This Week: The House passed legislation to roll back the "Cadillac tax" contained in the Affordable Care Act (Obamacare) (see below), a bill to increase the federal minimum wage (see below) and a resolution condemning President Trump's contentious comments about four members of Congress. The House also rejected a motion to bring impeachment proceedings against President Trump. The Senate confirmed several Trump administration nominees.
Next Week: The House will pass a bill to provide financial relief to various multiemployer pension plans and address ongoing asylum-related issues along the southwest border. The Senate will vote on various nominations, including Mark Esper to serve as Secretary of Defense. It also will take up legislation dealing with a 9/11 fund for first responders (see below). Both the House and Senate may pass a deal on the debt limit and budget caps (see below).
Financial Services Issues
Facebook Firestorm Continues.
Facebook was taken to task this week in hearings on both sides of the Capitol for its plans to partner with various financial services and technology firms to create a new cryptocurrency-based payments system, known as Libra, on its social network. While some members offered qualified praise for Libra's potential to bolster financial inclusion, lawmakers from both parties expressed a wide range of concerns spanning Facebook's credibility, its potential use of Libra users' data, Libra's impact on the dollar as the world's reserve currency, and the application of US laws and regulations (e.g. anti-money-laundering rules) to Libra-based transactions and the system itself. In response to calls for a moratorium on this project, Facebook indicated that it wouldn't move forward until it has addressed regulators' concerns. House Financial Services Committee Chairwoman Maxine Waters (D-CA) has already put forward legislation that would block large tech companies like Facebook from operating digital currencies and from becoming financial services companies. As if all of this wasn't enough, the House Judiciary Committee held a hearing to scrutinize the competitive impact of Facebook and other large technology companies. All of this activity will increase Congressional interest in advancing data privacy legislation, but this remains an uphill climb given differences on federal preemption and other issues.
Other Issues in Play
Budget Deal/Debt Ceiling Extension Likely Next Week.
We expect Congressional leaders and the Trump administration to soon reach a bipartisan deal on the budget and the debt ceiling that will be voted on late next week. Most importantly, with the government set to hit the current debt limit level in September, the final bill will provide enough room for another two years of borrowing. This will allay market fears about a potential default by the US on its debt obligations. The deal will also set discretionary budget parameters for the next two years, which should make it easier for the House and Senate to approve a budget as well as individual spending levels over that time. Democrats will win higher domestic spending from the deal, while Republicans will win higher defense spending. Overall federal spending is expected to rise between 5%-10% depending on the specific program involved as part of this deal. As we have said before with respect to previous budget deals, the budget deficit will be the deal's loser. Despite a generally strong economy, the budget deficit will exceed $1 trillion in fiscal year 2020, which may represent a milestone that the few remaining deficit hawks in Washington can rally around to advocate for deficit reduction.
Earlier this year, the House passed a retirement package with strong bipartisan support. Among its many provisions was an effective elimination of "Stretch IRAs." A Stretch IRA allows the beneficiary of an inherited IRA to take mandatory withdrawals over his or her lifetime, thereby stretching out the benefit over a longer period than if the original holder had cashed out in retirement. By taking distributions over a longer period, the beneficiary is able to benefit from smaller tax consequences, which is why this has become a popular estate planning strategy. The bill would provide some exceptions for certain circumstances, such as when the beneficiary is a spouse, a minor child or has a disability. The legislation containing this provision, known as the SECURE Act, has strong support in the Senate, but is currently being held up for a few issues unrelated to Stretch IRAs. Lawmakers have grown wary of what they perceive to be abuse of Stretch IRAs and have long wanted to make this change in law. We have warned over the past few years that Stretch IRAs were in the cross hairs, and their time may finally run out this fall.
Prescription Drug Price Reforms in Play.
Getting a win on prescription drug pricing reforms has been elusive for Congress and President Trump this session, but an impending Senate bill may offer a pathway to progress. The Senate Finance Committee soon will unveil a bill designed to lower the cost of drugs used in the major Medicare programs. The bill is expected to impose price inflation caps (or other limits) on physician-administered drugs (under Medicare Plan B) and on over-the-counter prescription drugs (Plan D). It could be merged with legislation from a separate committee that would address surprise medical billing, increase transparency on drug prices in the commercial market and promote greater use of generics. The Senate is likely to vote on one or both of these measures in the fall. Successful Senate action would then accelerate consideration of similar bills in the House. Drug pricing legislation still has plenty for hurdles in front of it, but it has a shot at enactment into law and that is more we can say about most legislation these days.
The House overwhelmingly voted this week to repeal the "Cadillac tax." This tax, which is a 40% tax on certain high-cost employer health plans, has never been implemented since its passage back in 2010 as part of Obamacare and is currently suspended until 2022. The tax was an effort to penalize overly generous health plans that encouraged over-usage of the health care system. At the time, it was hailed as a significant "pay-for" to fund the expanded health coverage and benefits provided to many individuals under the new law. Republicans have always opposed this tax and Democrats also have increasingly called for its elimination due to its impact on many health care plans offered to labor unions. This House repeal was not offset and would add $193 billion to the deficit. We believe this tax ultimately will be repealed completely but not until next year (post-election) at the earliest.
Minimum Wage Increase.
The House passed a bill to increase the federal minimum wage from $7.25 to $15 an hour by 2025. Raising the minimum wage has been a top priority for House Democrats for years. Currently, 542,000 workers in the US are paid the federal minimum wage of $7.25, though many more are paid higher minimum wage rates set by their states (29 states have set higher rates than $7.25). In this week's debate, more moderate Democrats expressed concerns about how a higher wage level could lead to job losses in rural communities. In fact, the Congressional Budget Office (CBO) reported last week that the higher rate could eliminate 1.3 million jobs. It also estimated the increase would raise wages for 17 million other workers. All of this may be interesting chatter for the impacted workers and businesses, but the reality is that the bill will not advance further than the House. There isn't sufficient support in the Senate for a raise to $15, but a smaller wage rate – in the ballpark of $8.50 – may be debated. We think this week's House action represents the high mark for the effort to increase the minimum wage and that it will languish going forward.
9/11 Victims Fund.
The House last week passed an extension of the September 11 Victims' Compensation Fund through 2090, a fund to cover the medical expenses for first-responders and victims of the 2001 terrorist attacks in the US. The number of people suffering health problems related to 9/11 has been increasing. There were 10,000 health claims submitted last year and the number of death claims in 2018 was the highest ever and more than the past seven years combined. This rise is due to delayed health problems for first responders exposed to deadly toxins, like asbestos. A Congressional Budget Office (CBO) report estimated that 63% of future claims will be cancer-related. The Victim Compensation Fund is due to expire in December 2020, but the current fund has not been able to keep up with demand and the actual cost of care for survivors. In February of this year, the fund had to reduce payments on current claims by 50% and future claims by 70% due to lack of funding. The House-passed bill would fully fund all medical claims (current and future) from 9/11 survivors through 2090, which the CBO estimates to cost about $10.2 billion in the next decade and billions of dollars more in future years. We expect the Senate to pass this bill next week and put an end to this uncertainty.
The Final Word
Second Quarter Fundraising.
The July 15 campaign finance filing deadline has passed and the amount that each Democratic presidential candidate raised during the second quarter is publicly available. While there were some surprises, like South Bend Mayor Pete Buttigieg leading all candidates with $25 million raised, the numbers were mostly consistent with the candidates’ broader polling. The top polling candidates (Biden, Sanders, Warren, Harris, and Buttigieg) saw their support in the polls translate to their campaign fundraising as they were the only candidates to top $10 million raised in the second quarter. However, as the top campaigns continue to build war chests, the lower-polling candidates have struggled. Former Congressman Beto O'Rourke is a prime example. His $3 million haul in the second quarter did not even match the $6 million he raised in the first 24 hours of his campaign. In all, 11 Democratic candidates for president spent more in the second quarter than they raised, an indication that the window of opportunity is quickly closing for many of these candidates. Strong fundraising does not guarantee success in the primary, but continued weak fundraising will prove that a candidate is not viable.