Tax Cuts and Infrastructure Stalled; October Shutdown, Default Loom

Congress faces a train wreck when they return after Labor Day:

  1. Federal government shutdown looms on October 1st unless Republicans and Democrats reach bipartisan agreement on new federal appropriation caps for FY 2018.
  2. U.S. Treasury default looms in early October as GOP remains deeply divided on how to pass a debt ceiling increase.  [Shutdown v. Default: Federal government shutdown occurs when Congress fails to appropriate funds to keep government departments operating in a new fiscal year. Default occurs when the Treasury is unable to raise cash to fulfill existing U.S. financial obligations because the statutory limit on borrowing has been reached.]
  3. Tax Cuts are stalled due to lack of GOP agreement on an FY 2018 Budget Resolution.
  4. Infrastructure investment is stalled due to opposition to public financing and lack of a capital investment budget.
  5. 80% of Americans want to mend, not end, the ACA according to a new survey.

Find up-to-the-minute numbers on the economy on FedWeb’s Real-Time Numbers

Government Shutdown Looms on October 1

The partisan impasse over health reform and Medicaid cuts is spilling over to appropriations for FY 2018.  With the new fiscal year beginning in less than two months, congressional Republicans and Democrats remain at an impasse over discretionary spending levels.

“Placeholder bills” have been marked up by the Appropriations Committees and 4 bills (Defense, Energy-Water, Mil Con-VA, and Leg. Branch) passed the House on July 27, 2017 as a “minibus” package and are expected to be combined with the remaining 8 bills (into an omnibus measure) in September.

However, the spending levels will have to be re-set in bipartisan negotiations

Here’s Why:  The Budget Control Act of 2011 placed tight spending caps on defense and non-defense discretionary (NDD) appropriations for each year through FY 2021.  However, neither Republicans nor Democrats have been willing to live within the caps.  The Bipartisan Budget Act of 2013 increased the defense and non-defense caps for FY 2014-15; and the Bipartisan Budget Act of 2015 increased the caps for FY 2016-17.

In both cases, Republicans sought increased caps for defense and Democrats (and some Republicans) sought to ease non-defense caps. Bipartisan agreement was necessary because raising the statutory appropriations caps, and enacting the appropriations bills, both require 60 votes in the Senate.

Many Republicans and Democrats agree that the caps should again be adjusted for FY 2018-19. The House has already passed defense appropriations that far exceed the statutory defense cap (and would trigger automatic “sequestration” cuts if enacted).

However, the partisan impasse over healthcare has delayed the start of bipartisan negotiations on adjustment of the spending caps. The result could be a government shutdown on October 1 — unless Congress enacts temporary funding (known as a “CR”) while negotiations proceed.

U.S. Treasury Default Looms in Early October Unless Debt Ceiling is Increased

By prior agreement, the Statutory Limit on the Public Debt was automatically frozen at existing debt levels on March 16, 2017. Since that time, Treasury has been meeting financial requirements through “extraordinary measures” — managing cash flow and dis-investing certain Federal trust funds to remain under the ceiling.  

However, Treasury’s capacity to manage operations within the March 16, 2017 debt ceiling is running out. CBO has estimated the U.S. could default on legal and financial obligations by early October without an increase in the ceiling. Treasury Secretary Mnuchin said in a letter to Congress it “is critical that Congress act to increase the nation’s borrowing authority by September 29, 2017.” (emphasis added)

The Administration is currently split between Treasury Secretary Mnuchin who wants Congress to pass a “clean debt ceiling” and OMB Director Mulvaney who (along with House Freedom Caucus colleagues) wants to use the threat of default to force major budget cuts through Congress. This is the same tactic that resulted in enactment of spending caps and automatic budget cuts (“sequestration”) during the debt ceiling crisis of 2010 – limitations that are now broadly opposed by both political parties and routinely circumvented.

Default would have catastrophic effects on the ability of the U.S. Treasury to issue bonds in the future, increasing the cost of borrowing, as well as destabilizing global financial markets – likely triggering another major recession. FedWeb’s Debt Ceiling page

Tax Cuts and Entitlement Reforms are Stalled Due to Budget Resolution Impasse

Congress cannot use the filibuster-proof Budget Reconciliation process to advance tax cuts and entitlement reforms until an FY 2018 Budget Resolution is adopted by both chambers.

Congress missed its April 15 deadline to pass an annual Budget Resolution – the internal congressional framework that sets overall budget limits for spending and revenue bills and launches filibuster-proof Budget Reconciliation Bills.

Adoption of the Resolution – like Reconciliation Bills — is filibuster-proof, but has been slowed by disagreements on tax cuts and entitlement reforms between GOP moderates and conservatives.

House Committee Action.–The House Budget Committee reported a Budget Resolution (H.Con.Res. 71) on July 19, 2017 that seeks to fundamentally re-order federal budget priorities — cutting Medicaid $1.5 trillion; cutting Medicare nearly $500 billion; making unspecified cuts of $2.5 trillion in other entitlement programs; and sharply increasing defense spending by nearly $1 trillion over 10 years, while cutting non-defense discretionary (NDD) programs $1.3 trillion.  It is unclear if the committee’s plan can pass the House.

No Senate Action.–Senate Budget Committee Republicans have not yet begun to write a budget plan.  Senate leaders have directed the Committee to report a budget plan in September.  However, it is unclear if they can develop a plan that will get 50 votes on the Senate Floor.

Why the Budget Impasse Matters:  Tax and entitlement cuts cannot proceed as a filibuster-proof Budget Reconciliation Bill until the House and Senate adopt an identical Budget Resolution that contains Budget Reconciliation instructions to House and Senate committees.

Strategic Gamble – Combining Tax and Entitlement Cuts:  House GOP leaders made a key strategic decision when they decided to combine tax and entitlement cuts into a single set of Budget Reconciliation instructions.

The House budget plan includes Reconciliation instructions that assume a revenue-neutral tax bill and require House committees to report $203 billion in entitlement cuts over 10 years.

The bulk of the cuts would come from Ways & Means ($52b), Judiciary Committee ($45b), Government Reform ($32b), Educations & Workforce ($20b), and Energy & Commerce ($20b). (Instructions to Senate Committees are left to the Senate Budget Committee to draft.)

The instructed amounts of deficit reduction are “floors” – not “ceilings” — on the amount of entitlement cuts the Committees can report; committees can report larger cuts, but not smaller.  In addition, the Ways & Means Committee could decide to draft tax cuts that are not revenue-neutral, as long as they meet their net deficit reduction instructions.

While the Reconciliation instructions focus on deficit reduction in the next 10 years, In the Senate there is an additional constraint that focuses on the longer-term.  The Senate’s Byrd Rule prohibits any title of the Reconciliation bill from causing deficit increases beyond the (10-year) budget window.  This prevents a tax bill from designing tax cuts that are paid for in the short-term but cause major revenue losses in the out-years.

On July 27, 2017, Speaker Ryan, Leader McConnell, Treasury Secretary Mnuchin, NEC Director Cohn, Senate Finance Chairman Hatch, and House Ways & Means Chairman Brady released a joint statement on tax reform that sets aside the controversial Border Adjustment Tax proposed last year by the House GOP, and commits to developing a plan to lower tax rates for individuals and  businesses, increases capital expensing, and incentivizes repatriation of corporate profits.

On August 1, 2017, Senate Democrats sent a letter to President Trump, Leader McConnell and Chairman Hatch urging Republicans to work with Democrats on tax reform and laying out three prerequisites: (1) tax reform should not increase middle class taxes or cut taxes for the top one percent;  (2) tax reform should be accomplished with open debate and amendments instead of the fast-track Reconciliation process; and (3) tax reform should provide a revenue base sufficient to fund critical programs like Medicare, Medicaid, Social Security, and public investments.

The most significant tax reform challenge remains identifying deductions and credits to eliminate in order to pay for tax cuts.  

Infrastructure Investment is stalled due to opposition to public financing and lack of a capital investment budget.

During the 2016 campaign, candidate Trump promised a $1 trillion 10-year investment in national infrastructure to ensure U.S. competitiveness and create millions of jobs.

In March 2017, the Civil Engineers estimated this would only get half the job done.  The Engineers released a report giving U.S. infrastructure a grade of D+ (“poor, strong risk of failure”), finding that a $2 trillion investment is needed to restore failing infrastructure and preserve U.S. competitiveness.

However, in an about-face from the campaign, the President’s Budget proposal in May asserted that “more Federal funding for infrastructure is not the solution.”  This rejection of federal funding rejects the history of successful federal investments in the nation’s infrastructure during the last century — beginning with the Eisenhower Administration’s landmark investment in the national highway system.

The President’s Budget proposed only $5 billion for infrastructure for FY 2018 and a 10-year investment of only $200 billion – only 20% of what he promised and 10% of what is required.  The Budget claims that the limited Federal funds will “leverage” the promised trillion-dollar total investment – although there is no explanation of why, when, and how private investors will repair and replace public highways, bridges, waterways, water and sewer systems, and airports – or how financially-strapped States and localities can assume the primary responsibility.

Reflecting a similar skepticism to public financing of infrastructure, the House Budget Committee reported a Budget Resolution in July that supports federal infrastructure investment only if it is “deficit-neutral” over the next 10 years – rejecting the longstanding governmental practice of issuing bonds (deficit-financing) to finance long-term capital investments.

The rejection of bond-financing is based on the unworkable principle that the federal government should make investments only when long-term projects can be squeezed into annual operating budgets.

If State and local governments followed this no-debt principle, local roads and schools would never be built.  If corporations followed this “no-debt” principle, corporate capital investments and growth would cease.

Corporations, and State and local governments routinely issue bonds – i.e. borrow money — for capital investments.  This is deficit-financing and is widely accepted as a responsible means of financing long-term capital expenditures.

The Federal Government needs a separate bond-financed capital investment budget – like State and local governments — to close the $2 trillion infrastructure gap.  That doesn’t mean ignoring the growing public debt; rather, it means committing to a moderate and steady level of capital investment through long-term financing – which is essential to keep our nation competitive, grow the economy, and create jobs.


Americans Oppose Letting ACA Fail

In the wake of the failure of repeal-and-replace legislation in the Senate, a new survey by the nonpartisan Kaiser Family Foundation found that:

  • Nearly 8 in 10 Americans say the Administration should be trying to make the health law work;
  • Almost 6 in 10 people think Republicans and Democrats should cooperate to improve the health law; and
  • Only 17 percent of the public think the Trump administration should take steps to make the health law fail.

The Administration is currently considering whether to continue federal funding for “cost-sharing reduction” payments that are critical to stability of the non-group (individual) health insurance marketplace.