OVERVIEW:
Congress returns from the Fourth of July recess facing a number of key agenda items before adjourning for the month of August, a recess targeted to begin on July 28 (our view is that recess will be delayed). While Republican control of the White House and both chambers of Congress set the stage for a robust agenda, President Trump and Congressional Republican leadership quickly realized their legislative “mandate” would not translate into swift passage of big-ticket items and campaign promises – namely repeal of the Affordable Care Act (ACA) and comprehensive tax reform. Congress is entering a three-week work period and will continue efforts to reach agreements on health care, tax reform, and the budget and appropriations process. While the legislative landscape remains difficult to predict, this note outlines what we expect in the coming weeks and months.
KEY TAKEAWAYS:
- It remains unclear whether Senate Republicans will be able to repeal the ACA
- Republicans' struggle to pass health care reform endangers enactment of tax reform
- The window for passing controversial “big ticket” items is likely to close in early 2018
- While we believe there will eventually be an agreement on the debt ceiling with Republican control of Washington - though there will likely be some gamesmanship with which to deal before such an agreement is reached.
“MUST PASS” ITEMS:
In addition to addressing key policy priorities, Congress must take action in the coming months to raise the debt limit, fund the government, and renew a number of programs with expiring authorizations:
Expiring on September 30, 2017:
- Appropriations (government funding);
- Coast Guard authorization;
- Federal Aviation Administration (FAA) authorization;
- National Flood Insurance Program (NFIP) authorization;
- Intelligence Agencies’ Authorization;
- Food and Drug Administration User Fee Program authorization;
- The Children’s Health Insurance Program (CHIP) authorization
Expiring Early-to-Mid October, Estimated:
Expiring on December 31, 2017:
- Section 702 of the Foreign Intelligence Surveillance Act (FISA);
- A number of tax extenders (also serving as a deadline to retroactively reinstate extenders which expired December 31, 2016);
- Medicare extenders
BUDGET:
The 115th Congress convened in January intending to repeal the Affordable Care Act (ACA) and pass tax reform through the “budget reconciliation” process, a procedural maneuver to enact legislation through a simple majority vote (51) in the Senate – rather than the 60-vote threshold normally required. Because the 114th Congress did not pass a FY2017 budget resolution, Congress had the unique opportunity to pass two budget reconciliation bills in the same year (FY2017 and FY2018 later in the year). The first (FY2017) is to cover ACA repeal and the second reconciliation bill for fiscal year 2018 would be focused on tax reform. As we head into the July work period with Senate Republicans still trying to find a path for passing ACA repeal using the 2017 budget reconciliation process and House Republicans yet to pass a FY2018 budget, there is some question as to how Congress will address tax reform from a procedural standpoint.
Importantly, the reconciliation process requires revenue neutrality, and the Senate’s uphill battle in passing an ACA repeal bill, which includes its own significant tax relief, has raised questions about the possibility of revenue-neutral tax reform. Specifically, the strategy being pursued by Republicans is to first repeal the taxes levied by Obamacare, theoretically making tax reform much easier from a procedural perspective. The rationale for this strategy is that under the Senate rules, anything passed through budget reconciliation is forbidden from increasing the long-term deficit (typically interpreted as more than a decade). Thus, by splitting the tax cuts between both reconciliation bills, one of which (ACA repeal) would include large spending cuts to offset lost tax revenue, Republicans’ strategy would allow greater tax cuts than they would have been able to accomplish under a single reconciliation bill. This strategy also allows the tax cuts to be made permanent.
In addition to the substantive and political challenges discussed below with passing health care and tax reform measures, the Republicans’ strategy is complicated by the threshold requirement that they still must pass a FY2018 Budget Resolution without which a 2018 reconciliation process cannot take place. The internal political struggle for Republicans pits deficit hawks against defense hawks, and risks further widening the divide between the ultra-conservative House Freedom Caucus and the moderate Tuesday Group. Adding further complication, under the Budget Control Act, the only way to increase defense spending is to also have an equal increase in non-defense spending. In order to override the Budget Control Act requirement, Republicans would need at least eight Democrats in the Senate to agree - unlikely in the current political environment.
Additionally, without a clear picture of the FY2017 final outcome, it has been even harder for Republicans to settle on their goals for FY2018. Despite all this, House Budget Committee Chairman Diane Black (R-TN) continues to work on a deal for the FY2018 budget with the hope of committee action in the next week or two.
HEALTH CARE:
Prior to the Fourth of July recess, Senate Majority Leader Mitch McConnell (R-KY) delayed a planned vote on Senate Republicans’ healthcare bill amid mounting opposition from moderate and conservative members over central aspects of the plan to repeal and replace the Affordable Care Act (ACA). Last Friday, President Trump urged Senate Republicans to vote to repeal the ACA and worry about a replacement later if they are unable to coalesce behind their own healthcare plan. However, this option is not something that is likely to be pursued by Republican leaders. Senate Republicans will seek to make progress on the stalled Better Care Reconciliation Act (BCRA), including negotiations to shore up the 50 votes necessary for passage, with at least 10 Republican Senators now on the record as being opposed to the bill in its current form. Senate Republican leaders have indicated that a vote on the BCRA is expected over the next two weeks with a revised bill now expected by the end of this week and will subsequently have to be scored by the Congressional Budget Office (CBO), but we remain skeptical.
While nothing is set in stone, it would seem like the next key deadline for a deal would be July 28, prior to lawmakers’ expected departure from town for the August recess. Likely changes that could be made to the BCRA to achieve 50 votes include, among others, keeping a tax on high income earners, increasing subsidies to help low-income and elderly individuals afford health insurance, additional funding to combat the opioid epidemic, changes to the rollback and restructuring of Medicaid, and the amendment proposed by Sen. Ted Cruz (R-TX) allowing insurers to sell almost any kind of health plan they want so long as they also offer at least one plan that complies with the ACA’s consumer mandates.
Overall, while Majority Leader McConnell is a skilled dealmaker, it remains almost impossible to balance the needs of moderates and conservatives while also complying with the arcane rules governing the reconciliation process. For this reason, we are already seeing McConnell and others hint at setting aside the repeal effort and pivoting to a bipartisan insurance stabilization package. In addition to these challenging health reform efforts, we also could see further action on FDA user fees and reauthorization of the CHIP program in July. Both programs need to be reauthorized prior to September 30.
TAX REFORM:
The big question on tax reform is where - and whether - the Republican Party will come to a consensus. The House has long been touting its “Better Way” blueprint, which relies upon a controversial Border Adjustment Tax (BAT) on imports, while the Senate is working on a draft that, according to some reports, is based in part on former Ways-and-Means Chairman Dave Camp’s 2014 proposal. The White House, meanwhile, has released a one-pager on what President Trump has called “largest tax cut since Reagan.”
The House blueprint has recently received pushback from the White House, Senate, key stakeholders, and even House Republicans (including some members on the tax-writing Ways and Means Committee).
McConnell and a number of key Senate Republicans also have voiced opposition to any proposal that adds to the budget deficit. Though McConnell has not committed to a timeline for tax reform, the White House and the House have targeted the end of 2017, and all members of the so-called “Big Six” (House Speaker Paul Ryan, McConnell, Ways and Means Chairman Kevin Brady, Finance Committee Chairman Orrin Hatch, NEC Director Gary Cohn, and Treasury Secretary Steve Mnunchin) have indicated a consensus plan would be unveiled in September 2017. With each passing day having not passed health care repeal and considering the number of programs expiring by the end of the year, however, the prospect of passing robust tax reform by the end of the 2017 – while not out of the question – is low.
In fact, the only way we see this ambitious timeframe being met is if McConnell was to jettison using the FY2017 reconciliation process for ACA repeal and instead opt to preserve it for use later in the year for tax reform, even if such “tax reform” is smaller, more targeted relief than comprehensive reform. No matter what occurs, we view the end of Q1 2018 as the window closing for comprehensive enactment of tax reform for the 115th Congress.
APPROPRIATIONS:
The House Appropriations Committee has passed three spending measures (Defense, Military Construction-VA, and Legislative Branch), and has approved an additional four out of their respective Subcommittee (Agriculture-FDA, Commerce-Justice-Science, Energy & Water, and Financial Services). The full House Appropriations Committee will now hold markups of the aforementioned subcommittee bills, while hearings continue in the Senate Appropriations Committee. Though the House will attempt to pass as many spending measures through the normal legislative process as possible, the slow start to the overall process, the lack of action in the Senate, and high level of partisanship would seem to indicate a series of short-term and/or mid-term Continuing Resolutions followed by an omnibus (or a series of “minibuses”) may be the most likely scenario when the fiscal year ends in September.
DEBT CEILING:
Congress must take action to raise the debt limit sometime in mid-October, according to a recent CBO report. Currently, the U.S. has been hovering near the debt limit since March of this year. During this time period, the Treasury Department has been employing “extraordinary measures” to meet the country’s financial obligations. However, the CBO predicts that Treasury’s ability to use “extraordinary measures” will run out in mid-October. Treasury Secretary Steven Mnuchin and others in the Administration have pushed for a “clean” debt limit increase before the August recess, though it remains to be seen how the Administration and Republican leadership will chart a path forward that would gain the Democratic support needed to advance an increase in the Senate, while simultaneously appeasing conservative members of the Republican Conference.
While Democrats advocated for a clean debt ceiling in 2011, there is no current consensus within the caucus to follow a similar strategy in 2017. Many view the need for Democratic votes as a moment of leverage and seek to advance policy goals as sweeteners for Democratic votes. However, we expect that a deal will be reached without the government defaulting on any debts.
CONCLUSION:
As Congress returns from the Fourth of July recess, the legislative landscape includes a number of unknowns: how will the Republican leadership reconcile competing factions within the Conference to advance key priorities, such as health care and tax reform? If Senate Republicans fail to advance a health care bill, will they reach across the aisle and work toward a bipartisan “fix?” Will Democrats up for re-election in 2018 work with their Republican counterparts? To what extent will President Trump’s low approval ratings and investigations into possible collusion between his campaign and Russia continue to hang over his agenda? How will the impending deadlines by which Congress must advance a number of “must-pass” items impact the agenda? We expect these questions, among others, to inform the landscape in the coming weeks as Trump and Congressional Republicans seek to advance big-ticket items. Please contact us at Hedgeye Potomac if you like to speak to us further about these topics.
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