LET'S GET READY TO RUMBLE | DIVIDED GOVERNMENT IS HERE

The 116^th Congress begins today at 12:00 pm ushering in a period of divided government. Republicans will hold a 54-46 majority in the Senate while Democrats will control the House by a margin of 235-199. The Republican who was originally declared the winner in the NC-9 Congressional race will not be seated as the state election board has refused to certify the results. There will be a vote in the entire U.S. House of Representatives to make Leader Nancy Pelosi the Speaker for a second time. It is widely expected at this point that she has the necessary Democratic votes to win.

FEDERAL GOVERNMENT SHUTDOWN:  The government is in its 13^th day of a partial shutdown. President Trump met with party leaders from the House and Senate for a briefing on border security with the Department of Homeland Security (DHS) yesterday and no compromise was reached to fund a southern border wall. Instead, Pelosi plans to send two bills to the Senate later today that would reopen the government: the first would fund six of the remaining seven FY-19 appropriations bills through the remainder of the fiscal year (September 30^th); the second would use a continuing resolution to temporarily fund the Homeland Security spending bill through February 8. Trump has already characterized this approach as a “non-starter,” and Senate Republicans have stated that they will not advance any bill that the president won’t sign. Moreover, a compromise proffered to the Democrats last week by Vice President Pence at ~2.5 billion for border security appears to have been rejected by Trump who is standing firm for $5 billion.

EARLY PRIORITIES FOR THE NEW HOUSE DEMOCRATS: We expect Democrats to prioritize legislation addressing electoral reform, shoring up Obamacare, and separately addressing prescription drug costs. Incoming Transportation and Infrastructure Committee Chairman Peter DeFazio (D-OR) plans to introduce a large-scale infrastructure package in the first half of the year, though questions over the scope, and how it will be paid for, remain. In addition to their legislative work, the committees will also proceed into oversight and investigation roles across a wide range of areas. Anecdotally, we note that the number one Democrat staff job listing making the rounds on Capitol Hill is for…experienced litigators.

TRADE: The U.S.-Mexico-Canada-Agreement (USMCA or NAFTA 2.0) could hit the Hill this spring following some procedural Trade Promotion Authority (TPA) requirements. If the Administration waits until the International Trade Commission (ITC) report is completed (mid-March) to submit the final text to Congress, then we could see the introduction of the implementing bill by mid-April. The fate of the USMCA will be determined by the extent to which Trump and Congressional Democrats are willing to work together to address outstanding concerns. Newly empowered House Democrats have their own legislative agenda, and how their broader priorities play out may drive their calculus on whether it makes political sense to cut a deal with Trump on the USMCA or deny him a victory on the road to the 2020 presidential election. Although we don’t currently believe Democrats will thwart the USMCA, there is precedent for Pelosi as Speaker to stop the clock on TPA. When the Colombia Free Trade Agreement was sent to Congress in 2007, then-Speaker Pelosi led the Democrats in voting to eliminate the rules requiring Congress to approve the deal within 90 legislative days under TPA. The Colombia agreement was not passed until 2011 after the Obama Administration renegotiated elements of the agreement.

Other TPA considerations:

• 30 days before introduction of the implementing bill, the Administration must submit the final text and a draft Statement of Administrative Action (SAA).  There is no deadline for this step. If, however, the president has invoked Article 2205, the withdrawal clause in the original NAFTA agreement, to force Congress’ hand to take up the USMCA, he will presumably move quickly to get these required materials to Congress.
• Upon introduction of the implementing bill, the House Ways and Means Committee must vote on the bill within 45 session days (if not it is automatically discharged), then the full House must vote within 15 session days of the Committee.
• The Senate Finance Committee must vote on the bill within 15 session days after House passage (if not it is automatically discharged), and the full Senate must vote within 15 session days of the Finance Committee.

Aside from USMCA, trade conversations with the United Kingdom, European Union, and Japan will continue in early 2019, while the timing and scope for any formal negotiations remain unclear. March 1 is the end of the 90-day negotiating window set by the Trump administration to reach a deal with China after the White House agreed to delay a tariff hike. U.S. Trade Representative Robert Lighthizer and EU Trade Commissioner Cecelia Malmström will meet on January 9 to discuss bilateral trade issues, and the International Trade Commission will hold a hearing on the economic impact of a potential U.S.-UK trade deal on January 31, with a report due May 8.

116^th CONGRESS KEY DATES:

• January 22 – State of the Union
• January 29—Administration’s list of required changes to U.S. law for USMCA is due to Congress.
• February 4— President’s budget request due.
• March 1— Debt limit suspension ends. The Treasury Department can use extraordinary measures to delay the deadline for action until mid-summer, according to some estimates.
• March 15—International Trade Commission report on the USMCA’s expected economic impact is due.
• May 31— National Flood Insurance Program expires.
• October 1— Fiscal 2020 begins with lower spending caps under Budget Control Act.
• December 31— Medical device tax, health insurer fee suspensions end.

NEW HOUSE RULES:  Democrats will vote to ratify changes to the House rules this afternoon when the new Congress convenes. Their proposed rules package creates a new subcommittee for Financial Services, and two new Select Committees—one on Climate and one on the Modernization of Congress. It also includes additional ethics requirements, strengthens regular order in consideration of bills and joint resolutions, and defends the House’s prerogative in legal cases involving the ACA.

However, it seems that the intraparty headaches for the new Majority’s leadership will begin almost immediately. Incoming firebrand freshman Alexandria Ocasio-Cortez (D-NY) and at least one other prominent member of the Congressional Progressive Caucus have stated that they will vote against the package because it contains pay-as-you-go (PAYGO) language. Democratic leaders can lose as many 17 votes within their ranks and still pass the rules package. Along with PAYGO, other key rules changes related are highlighted below.

• The Gephardt Rule — Democrats are bringing back a rule that allows the House to avoid a separate vote on the debt limit. Under the rule, once the House passes a budget resolution, which includes a new debt limit, a separate joint resolution with the new limit will be sent to the Senate for consideration. The joint resolution must pass the Senate and be signed by the President to change the debt limit.
• CBO dynamic scoring — The Congressional Budget Office and Joint Committee on Taxation will no longer be required to provide "dynamic scoring" for major legislation, though the analysis may still be requested.
• PAYGO —  House rules will reinstate the PAYGO mechanism that requires tax cuts or increases in entitlement or mandatory spending to be offset by tax increases or cuts in mandatory spending.