Three 2020 Election Outcomes
What to watch from tax and business perspectives
Of course, it's too early in the upcoming general election to pick winners but it's not too early to consider how various election outcomes may impact your business and taxes. All elections inevitably lead to a host of important policy changes. For example, the 2016 election saw the Republicans capturing the White House and running Congress which provided the perfect political platform for enacting far-reaching and impactful policy changes in areas like taxes, health care, government spending, and business regulations. In 2017 Congressional Republicans passed the Tax Cuts and Jobs Act and the White House continues to pursue an aggressive deregulatory agenda. Likewise, in 2009-10, President Obama and the Democrats enjoyed a majority in both Houses of Congress. The Affordable Care Act is the big policy change that emerged from that Congress.
The 2020 election will usher in significant policy changes to laws and regulations impacting taxes and business. There are 435 members of Congress up for election and 12 Democratic and 23 Republican Senators seeking election. Also, the White House is up for grabs. It doesn't take a landslide election, although it could happen, to bring big changes in taxation and how businesses are regulated.
Peering into the 2020 election looking glass, I see two new outcomes and one status quo.
A. Democrats capture the White House and Congress remains split.
B. Democrats capture the White House and Congress
C. Republicans hold the White House and Congress remains split (current scenario)
Scenario C is the status quo, and we have a good sense of how this will play out. For that reason, I'm focusing on scenarios A and B. Inside the beltway experts predict that Congress will most likely remain split with the Democrats controlling the House and Republicans hold a slim majority in the Senate. The 2020 election on its face does not favor Senate Republicans because they have to defend twice as many seats as Democrats. However, as I noted in an earlier article, the 23 open Republican seats are in mostly "red" or traditionally Republican states. This provides an easier road for Republicans to maintain the Senate. Control of the Senate and the White House are the most important factors in predicting legislative outcomes. The buck stops in the Senate by design.
What to look for under scenario A; Democrats capture the White House and Congress remains split.
Under this scenario, the most significant policy changes will come in the form of new tax and business regulations. I'm less concerned about big legislative changes because Senate Republicans will maintain tight control of the legislative agenda. This is a recipe for legislative gridlock on most big policy issues except for a handful of bills that keep the federal government running.
However, look for the biggest changes to occur through regulations. We tend to forget that the White House appoints the agency heads who in turn appoint the regulators. I could see changes in the following tax and business regulations under a Democratic administration.
- An immediate halt to President Trump's two for one deregulation agenda. President Trump issued Executive Order 13,771, which imposed a regulatory budget constraint on executive agencies and required them to remove two regulations for every new significant regulation they adopted.
- Expansion of the H-1B guest worker program to relieve the worker shortage problem in many industries.
- Rewrite of the Department of Labor's fiduciary investment advice rule. This regulation required broker-dealers who provide investment advice on retirement accounts to act in a fiduciary capacity. This rule by the Department of Labor under the Obama administration was struck down by a federal court in 2018
- House proposals to increase corporate and individual tax rates on the highest earners. House Democrats will likely propose increasing the corporate tax rate and the special tax deduction for pass-through businesses to pre-2018 levels (before passage of the Tax Cuts and Jobs Act of 2017.). Also, they will push for a special tax rate on the "uber" wealthy. However, It is unlikely a Republican-led Senate will go along with all of these tax increases.
- Regulators softening the bite of the "SALT" provision in the Tax Cuts and Jobs Act of 2019 with some form of taxpayer-friendly workaround. This provision limits the deduction of state and local taxes to $10,000 annually. The provision is especially burdensome to the high cost of living states.
- Reinstatement of pre-2017 Occupational Safety and Health Administration Rules that have been delayed or repealed by the Trump administration. For example, a Democratic administration would reinstate regulations providing a longer period for OSHA regulators to cite employers for lax reporting of workplace injury and illness record keeping. This is a hot button issue for small businesses.
What to look for under scenario B: Democrats capture the White House and Congress.
This scenario brings the most sweeping changes to taxation and business regulations. In addition to the regulatory changes mentioned above, I expect legislative action on several key business and tax areas including:
- Rollback of the personal and corporate tax rate cuts for highest income earners to pre-Tax Cuts and Jobs Act levels. The top individual tax rate would likely rise from 37% to at least 39.6% if the proposal passes.
- Early repeal of the estate and gift tax exemption which was doubled to $11.4 million in the Tax Cuts and Jobs Act of 2017.
- An increase in the capital gains tax rate which is currently 20% for top earners. Senator Ron Wyden (D-OR) introduced a bill in September that would tax the incremental gains in capital assets annually. Right now, it is more of a political statement than policy change. The election could change that.
- Reinstatement of the tax on the failure to obtain health care coverage under the Affordable Care Act.
- Federal government loans to aid underfunded multi-employer union pension plans.
- Legislative repeal of the SALT mentioned above.
- A significant increase in spending with an emphasis on domestic programs and a reduction in defense spending.
- Climate change legislation including emission controls.
- Immigration reforms which are likely to impact the supply of labor.
Well before the election, Congress and the President must reach a budget deal before October 1, 2019 otherwise the federal government closes again. Gun control, drug pricing, border protection, and defense spending are some of the big-ticket items on a crowded fall agenda. Other than the budget, it is very unclear whether any of these get done before year-end. Party leaders may decide these make better campaign issues than near-term solutions.
As always, we will let you know what we see as our election looking glass becomes clearer in the coming months. In the meantime, do not hesitate to contact your Boston Private Wealth Advisor with any financial planning considerations you may have.
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. Doug provides strategic insight into the political and policy developments in Washington which impact the wealth management business. Advising wealth management clients on business, tax, and retirement issues, he helps firms and their clients understand the legislative and regulatory landscape and how to maximize business opportunities.
Doug served as tax counsel to the U.S. Senate Finance Committee and led the development of the Roth IRA, Simple retirement plan, the health savings account, and the 529 college savings plan. He co-authored the Small Business Jobs Protection Act, the Balanced Budget Act of 1997 and the Health Insurance Portability and Accountability Act.
After serving on the Senate Finance Committee, Doug led Fidelity Investments’ federal government relations and public policy teams. During that time, he focused on financial services, tax, retirement, and health care policy impacting Fidelity and its clients.
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The opinions expressed and information contained in any article published in the Vault are given in good faith and considered reliable. However, such opinions and information are subject to change without notice and are provided only as of the date issued. Neither Boston Private nor its affiliates warrant the completeness or accuracy of such information. Any third-party opinion is solely the opinion of its author and does not necessarily reflect the opinion of Boston Private or its affiliates. The materials on this website are for informational purposes only and do not take into account your particular investment objective, financial situation or need. Since each client's situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.
The opinions expressed and information contained in any article published in the Vault are given in good faith and considered reliable. However, such opinions and information are subject to change without notice and are provided only as of the date issued. Neither Boston Private nor its affiliates warrant the completeness or accuracy of such information. Any third-party opinion is solely the opinion of its author and does not necessarily reflect the opinion of Boston Private or its affiliates. The materials on this website are for informational purposes only and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.