This Week: The House approved legislation to fund several departments and agencies for fiscal year 2020, including Defense, Labor, Health and Human Services, Education, State and Energy. The Senate debated the fiscal year 2020 defense authorization bill and passed a measure that blocks US arms sales to Saudi Arabia and the United Arab Emirates.
Next Week: The House will consider a government funding bill that covers other departments and agencies that were not approved this week. The Senate will vote on a $4.6 billion bill to address the asylum crisis along the southwest border (see below).
Financial Services Issues
Facebook Crypto Pushback. Facebook this week earned a sharp rebuke from senior lawmakers following its announcement of plans to partner with various financial services and technology firms to create a new cryptocurrency-based payments system on its social network. Notably, House Financial Services Committee (HFSC) Chairwoman Maxine Waters (D-CA) called upon the company to stop work on these plans until Congress and regulators can examine relevant issues. There is particular concern about Facebook’s movement into financial services given its issues with data protection and its dominance in social media. Last month, Senate Banking Committee Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) requested information on the company’s data collection and protection practices. The Banking Committee already announced a hearing next month on Facebook’s cryptocurrency plans, and the HFSC will soon follow suit. While cryptocurrencies have fallen into somewhat of a regulatory no man’s land, the scrutiny from the Hill will send regulators scrambling. Indeed, the viability of Facebook’s plans will be determined by how the company navigates a multitude of regulatory pressures and constraints, both in the US and globally. While Congress seems a long way off from a major bill in the digital currency space, these developments may be a further spur to ongoing legislative efforts on data protection.
Other Issues in Play
US-China Trade. An official meeting between President Trump and Chinese President Xi has now been set for next week at the G-20 meetings in Japan. While the meeting is helpful in showing US and Chinese interest in further discussing their trade challenges, no one should be under any illusion that an actual deal will be struck. We have long said the most realistic outcome for next week's meeting is an agreement to merely continue to meet in the future to try to resolve their differences. It still appears to be in both countries' interests to strike a deal, but the two sides aren't anywhere close to identifying common ground on the dozen or so issues that divide them. Somehow they will have to rebuild the negotiations that they abandoned a month ago, and this will not be easy since both have seemingly hardened their negotiating positions over that time. At this point, a deal is no better than a 50-50 proposition, and it will take more time (months) and more pain (new tariff increases) to get there.
Hong Kong Political Unrest. While Washington has taken note of the protests in Hong Kong, it's unlikely Congress or the Trump administration will take any near-term action beyond expressing sympathy for the protesters. Hong Kong's chief executive has shelved plans to impose the extradition law that sparked the protest, but this issue will continue to be a priority for the Chinese government. The US has limited options for action since Hong Kong is a Chinese territory. Further complicating considerations are the nearly 100,000 US citizens living in Hong Kong and the strong presence of many major US companies in the territory. The United Kingdom has a better case for pressing the Chinese since it transferred sovereignty over Hong Kong to China under an agreement 35 years ago that was supposed to provide Hong Kong with autonomy to operate its current social and economic systems until 2047 when China is to assume full control. The protests have put China on the defensive as it prepares for a gathering of G-20 world leaders at the end of this month and continues to defend its trade practices from attacks by the US and others. While the protests in Hong Kong seem to have calmed down for now, China will continue to try to tighten its rule over Hong Kong in the years ahead and this will inevitably cause tension with the US and other nations despite their limited ability to redress their concerns.
SALT Deduction. As most people know, the 2017 tax reform law capped at $10,000 the State and Local Tax (SALT) deduction that taxpayers are allowed to take for the payment of state and local taxes on their federal tax returns. Lawmakers from high-tax states have been on a mission since then to eliminate the new cap without success. The resistance will be on display next week as a House subcommittee will hold a hearing on the topic. This may bring some renewed energy to efforts to lift the cap, but this should not be misinterpreted. Overturning the cap would add an estimated $620 billion of debt and would publicly be derided as benefitting "the rich." Despite the noise you'll hear next week about concerns over the SALT cap, we remain very skeptical of any changes to it in the near future.
Bipartisan Asylum Relief. A Senate committee approved legislation providing $4.6 billion to help deal with the surge of migrants crossing the southwest border seeking asylum. Lawmakers from both parties on the committee embraced the measure, a rare display of bipartisanship and an acknowledgement that a crisis along the southwest border is real. The bill will clear the full Senate next week and then be considered by the House in July. A strong, bipartisan vote in the Senate will put pressure on House Democrats, many of whom are skeptical about any of President Trump's border and immigration policies. Nonetheless, we believe the House will move forward and vote for this bill before it adjourns for a summer recess in August.
Tax Extenders and More. House Ways and Means Committee Chairman Richard Neal (D-MA) advanced a few bills that renew about two dozen tax provisions that expired at the end of 2017 and expands the earned income tax credit (EITC) and the child tax credit (CTC). In total, these modifications to the tax code will cost over $100 billion and should be viewed as the opening salvo in a negotiation with the Senate that likely won't pick up steam until later this year. Senate Republicans are interested in pursuing some of these items but are not enamored with the provisions that don't need to be extended at year's end, such as the sizable expansion of the EITC. A compromise will probably be in the works toward the end of the year that contains the tax extenders, a more modest expansion of the EITC and CTC, and some technical "fixes" to the GOP tax bill that passed 18 months ago.
Supreme Court Activity. The Supreme Court is in the process of announcing various decisions from cases it heard this term, which started last October and ended this April. It also will soon announce the cases it will consider next term and decide by next June. What cases the court will consider could have significant political ramifications since decisions on them will be announced in the midst of what will no doubt be a heated political battle next year between President Trump and the Democratic nominee. Potential cases involving immigration, LGBT rights, abortion and other social issues could trigger widespread support or outrage that may increase voter turnout among some sectors of the public next year. The activity could also play into an assessment by the public about whether the court is too liberal, too conservative or just about right.
The Final Word
Frontrunner Status? With the first Democratic debates occurring next week, a lot has been made of former Vice President Joe Biden's polling leads. While different polls have data about the length of his lead, they all agree that he's the clear frontrunner. The question is, how much do early leads matter? As of today, the Iowa Caucuses are 227 days away, the Democratic National Convention is 388 days away, and the 2020 presidential election is 500 days away. Regardless of how you slice it, that is a lot of time for new issues and circumstances to rise and pose challenges to the candidates. History has proven that early leads don't necessarily translate to victory. In June of 2015, former Florida Governor Jeb Bush was the frontrunner in most 2016 Republican presidential primary election polls, closely followed by then Wisconsin Governor Scott Walker and Senator Marco Rubio (R-FL). Donald Trump had just entered the race on June 16 and consistently polled behind eight other candidates that summer. It wasn't until August, after the first debate, when Trump took a lead in the polls and would only be surpassed once, briefly, in November of that year by Ben Carson. Where candidates stand in the polls currently is not a guaranteed indicator of where they will finish. However, the debates will begin to sort things out as most candidates will rise and fall through their televised performances.