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ElectionWatch: 2022 US midterm elections

We sat down for an interview with John Savercool, Head of the UBS US Office of Public Policy, and Jeb Hensarling, Executive Vice Chairman, UBS Americas. Below is an excerpt of that conversation.

Interview transcript

President Biden’s Build Back Better plan has been stalled in Congress for months. John, will the bill have to be modified in scope for any chance of enactment?

John: Well, Democrats in the Senate will certainly try to revive a version of Build Back Better. As originally drafted, the House bill was sized at a little under USD 2 trillion, but it will have to be scaled back a bit to have any chance of passage in the Senate. Much will depend on the positions taken by Senator Joe Manchin (D-WV) in an evenly divided Senate. Any one Democrat can oppose the bill, and Manchin has shown an inclination to oppose provisions with which he disagrees. Manchin will be actively involved in writing whatever bill comes to the Senate for a vote and may demand some deficit-reduction provisions.

Jeb: I’m glad you asked the question because many clients prior to the holidays saw headlines along the lines of Joe Manchin as the Grinch who stole Christmas. As John has pointed out, this bill is not necessarily dead, but it will be dramatically different in all probability than the version originally presented. When it comes to domestic policy, I would characterize Senator Manchin as just as influential as the president of the United States.

Senator Manchin has said he’s willing to do something on prescription drug pricing and something on climate change, most likely in the form of subsidies. Deficit reduction is an important issue for him. A tax package is not necessarily off the table, but it’s hard to legislate in an election year. The thin majorities pose bandwidth problems for the Democratic leadership. There are also “time clock” problems, with so many issues demanding attention within the confines of a limited legislative calendar.

John: Many Democrats desperately do want to pass another signature piece of legislation, which they can take to the electorate, so there is still an incentive to get this done. But it’s all in Manchin’s hands. And then the question is, will everybody agree with what he decides to do? I would say the probabilities are dropping, with a 40% probability of something passing.

Jeb: I’d put the odds at about one out of three, maybe one out of four. Those probabilities start to go down given the amount of time being dedicated to the Russian invasion of Ukraine. There’s still a huge incentive to get this done going into the midterms. Democrats need something to show their political base. If there’s something in there for climate change, progressives may agree to support it. They don’t want to end up completely empty-handed in November.

If Senator Manchin remains focused on deficit reduction, what is the likelihood that we might see some renewed interest in other changes to the Internal Revenue Code related to personal income?

Jeb: I would say very doubtful. Kyrsten Sinema (D-AZ) is a name that you have not heard in quite some time. She took withering political fire when she registered her opposition to the original tax plan and substituted her own. I served with her. She was a member of the House before being elected to the Senate. She works on a bipartisan basis and doesn’t mind crossing her party leadership. And she certainly doesn’t like being told what to do. That’s my impression. And because of that, I would say there is a strong probability that any tax bill will not deviate too much from her own version.

John: I haven’t heard of any Democratic senators say they oppose the tax provisions, since Sinema did all the heavy lifting. The comprehensive tax increase, which was initially discussed, is no longer on the table. Democrats appear to have fallen back and seem to have acquiesced to Sinema’s view. That likely means no changes to capital gains taxes. But there is still a proposal to increase the tax on income over USD 10 million year with a 5% surcharge, and another surcharge on income over USD 25 million. So, while it might not affect most Americans, it’s still a significant increase in taxes.

Companies are going to have some new tax burdens by virtue of a 15% minimum corporate tax, so their ability to take deductions will be sharply curtailed. We should remember that there still are some significant tax increases embedded in the bill. It just doesn’t compare to what was present, initially. I don’t expect you will see any of the provisions that unnerve many of our clients, such as the removal of stepped-up basis for capital gains or the IRS reporting provisions.

Energy policy remains a contentious issue. One side of the aisle is focused on the transition to renewables, while the other side is more sympathetic to the need for traditional fuel sources to satisfy immediate demand. How does Congress deal with those two competing priorities?

Jeb: Well, when it comes to energy policy in this Congress, it’s all in Joe Manchin’s hands. At this point, he has broadly signaled that he is willing to support some subsidies for renewables, perhaps around solar and wind and electric vehicle battery technology. So, there could be some energy legislation that comes out of this Congress. Otherwise, as you point out, it tends to be a strong dividing line. Republicans refer to their approach “as all of the above”—renewables and carbon-based energy. For Democrats, dealing with global climate change is just a very foundational principle. There is a limited amount of common ground there. I don’t believe that the Russian invasion of Ukraine has changed that calculus. Again, we’re in late March of an election year, at a time when Republicans believe they have an excellent chance of taking control of the House of Representatives. They are not highly motivated to negotiate with Democrats on energy issues.

Does President Biden follow the lead of Bill Clinton and begin negotiating more with the other party after the midterms? Will Biden’s administration be willing to reconsider permits for pipelines, energy extraction on federal land, and the reproposed methane capture rule as we transition to a carbon-free energy future? Are they willing to do so for the purposes of national defense? Germany has already pivoted and is now trying to invest in major LNG facilities. Most of Europe is now trying to wean their way off Russian gas. I certainly think that there is a case to be made that you could see legislation geared towards the production of LNG once we get past the midterm elections.

John: I think you’ll see great public debate around this question over the next year or year-and-a-half, but not much forward movement. I’m a bit less confident that President Biden will pivot to a more carbon energy-friendly policy. The climate change agenda is just too strongly embedded in his party, so LNG exports and drilling on public land will be problematic for this administration. The president might be willing to make some accommodations, if our European allies require US energy sources as a replacement for Russian oil, but it will be around the edges.

Jeb: The president is sitting in the driver seat on energy policy. There are certain sectors of the economy where a lot of legislative power has been yielded from Congress to the executive branch, and certainly the energy sector is one of those.

The bilateral relationship between the US and China has become more contentious in recent years. What are the implications in terms of trade, tariffs, and export controls?

John: China’s embrace of Russia certainly poses a challenge for US-China relations. In the context of the Russian invasion of Ukraine, China will need to consider how it wants to be perceived by the rest of the world. Regardless of how China positions itself vis-à-vis Ukraine, I think that the genie is out of the bottle regarding the relationship between the US and China.

I suspect that US-China relations are going to be very tough and will need to be handled very delicately for many, many years. Provided the two share the same global ambitions and remain highly competitive in the industries of the future, I believe the relationship will remain very cool and may become even more contentious.

Jeb: Well, there are few bipartisan issues in Washington. We’ve touched upon one: support for Ukraine. The second is a palpable distrust of China. Unless China was able to do something dramatic, such as facilitating a Russian withdrawal from Ukraine, both parties are likely to retain a more adversarial posture.

President Trump’s use of trade sanctions was a pivotal moment, which was followed by COVID-19. We’ve seen renewed efforts here in the States to improve the resilience of the pharmaceutical supply chain by reshoring production. Greater controls over exports and foreign direct investment may be on the horizon. I believe there is a good chance that China will find ways to assist Russia in evading sanctions, and that will cause the relationship to go from bad to worse and accelerate trends that we already see today.

There are two bills in Congress right now that address the bilateral relationship directly: the Innovation and Competition Act (USICA) in the Senate and the COMPETES Act in the House. What are the principal differences, and are Republicans and Democrats prepared to strike a compromise?

Jeb: USICA enjoyed strong bipartisan support, whereas the COMPETES bill was passed on a straight party-line vote in the House. Republicans would argue that the House bill included an array of unrelated climate change provisions. So, unless Speaker Pelosi and the Democratic leadership decide to delete those provisions, I am skeptical the bill will land on the president’s desk in this Congress.

John: A political compromise is still possible, but there are many provisions in the House bill that just won’t fly in the Senate. A lot of lawmakers really want to see some progress on this legislation, and some of it is very important. Investment in research and development, for example, and provisions to enhance semiconductor production here in the US are popular with legislators. My sense is that there is still a chance that the speaker drops those provisions that are anathema to the GOP. As Jeb mentioned, some of these disagreements are tough to resolve. But with that said, I’m a little more optimistic that something could get done.

History tells us that the party of the incumbent president tends to perform poorly in midterm elections. So where does that leave the two political parties as they assess their chances in November?

John: The president’s party usually loses seats in a midterm election in the House. In fact, the president’s party has only gained seats on three occasions in the last 100 years. It’s just an amazing statistic. This year shouldn’t be any different, and the trend will continue. We expect the House of Representatives to flip to GOP control. Republicans only need to win a couple of seats to get a majority, but it now appears that they could gain as many as 20 to 30 seats. It’s still too early to tell whether this will be a “wave” election, which would trigger the loss of even more seats.

The Senate is a little trickier. As we all know, it’s evenly divided today. A handful of Senate Republicans in competitive seats are retiring, including those from Pennsylvania, Ohio, North Carolina and Missouri, and it’s very possible that Democrats could pick up a seat or two from these states that would allow them to keep their very narrow majority.

I would say right now that the Senate will stay where it is and remain evenly divided unless Biden’s problems get a lot worse than what we see right now. I expect you’ll see at least one chamber flip to Republican control. Both chambers could flip, but that’s tougher to predict at this point.

The reality is that both parties are in bad shape, and Republicans are not going to win this election because of anything they did. It’s more likely that Democrats will lose it because independent voters are not happy with Joe Biden. Hopefully, one day we’ll be in a position where we can say that one party earned their majority, rather than just being the default option as control swings back and forth.

Jeb: John’s analysis is spot on. The Democrats are facing strong political headwinds. Please take my word for it: If you’re running in the House, your fortunes are closely tied to your president’s approval rating. No matter what you do in your district. President Biden typically polls anywhere from the high 30s to the low 40s. And then if you look at some other polling questions that are bellwethers about where an election is headed, the news is not good for the current majority party in the House.

I’ve seen polling data that says 70% of the respondents believe that America is on the wrong track. What we call the “generic ballot question” is another important indicator of voter sentiment: If the election were held today, would you vote for a Democrat or a Republican for Congress? That type of question usually results in a three- to four-point Democratic advantage. Today, those numbers are reversed. The latest numbers I saw showed about a four-point advantage for Republicans.

This is also a reapportionment year. Few people will be shocked to learn that Democrats draw congressional districts to benefit Democrats. Republicans, of course, do the same thing. Republicans currently control more map-drawing pens than Democrats. So, unless you really see a huge “rally round the flag” kind of moment, a Russian retreat from Ukraine, or an abrupt decline in inflation between now and Election Day, Republicans will hold on to their advantage—unless, of course, the GOP finds a way to snatch defeat from the clutches of victory. Internecine squabbles can undermine political campaigns quickly.

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