Fall Classic: Election Year Politics and Policy Perspectives from Inside the Beltway
- Tax Planning
As Congress prepares for its August recess and looks ahead to midterm elections, a great nervousness prevails over both Republicans and Democrats on the outcome of the election. Usually the party in power – now the Republicans – loses seats in the House and Senate. This has been true since Franklin Roosevelt.
A Congress divided?
On average, the party of the President loses about 32 House seats and two Senate seats in a midterm election. In 16 out of the last 18 midterm elections since 1946, the President’s party has lost seats in the House. Polling consistently shows the trend is likely to hold true in upcoming House elections where Republicans hold a slim 23-seat majority. A midterm election is a referendum on the President and his party and thus a shift in power is a real possibility in the House of Representatives.
However, the Senate is likely to buck the trend. The election map favors Republicans in this election cycle. Senate Republicans are defending 9 seats compared to 26 seats for Senate Democrats. Furthermore, three seats held by Democrats are in red-leaning states Indiana, South Dakota, and West Virginia, which adds to Republicans’ midterm election advantage. In 2020, the dynamic reverses and favors Democrats. As a result, Senate Republicans expect to expand their majority by at least two seats in the November elections.
If midterm predictions hold, the Executive branch and Congress will be divided. The last time Congress was divided, in 2010, it largely resulted in more gridlock. Then, the House was controlled by Republicans and the Senate controlled by Democrats. During those years, the Senate Majority’s strategy was to shield Senate Democrats from making so-called “tough” or “message” votes on legislation passed by House Republicans and sent to the Senate. So-called “message” votes are aimed at making re-elections more difficult for the opposing party.
For those who love the “inside baseball” of politics, another political event may unfold after the midterm election, creating great political drama. If Democrats take the House as predicted, there could be a serious challenge to Minority Leader Nancy Pelosi’s return to the Speaker’s role. At this point, it is not clear whether she has the votes to return to the top House post. A handful of Democrats could join Republicans (both parties vote for the Speaker) to select an alternative candidate. And there is no rule that says the Speaker must be a sitting member of Congress. The role of Speaker is critical because he/she effectively runs the House – determines the legislative agenda and schedules votes. It may take some time to sort out, leaving the House without leadership for a period of time and adding more political turmoil to Washington. By the way, the process used today to elect the Speaker of the House was proposed by Thomas Jefferson.
Pending budget package and other legislation
Before the midterms, Congress has unfinished business involving the fiscal 2019 budget and spending levels for government agencies. The normal course of business involves Congress passing a fiscal 2019 budget, which sets spending levels for the 12 appropriations bills. These are the bills that keep the federal government and various agencies funded for the new fiscal year, which begins October 1, 2018. With the state of politics in Washington, increasingly Congress forgoes passing a budget and instead continues current spending levels by packaging most of the 12 bills into one or more large “omnibus” packages for debate and vote. Forgoing a budget also shields Republicans from being on the public record voting for a budget that forecasts growing deficits related to increased spending and the 2017 tax reform legislation. The omnibus packaging process also restricts Members from filing amendments, which facilitates passage of the appropriations bills en masse. Passage usually takes place hours before the federal government is scheduled to shut down.
In addition to government funding, the House Ways and Means Committee passed legislation expanding the availability of Health Savings Accounts (HSA) and doubling the contribution levels. Republicans believe the legislation will expand access to health care and lower costs. The legislation is expected to pass the House floor by mostly party line vote. However, the legislation is not expected to garner the 60 votes needed to pass the Senate.
The Ways and Means Committee is also considering action on tax legislation (called Tax Reform 2.0 by Beltway Insiders). Proposals include making the individual tax rate reductions permanent (currently they expire at the end of 2025), indexing capital gains tax rates for inflation, and expanding savings with a universal Roth savings account. Individual tax rates have been indexed for the cost of living since the Bush tax cuts in 2001, but capital gains continue to suffer from inflation, which yields a tax collection windfall to the government but reduces the value of capital assets over time.
The universal Roth savings account is an idea that has also been around for several years. The current proposal would allow individuals to contribute up to $5,500 annually in an after-tax savings account with no withdrawal restrictions or tax penalties. Similar saving accounts have been tested in Britain and Canada and prove popular. The broad policy objective behind expanding HSAs, indexing capital gains and creating a new tax-free savings account is to exempt more savings and investment from taxation. It is no secret that Republicans would like to move the tax code to a consumption-based tax system. Generally, a consumption-based tax system rewards savings and taxes spending. The Senate is not expected to pass this legislation because it will fall short of the 60 votes needed to avoid a filibuster.
And last, a comment about rare bipartisan legislation that could actually pass the House and Senate before year end. In 2016, the Senate Finance Committee passed by unanimous vote a package of sensible reforms to our complex private retirement system. Most of the provisions are aimed at simplifying and expanding 401(k) plans, especially those offered by smaller employers. The House has not passed companion legislation and is evaluating whether Members are interested in making a deal with the Senate. The House would like to move a package of IRS reforms and the two proposals have been linked in discussions. Horse trading is alive and well in Washington.
Stay tuned for a webinar in early fall sponsored by Boston Private focusing on how the new tax law impacts real estate investing and planning tips to maximize the benefits under the law.
Doug Fisher is Director of Retirement Policy at the American Retirement Association and consults with businesses on Washington Strategies and Planning. In this role, Doug works with the ARA membership and other private companies 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
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