Any policy responses to the SVB fallout likely will be in the regulatory domain after the Federal Reserve completes its own internal review by May, says the UBS Office of Public Policy. (ddp)

SVB fallout. Earlier this week we issued a special report on the policy implications of the SVB collapse that can be accessed here. Treasury Secretary Janet Yellen testified in the Senate yesterday and was more circumspect about the SVB failure than some progressive Democrats who quickly introduced legislation to repeal regulatory relief for regional banks that Congress passed in 2018. Senate Leader Majority Leader Chuck Schumer (D-NY) has called for a bipartisan legislative response, but that is unlikely to get off the ground with Congress potentially divided on the causes of the collapse (lapses in basic risk management and supervisory practices versus regulatory relief). Instead, any policy responses likely will be in the regulatory domain after the Federal Reserve completes its own internal review by May.

Jockeying on the debt ceiling. At this point, it looks like each party has set an extreme negotiating position on deficit reduction measures as part of the ongoing standoff over the extension of the debt ceiling. On the Democratic side, President Biden’s proposed 2024 budget raises taxes on wealthier Americans and businesses to provide nearly $3 trillion in deficit reduction over ten years. Meanwhile, the conservative House Freedom Caucus last week touted a plan of nearly $3 trillion of wide-ranging federal spending cuts. The amounts of deficit reduction in both plans are likely exaggerated, and frankly, neither plan will be adopted. But, they represent starting points. Now it is up to other lawmakers to identify ways to achieve deficit reduction in a way that can attract bipartisan support. The Treasury next month will indicate its expectation of the “X-date”(the date when the government runs out of room to maneuver with extraordinary measures and can no longer meet all of its obligations), and that announcement will add some urgency to identify more specific deficit reduction measures that could be rallied around to break the impending debt ceiling impasse.

IRS funding. Republicans are crying foul that President Biden’s proposed 2024 budget calls for an additional $30 billion in funding for the Internal Revenue Service (IRS). This is on the heels of the nearly $80 billion in IRS funding that the Inflation Reduction Act provided last year. About half of that $80 billion is intended for enforcement, which is a pleasant way of saying expanded audits on taxpayers. The new request for $30 billion would be used to continue expanded IRS enforcement measures. Republicans will not accept this and seek to repeal the $80 billion that has already been approved. The disagreement over IRS funding could be addressed as part of the budget negotiations to unlock the current debt ceiling stalemate in the coming months. Republicans may be successful at chipping away some of the funding but are unlikely to repeal all of it. The short story is that we still expect increased audit rates for higher income Americans over the next couple of years.

Retirement account cap? Now that the dust is settling from the release of President Biden’s budget proposal, we are looking past the headlines and into some of the details that may have been overlooked. One that caught our attention was a part of the “Build Back Better” initiative that was not enacted into law. It essentially would put limitations on retirement accounts. The President’s proposal has multiple components to it, including forced distributions for retirement accounts over $10 million and reporting by plan administrators to the Treasury on accounts with balances that exceed $2.5 million. While these proposals won’t be enacted this year or next, it demonstrates the commitment the Biden administration and some key lawmakers have to address the size and contents of retirement accounts to generate new tax revenue. This issue does not seem to be going away and may come back into play in 2025 depending on which party wins the elections.

Third-party viability. Every few years, the idea of a viable third-party presidential candidate seems to gain traction in the media, though the last competitive third-party presidential candidacy was nearly 30 years ago. While third parties over the years have influenced elections primarily by siphoning off a portion of the vote from one party or the other, they haven’t been able to overcome the structural obstacles of modern politics to become a mainstay in elections. Two developments in this election cycle have presented interesting third-party opportunities. First, Senator Kyrsten Sinema’s (AZ) change of party affiliation from Democrat to Independent might be the best chance for a third-party candidate to win a Senate election featuring both a Democrat and Republican in recent memory. Second, the politically moderate group No Labels, which has attempted to draft Senator Joe Manchin (D-WV) to run as a moderate third-party option under a “unity ticket,” has qualified to be on the ballot in several states, including Arizona. It will still be an uphill battle for third-party candidates, and Arizona voters will play an outsized role in determining their chances for success next year.

For more, read Washington Weekly 17 March 2023.