2018 Midterm Elections: The Song Remains the Same — as in 2011 that is.
- Tax Planning
I borrow the title from one of my favorite Led Zeppelin albums to describe the midterm election and the new Congress. Much has been written about the election. Inside the beltway, observers spin both sides saying its absolute gridlock to “let’s make a deal” time. From my perspective, “The Song Remains the Same” – as in 2011 that is.
I look back to the political dynamics of 2011 for guidance. In 2011, Democrats controlled the White House and the Senate, and the Republicans controlled the House. In 2019 we will have the just the opposite in terms of political party control but the same dynamic of divided government.
In 2011 it was “gridlock plus”. The Republican-led House passed many politically motivated and charged bills and sent them to the Senate. In the Senate, the Majority Leader has absolute control over the legislative agenda—what is bought to the floor debated and voted. Senator Chuck Schumer (D-NY), the Senate Majority Leader in 2011, made sure most of these politically motivated House bills would not see floor time. This is a common tactic used by both political parties to avoid tough votes on politically charged issues ahead of major elections. The parties managed to produce bipartisan legislation in just a handful of areas, most involving government funding.
Looking ahead to 2019-2020, Senator Mitch McConnell (R-KY), the Senate Majority Leader, will borrow from Senator Chuck Schumer’s 2011 playbook. In early 2019, House Democrats will start sending politically charged legislation to the Republican-led Senate. The bills will cover a variety of politically sensitive topics like health care, immigration, prescription drug pricing, taxes, labor practices, and government oversight of White House and Cabinet officials. Senate Majority Leader McConnell will hold the legislation at the Senate desk where they will not see the light of day.
So what is on the agenda for the new Congress?
Healthcare and Taxes
Expect House Democrats to pass legislation rolling back regulations permitting “skinny” health care plans that do not meet the Affordable Health Care Act’s minimum coverage requirements. House Republicans voted to repeal the Affordable Care Act nearly 60 times since 2011.
Regarding taxes, Democrats will likely pass legislation rolling back the tax breaks for the wealthiest taxpayers in the Tax Cuts and Jobs Act of 2017 in favor of more tax breaks for low and middle-income workers. The Republican-led Senate will block these efforts.
House Democrats are likely to pass legislation rescuing severely underfunded multiemployer union pension plans. A handful of large union pension plans are at risk of going bankrupt leaving the federal government at risk for over $35 billion of pension liabilities. This year, Congress formed a special bipartisan committee to develop and pass legislation rescuing these plans. With less than two months left in the current lame duck session, a bipartisan compromise seems unlikely because of the politics surrounding the issue and its large price tag. House Democrats are better positioned to strike a favorable solution for their labor base by waiting until 2019.
House Democrats will initiate several oversight investigations including hearings on President Donald Trump’s business dealings, financial relationships, and tax returns. In 2017, House Democrat’s offered amendments to the Tax Cuts and Jobs Act requesting the President’s tax returns only to be rebuffed by Republicans. In fact, less than two days after the midterm election, Democrats sent letters to the White House requesting all documents relating to the Mueller investigation and the firing of Attorney General Jeff Sessions be preserved for Congressional investigations beginning in 2019. We will know early in the new Congress whether the intensity and depth of these investigations will freeze cooperation between Democrats and Republicans making it nearly impossible to attract bipartisan support on legislation that is not critical to keeping the government running.
Legislation That Must Pass Congress
I opened by describing the next two years as “gridlock plus”. A few things will get done even if the relationship between the parties sours. This category includes a handful of government funding bills (called appropriations legislation) and legislation increasing the debt ceiling, so the federal government can continue to borrow money.
Government funding generally requires passing twelve appropriations bills. This year, Congress passed five of the twelve through regular order by the end of the government’s fiscal year. The remaining seven were packaged together and passed before the election keeping the government funded through December 7, 2018. Those of us who follow political sentiment in Washington, hear that a fight over funding for a border wall may cause a short-term government shutdown. However, in the end the parties will work out a deal extending current government funding levels into early 2019.
Legislation That Could Attract Bipartisanship
Incoming chairman of the Ways and Means Committee Richard Neal (D-MA) says retirement security is his top priority. Chairman-elect Neal has introduced two bills on retirement security in the current Congress. One bill provides sensible simplifications to our overly-complex 401(k) plan system. The other bill would require all employers with 25 or more employees to enroll employees into a 401(k) plan. Historically, legislation involving retirement security attracts bipartisan support.
There are a handful of tax provisions called “tax extenders” that generally attract bipartisan support. Tax extenders are narrowly targeted preferences for specific interests such as special tax breaks for renewable energy production like ethanol produced from corn and renewable bio diesel. The tax writing committees include many Members from farm states where raising corn for fuel additives like ethanol is an important constituent interest. Other popular tax extenders include bonus depreciation energy efficient new home credit and military housing allowance exclusion. Also, in the tax area, there is bipartisan support for an IRS reform package. It has been 20 years since Congress addressed much needed IRS reforms involving taxpayer rights, oversight, and systems modernizations.
President Trump and Democrat Leaders have discussed the need to update our transportation infrastructure. The sticking point will be how to pay for improvements that could cost up to $1 trillion dollars. Some Democrats propose increasing the gas tax which was set in 1993. Senate Republicans will not agree to a gas tax increase with the 2020 presidential election around the corner. The same Republicans added $1.5 trillion to the deficit from the 2017 tax cuts legislation.
The roles will reverse in the infrastructure debate with Republicans complaining due to the cost of infrastructure and Democrats proposing a massive increase in spending. In addition, the parties must find an acceptable funding source to strike a deal. These are big political hurdles but not impossible.
Timing Also Matters
The new Congress starts in January. The first few months will be very acrimonious. The political parties know the best time to produce compromises on big issues and projects (that may upset their respective political bases) is in the first year of a new Congress. The second year of the new Congress, which frames the next presidential election, generally does not produce compromise on big issues. The political parties always believe there is more to gain by taking these issues into the election.
The outcome was what the markets expected, and investors now have greater clarity on the playing field for the next two years, say Shannon Saccocia, Chief Investment Officer of Boston Private. While this clarity provided a brief move higher in the markets, we have continued to experience volatility as tariff tensions with China have yet to subside, and the Fed remains focused on tightening, despite some softer data. However, should a constructive dialogue around the current trade tensions between the U.S. and China occur at the upcoming G8 meeting, investor expectations for 2019 could move meaningfully higher.
MidTerm Election Webinar
Join Shannon and me for an in-depth discussion on the impact the midterm election will have, the market response and considerations as you look ahead to 2019.
Boston Private is pleased to announce a partnership with Doug Fisher, a Washington Policy expert, who will offer a series of insights into a number of reform proposals making their way through Congress in 2017. Doug is Director of Retirement Policy at the American Retirement Association. In this role, Doug works with the ARA membership to protect, advise and grow their businesses through ideation and advocacy in the benefits area. Before joining ARA, Doug led Fidelity's legislative policy and thought leadership development teams involving retirement, health and welfare benefit plans. Doug has advised many Fortune 1,000 companies on the impact of legislation and regulation on the design and delivery of benefits. Before joining Fidelity, Doug served as tax counsel to the U.S. Senate Finance Committee and was involved in writing the pension, health and insurance provisions of the Small Business Job Protection Act of 1996; the Balanced Budget Act of 1997, including the Roth IRA, Simple retirement plan, medical savings account (predecessor to the health savings account); and the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
- Tax Planning