As Congress returns from its August break today, a number of controversial issues must be addressed in the coming weeks. Efforts to increase the debt ceiling, extend government funding, provide a down payment on Hurricane Harvey relief, and reauthorize expiring provisions are likely to serve as the main flashpoints throughout September. Further complicating the legislative agenda will be the increased effort to pass tax reform.
Despite Congress being in recess for most of August, there have been a number of developments that have had a direct impact on Washington. White House staff shakeups, infighting between the President Trump and Republican leaders, the Korean Peninsula security situation, and the investigation into Russian interference in the 2016 presidential election have all contributed to the beltway noise during the past month. Complicating things further is the new pressing need to address the devastation caused by Hurricane Harvey. Tackling the legislative agenda in September already was going to be a formidable task, especially given the House and Senate are scheduled to be in session for only 12 joint legislative days. The addition of Hurricane Harvey funding sets the stage for an even more arduous September work period with intra and interparty tensions rising at both ends of Pennsylvania Avenue.
While the landscape remains difficult to predict, the following piece outlines what we expect in the coming weeks:
“Must-Pass” Items
Congress must take action on the following items before September 30, 2017:
- Raising the debt ceiling;
- Appropriations (government funding);
- Coast Guard authorization;
- Federal Aviation Administration (FAA) authorization;
- National Flood Insurance Program (NFIP) authorization;
- Intelligence Agencies’ authorization; and
- The Children’s Health Insurance Program (CHIP) authorization.
While much of the “must-pass” legislative items can either be simply extended (i.e., FAA reauthorization and NFIP reauthorization), raising the debt ceiling and funding the government will likely be the most challenging.
Debt Ceiling:
While the United States has been hovering near the debt limit since March of this year, the Treasury Department has been employing “extraordinary measures,” which are set to expire on September 30, to meet the country’s financial obligations.
Treasury Secretary Steven Mnuchin and others in the Trump Administration have pushed for a “clean” debt limit increase. Still, it remains to be seen how the Administration and Republican leadership will chart a path forward. It is an effort that will require Democratic votes, especially given some expected Republican defections. Notably, Senate Democratic Leader Chuck Schumer (D-NY) has stated Democrats will not support a debt ceiling increase if Republicans push forward with a tax bill that is not deficit neutral. Nevertheless, we expect a debt ceiling deal will be reached – possibly in the form of a package tying a clean debt limit increase to appropriations and all/some of the aforementioned list of “must-pass” items expiring on September 30.
Appropriations:
Partly as a result of a protracted effort to repeal and replace the Affordable Care Act (ACA), Congress has gotten a slow start in advancing appropriations measures to fund the government when the fiscal year ends on September 30. The Senate Appropriations Committee has passed six of 12 spending bills, though the full Senate has yet to consider any. Moreover, the House Appropriations Committee has reported out all 12 spending bills, but the full House has passed just one “minibus” comprised of the Defense, Military Construction-VA, Energy and Water Development, and Legislative Branch appropriations bills.
While we do not expect any of the House measures to become law, the chamber plans to spend the week of September 5 considering a short-term Hurricane Harvey recovery package and a “consolidated” appropriations package comprised of all 12 bills. Thereafter, the Senate likely will substitute the House-passed package with a short-term continuing resolution (CR) through mid-December that may also include a debt ceiling increase. While this gives House conservatives their vote on a more austere spending package and avoids a shutdown, it does potentially put Speaker Paul Ryan (R-WI) in the awkward - but familiar - spot of relying heavily on Democratic votes once the short-term extension bill is sent back from the Senate.
The three visible wildcards that could disrupt this course of events are Hurricane Harvey funding, emboldened Democrats, and the president. The easiest of these issues for Congress will likely be Hurricane Harvey recovery funding. While we expect the issue to be, at least, partially addressed in September, the unprecedented price tag for the Hurricane Harvey recovery effort is certainly going to create some noise around the appropriations process.
Another tough issue to confront is the fact that many Democrats are going to return to Washington emboldened by what has transpired over the past month. President Donald Trump’s declining poll numbers along with the constant array of negative news could embolden Democrats to demand policy changes in order for Republican leadership to obtain their support for a funding measure. The precise policy changes Democrats will demand is currently unclear, but the likelihood they will try to extract something has grown during August. The final, and probably biggest wildcard, is how Trump approaches the legislative effort. He has already threatened a government shutdown over funding for a wall on the U.S.-Mexico border - funding that is unlikely to be included in this process. While the president could certainly veto a legislative package that does not fund the wall, the anticipated inclusion of Hurricane Harvey relief funds could likely forestall such an outcome.
Other Agenda Items
Budget:
The current strategy for Republicans is to move forward with tax reform using the budget reconciliation process. Assuming almost unified Republican support, which itself is a challenge, using reconciliation means they could pass a reform bill without needing any Democratic support. However, using the process also means they will have to pass an FY18 budget resolution - which, as we’ve said many times before, will not be an easy task.
As it currently stands, the House Budget Committee passed its FY2018 budget resolution on a party-line vote in July, and the full chamber will reconvene tasked with forging a path forward on the measure to set budget caps and the stage for a tax overhaul using the budget reconciliation process. Efforts in the House to advance H.Con.Res. 71 – a $1.1 trillion resolution that increases defense spending by $70.5 billion and cuts non-defense spending by $7.5 billion – have stalled amid disagreements over mandatory spending cuts and “unanswered questions” with respect to tax reform. As a result, the Republican leadership is working to reconcile differences between competing factions of the Republican Conference in order to advance a budget resolution, and in turn, tax reform.
The House may try to consider a FY2018 budget resolution with reconciliation instructions for tax reform as early as the week of September 11. If the House is able to pass a budget resolution, the Senate could follow suit in early October. Importantly, Congressional leadership cannot use reconciliation measures to pass tax reform without passing a budget resolution.
Left unresolved is whether the FY2017 budget resolution - the vehicle used for the failed ACA repeal effort - could be used for tax reform, and whether a FY2017 reconciliation bill would be precluded from a filibuster after the fiscal year ends on September 30. As of late, there has been little focus on repurposing the FY2017 measure, but that could change quickly if a deal on FY2018 proves unreachable or time consuming.
Tax Reform:
On July 27, the so-called “Big Six” – House Speaker Paul Ryan, Ways and Means Chairman Kevin Brady, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, White House Economic Adviser Gary Cohn, and Treasury Secretary Steven Mnuchin – released a joint statement outlining an agreement on core principles for tax reform. The statement expressed a commitment to lowering rates, shifting to a territorial tax system - and importantly - stated the House and Senate tax-writing committees will produce draft legislation to overhaul the U.S. tax code this fall. Of note, the statement confirmed the border adjustment tax (BAT) on imported goods, a proposal on which the House approach relied, will not be included in forthcoming negotiations.
Finance Committee Chairman Orrin Hatch (R-UT) recently announced his intention to hold multiple hearings and a full markup on legislative text in the Senate Finance Committee this fall, and the Big Six have targeted the end of 2017 as the timeline by which to advance tax reform. President Trump is meeting with the Big Six this afternoon at the White House to discuss tax reform (and possibly trade issues) coordination and strategy.
While we maintain that the prospect of passing robust tax reform by the end of 2017 are low given the complexity of unresolved “big-ticket” issues (i.e., corporate and pass-through rates, interest deductibility, asset depreciation, among others), we expect continued discussion of a number of popular and not-so popular pay-fors, such as tweaking the mortgage interest deduction, before any resolution. As a back stop, it seems more likely Congress would take action on a smaller, more targeted relief package akin to the 2015 PATH Act, rather than comprehensive reform, especially as pressure builds for the Trump Administration and Republican Congress to “put points on the board.” 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.
Health Care:
Prior to adjourning for recess, Republican efforts to repeal and/or replace the ACA were thwarted in the Senate after the chamber rejected three proposals: a revised version of the Better Care Reconciliation Act (BCRA) (43-57), a simple ACA repeal (45-55), and a “skinny” repeal (49-51).
Despite calls from President Trump to let the ACA “implode,” the Senate now is expected to pivot toward a bipartisan insurance stabilization package. Senator Lamar Alexander (R-TN), Chairman of the Senate Committee on Health, Education, Labor, and Pensions (HELP), recently announced the Committee will begin holding bipartisan hearings this week on actions to stabilize and strengthen the individual health insurance market. Two more hearings also are scheduled for the week of September 11. The goal of these hearings is to help create a framework for a legislative package in September. This faces a steep uphill climb in the current environment, but the goal would be for this legislation to provide, at a minimum, certainty for cost sharing reduction (CSR) subsidies in exchange for some greater regulatory flexibility for states.
While there has also been activity in the House with a group of approximately 40 moderate House Republicans and Democrats – known as the ‘Problem Solvers Caucus’ – recently announcing a proposal to stabilize the individual market, we still view the Senate HELP Committee as the most likely architect of any bipartisan deal.
In addition to efforts to stabilize insurance markets, Congress also needs to reauthorize the Children’s Health Insurance Program (CHIP) and Community Health Center funding prior to September 30. The Senate Finance Committee has announced a September 7 hearing focused on the CHIP program. Depending on the length of both these reauthorizations, this legislative package, which could include other healthcare priorities, could cost well over $10 billion. Given the overall cost and the potential need to extend certain ACA provisions as part of this process, this effort could face challenges and may need to be packaged with other “must-do” items. Alternatively, some have highlighted that states still have CHIP money to spend past September 30 and have downplayed the impact of reauthorization slipping until later in the year.
Flood Insurance:
The debate over the future of the National Flood Insurance Program continues in both the House and Senate. Signs were already pointing to a short-term extension of the program before the devastation caused by Hurricane Harvey and it seems even more likely in the storm's aftermath.
Nevertheless, House Financial Services Committee Chairman Jeb Hensarling (R-TX) continues to make the case for his bill. Hensarling recently said in an interview he was "pressing on the accelerator," and "it's more urgent than ever we get this bill done." While Chairman Hensarling will try to advance his bill, as it stands now, the most likely scenario is an extension attached to the CR that runs until mid-December.
Nominations:
Before adjourning, Senate Republicans and Democrats agreed to a package of 65 nominees, though it remains to be seen whether such a bipartisan effort will repeat itself when the chamber reconvenes, or if Democrats will continue to slow-walk the confirmation process. The Senate will return with 47 nominations pending on the Executive Calendar, and 133 nominations awaiting committee action. Remember, the confirmation process eats up precious time on the Senate calendar...
National Defense Authorization Act:
The House passed its version of the FY2018 National Defense Authorization Act (NDAA) on July 14, and while the Senate was expected to take up the NDAA prior to adjourning for the August recess, Senator Rand Paul (R-KY) objected to Leader Mitch McConnell’s (R-KY) unanimous consent request to expedite consideration of the bill. As such, floor consideration was pushed to September. Senator John McCain (R-AZ), after completing his first round of chemotherapy over the recess, will lead the chamber’s debate on the NDAA. Senator McCain and Armed Services Ranking Member Jack Reed (D-RI) have agreed to a series of bipartisan amendments to the bill, suggesting that the Senate will take swift action on the measure, possibly as early as this week.
Congressional Review Act:
On July 25, the House passed a joint resolution of disapproval to repeal the Consumer Financial Protection Bureau’s (CFPB) rule on mandatory arbitration, and the Senate could follow suit when it returns in September. The rule, which prevents the use of mandatory arbitration clauses in consumer financial products, was promulgated by the CFPB in early July, and sharply criticized by most congressional Republicans. Senate passage of the joint resolution of disapproval requires just 51 votes, and would eliminate the regulation and prevent the CFPB from promulgating a similar rule in the future but it remains unclear whether there are enough votes to bring the measure to the floor.
Immigration:
President Trump is anticipated to announce a reshaping of the Deferred Action for Childhood Arrivals (DACA) today. The DACA program, created under President Obama, provides children who entered the U.S. illegally the chance to work and attend schools in the U.S. without fear of deportation. The September 5 deadline has been driven by the looming threat of a lawsuit to be filed by Republican state attorneys general, who believe the program to be unconstitutional.
Any changes to the program would impact the Congressional agenda for September by further complicating existing immigration flashpoints, including funding for a wall along the U.S. southern border. Congressional Republicans likely would be divided in their views on the president’s potential action, putting them at a weakened negotiating position against Democrats, who are most certainly to be united in their opposition to whatever action the Trump Administration takes on DACA. At the same time, the president’s potential drastic changes – including elimination of the program – sets the stage for a possible agreement between Democrats and Republicans on funding for border security and protecting DACA.
Trade:
The Administration is required by Trade Promotion Authority (TPA) to consult and work with Congress as it renegotiates the North American Free Trade Agreement (NAFTA), and trade is likely to operate in the background of the Congressional agenda in the coming weeks. United States, Mexican, and Canadian trade officials have held two rounds of NAFTA negotiations – one August 16-20 in Washington, DC, and another September 1-5 in Mexico City – and aim to reach an agreement by the end of 2017. As efforts continue, we expect House and Senate committees of jurisdiction to schedule hearings in the coming weeks on priorities for modernization. At this point, despite presidential tweets to the contrary, we believe for economic and political reasons, the likelihood of NAFTA withdrawal is low.
In addition to NAFTA negotiations, U.S. officials also have been engaged in discussions with their South Korean counterparts regarding the U.S.-Korea Free Trade Agreement (KORUS). Industry stakeholders submitted comments to the Office of the U.S. Trade Representative on August 15 to provide feedback on potential modifications to KORUS, and on August 22, U.S. officials convened a session of the Joint Committee to discuss improvements to the deal. Discussions will continue over the coming weeks to “improve the implementation of KORUS and amend or modify the agreement.”
House and Senate trade leaders have emphasized the importance of congressional consultation and review in KORUS discussions, and we expect this dynamic to play out in the coming weeks.
Conclusion
Congress has set the stage for a robust September work period, including a lengthy list of “to-do” items. While Congress is certain to take action on its “must-pass” items, it remains to be seen whether – and the timeframe by which – lawmakers will punt items such as the debt ceiling and appropriations via a short-term extension. As one pundit recently stated “it’s looking like September could last all the way until December.” As we confront all these twists and turns throughout the coming months, our team will keep you updated on a regular basis, and is always available for further discussion on these topics and to answer any questions you may have.
JT Taylor
Managing Director
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Emo Gardner
Managing Director
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Emily Evans
Managing Director
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@HedgeyeEEvans
Paul Glenchur
Managing Director
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Joe McMonigle
Managing Director
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