt Ceiling: 

  • 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, through this summer, Treasury can meet legal requirements for redemption of bonds, payment of benefits, and payment of contractors by managing cash flow and dis-investing certain Federal trust funds.
  • By late summer or early fall, Congress will have to raise the debt ceiling to avoid a U.S. default that would cause economic chaos.   Treasury Secretary Mnuchin has promised action in plenty of time to avoid last minute jitters.
  • However, when a contentious budget debate is under way, raising the debt ceiling typically becomes part of the larger budget picture. Link to Debt Ceiling Webpage.   [Return to Top of Page]

Financial Regulation and Dodd-Frank

  • House Financial Services Committee on Thursday, May 4, voted on party lines to report H.R. 10 (“The Financial CHOICE Act”) to repeal parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Proponents of the legislation argue that implementing regulations have stifled economic growth, while opponents argue that repealing Dodd-Frank would unleash the same behavior on Wall Street that led to the 2008 financial crisis.
  • Key provisions of the legislation would: repeal the authority of the Financial Stability Oversight Council (FSOC) to designate firms as systemically important financial institutions (SIFIs); prohibit the use of the Exchange Stabilization Fund to bailout financial firms; replace regulation with enhanced penalties for fraud and deception; make all regulatory agencies including the Consumer Financial Protection Bureau (CFPB) subject to annual appropriations decisions; limit the independence of the CFPB; repeal the “Volcker Rule” which prohibits banks from engaging in proprietary trading; increase congressional oversight of the Federal Reserve; and provide regulatory waiver for banks that elect to be strongly capitalized.
  • Outlook: If the legislation passes the House, it will advance to the Senate where 60 votes and bipartisan agreement are required for passage. LINKS: Legislative Language (4/29)   Majority – Executive Summary  Comprehensive Summary  Minority Views  Link to Financial Regulation Webpage [Return to Top of Page]

Tax Reform

Infrastructure

  • Supporters of the President’s campaign pledge to increase infrastructure investment received a setback when the Administration’s tax reform outline did not include any mention of new revenues to fund infrastructure.
  • Administration has called for a $1 trillion investment over 10 years, but financing mechanisms are unclear, given strong opposition among congressional Republicans to new spending. There is some discussion of financing through a one-time tax on repatriated corporate assets or using the tax code to leverage private investment.
  • 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 must be Raised by Late Summer, Early Fall

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]

U.S. Government: Congress, the Presidency, and the Courts