US Politics and Policies Implications of a potential rematch

Thus far, a bipartisan compromise on defense funding and foreign aid has proven elusive. We believe a compromise will be reached by the end of March that will provide for higher spending in the next fiscal year. Both candidates are expected to support aid for Israel, but more stringent conditions may be attached to future aid. Military assistance for Ukraine has become a more contentious issue, and a Trump administration would be more likely to encourage a negotiated settlement to the conflict.

The two candidates are expected to highlight their alternative approaches to energy policy. A Trump administration would be expected to advocate forcefully for a reduction in expenditures related to the Inflation Reduction Act (IRA). A unified government under GOP control would be necessary for this to occur and might still encounter opposition. A Trump administration would likely remove barriers to fossil fuel development. The key issue to watch during 2024 will be oil prices due to a potentially broader conflict in the Middle East. 

The outcome of the election will affect regulatory policy, but Congress is set to encounter difficulty passing substantive legislation regardless of who is elected president. We would expect a Biden administration to impose more stringent rules and interpret regulations that increase the cost of compliance for banks. A Trump administration would be more likely to support some deregulation and tailoring of existing rules and regulations that could simplify the oversight of banks and lower compliance costs. 

Healthcare policy will likely have a lower profile in this election. We expect President Biden to claim credit for authorizing Medicare to negotiate some pharmaceutical prices. However, we do not expect additional drug pricing proposals to gain much traction in a closely divided Congress. Republicans are unlikely to sponsor major healthcare policy initiatives and appear to have little appetite to roll back the IRA’s drug pricing provisions, but will likely focus attention on rising healthcare costs.

As the next Congress reconvenes in January 2025, both parties will be focused on passing a major tax bill. We expect all federal tax expenditures—including municipal tax exemption—to be actively debated, but substantive changes to tax exemption appear unlikely. Public interest groups are advocating for a change to the Internal Revenue Code that would permit advance refundings. We believe this is unlikely in a Republican scenario but remains a possibility in a Democratic sweep or a divided government.

Section 1031 now applies only to exchanges of real property. Exchanges of personal or intangible property are no longer exempt from treatment as a gain or loss under the Internal Revenue Code. We place a low probability on the restoration of personal or intangible property as eligible exchanges for 1031 treatment. Previous Democratic administrations have discussed further limitations on 1031 exchanges, but the probability of substantive restriction in a closely divided Congress is low. 

Technology policy has been front and center in both domestic policy and international relations for the past five years. The four pivotal issues for the two presidential candidates are: 1) the perception of disproportionate market power of large technology companies; 2) the impact of mergers and acquisitions by large technology companies on competitive practices; 3) bilateral relations with China; and 4) the risks, threats, and opportunities of artificial intelligence. Of these, the campaign will probably focus most intensely on the third.

Management of the growing federal deficit is now top of mind for many members of Congress. Republicans are likely to focus on reductions to domestic policy programs, while Democrats will likely focus on raising new revenue to support existing programs. A unified government under either party would result in policies aligned with those priorities. A divided government would result in only incremental changes that might slow the rate of growth but not reverse the size of the deficit.

Congress will address a variety of expiring personal tax provisions after the election. We believe an increase in the limitation to the state and local tax deduction is probable, but a return to an unlimited deduction is more problematic because it would result in foregone revenue to the federal government, thereby raising the deficit. The top marginal tax rate is scheduled to revert to 39.6% in 2026. A unified Democratic government will likely target lower income levels for relief. A unified government under GOP control would seek to make the existing rates permanent.

The federal estate tax exemption will be cut in half in 2026, adjusted for inflation, due to the sunset provision in the Tax Cuts and Jobs Act. We expect a spirited debate over whether to adjust the exemption higher, but the outcome will depend on the election results.

Immigration and border protection has become a contentious campaign issue. Republican candidates are likely to focus on the threat to national security from a porous border. Democrats will likely focus on the GOP’s unwillingness to strike a legislative compromise. At present, it is unclear whether a legislative compromise will be reached prior to the election.

A negotiated outcome that allows the US to resume military assistance to Ukraine and Israel is proving more elusive than expected, but we still anticipate a compromise over increased military aid, subject to some conditions. 

Global trade relationships will be front and center in the next administration. A second Biden administration will likely pursue the “high fence, small yard” policy, whereby the most advanced technology is highly restricted, but trade in less sensitive consumer items is less affected. A Trump administration is more likely to implement trade restrictions and impose broad tariffs on national security grounds to leverage concessions from global trading partners.