The House passed a newer version of its fifth COVID-19 stimulus bill (see below). The Senate passed a funding bill for government agencies for the new fiscal year that began yesterday, October 1.
The Senate will vote to confirm judicial nominations. The House is scheduled to go out of session, though could be called back depending on the progress of stimulus talks (see below).
Trump and COVID.
Investors typically expect an “October Surprise” in most elections, but voters were not expecting the news that came out this morning that President Trump has tested positive for COVID-19. Clearly, the news will have a major impact on the campaign. Notably, it sidelines the President in the homestretch of the campaign at a time when he appears to be losing in the vast majority of national polls. The President is expected to campaign (and debate) from isolated quarters if he is healthy enough for these activities. But virtual appearances won’t have the same impact at this critical juncture. This development also hurts President Trump by making his administration’s handling of the pandemic as the campaign’s biggest issue. This news is clearly a significant blow to the President, both personally and as a candidate, and our first impression is that it further solidifies a likely win for former Vice President Biden.
The President may call for a rescheduling of the election, but this would require congressional action. House Speaker Nancy Pelosi (D-CA) will certainly not let that happen. Besides, the election has already begun in many states through early voting and mail-in ballots. If President Trump becomes symptomatic and his health worsens, he could transfer power to Vice President Pence under the 25th Amendment, which has occurred in the past when sitting presidents have undergone medical procedures (but never during an active election). Government would continue to function under any potential transfer of power. Theoretically, if the President’s health worsened and forced him to drop out of the race, he would be replaced by another nominee, most likely Vice President Pence. We don’t view any of the above possibilities as likely based on what we know right now, but they will be ongoing topics of speculation.
House COVID-19 Bill.
House Democrats yesterday passed another version of COVID-19 stimulus as a means of putting pressure on the Trump administration and Senate Republicans to come to agreement on a bipartisan measure. The $2.2 trillion bill , which is smaller than a $3.4 trillion bill the lower chamber passed in May, contains provisions that have broad bipartisan support, including further assistance to small businesses, the unemployed and schools facing reopening challenges. However, Republicans objected to several “poison pills” (such as a provision that would curb the ability of states in setting voter identification requirements) and the overall size of the bill. A potential bipartisan agreement, which would need to be smaller and more targeted to get Republican support, is unlikely to be reached before the election.
Airline Workers in the Spotlight.
The stimulus package that passed in March contained $25 billion of federal aid to help airline workers. This aid, which allowed airlines to keep employees on payrolls despite financial challenges due to dramatic cutbacks in passenger flights, expired this week. Some continuation of this assistance is supported by both Democrats and Republicans. An extension was included in the bill passed this week by the House and would be part of any bipartisan agreement. The expiration of funding for employees could be a spark to bring Democrats and Republicans closer to a bipartisan deal. Without any new assistance, US carriers may need to lay off tens of thousands of employees.
Trump is the Wild Card.
House and Senate Democrats are focusing their negotiating efforts not on Senate Republicans but on President Trump via Treasury Secretary Steve Mnuchin. While Senate Republicans are adamant about reducing the cost of the next stimulus bill – perhaps to $1 trillion or lower – it is likely that both the President and the Secretary would accept a deal closer to $2 trillion. They have not embraced this level of funding yet, but questions on the campaign trail about President Trump’s COVID-19 policies may push them in this direction. Such a Pelosi-Trump deal would put many House and Senate Republicans in a quandary as they try to balance their concerns over further deficit spending with their support of the President. We do not view such a grand bargain between the President and the Speaker before the election as likely, but it is possible.
Supreme Court Vacancy.
Supreme Court nominee Amy Coney Barrett began to meet with members of the Senate Judiciary Committee and other senators this week in preparation for her confirmation hearings, which are scheduled to begin on October 12. Those hearings will last most of that week and determine whether she has the continued support of Republican senators to vote for her confirmation in late October. While everything at this point seems to be on track for her ultimate confirmation, her hearings will be very contentious. The media will focus not only on the nominee, but also on the 22 members of the committee, particularly committee chairman Lindsay Graham (R-SC) and vice presidential candidate and Senator Kamala Harris (D-CA). The hearings could hurt or help the re-election chances of several committee members – including Chairman Graham, Senators Thom Tillis (R-NC) and Joni Ernst (R-IA) – that are in very competitive races this year.
During her confirmation hearings in 2017 for a circuit court appointment, Judge Barrett, who is a devout Catholic, faced questions about her religious beliefs. We will no doubt hear more about her religion as her nomination to the Supreme Court is considered. Given the importance of Catholics in American politics, this could have implications for the election. Only one presidential candidate has won since 1972 without carrying a majority of the Catholic vote. The one exception is Al Gore in 2000 (he won the Catholic vote by a 50%-47% margin and also won the popular vote, though narrowly lost the electoral vote). This political clout is magnified by the significance of the Catholic vote in the swing states that often determine which candidate wins the election. Catholics make up a significant percentage of the population in such states as Nevada (25%), Wisconsin (25%), Pennsylvania (24%), New Hampshire (26%), Michigan (18%), Ohio (18%), Iowa (18%) and Florida (21%). Many Catholics are swing voters and may be swayed by Judge Barrett’s performance in the hearings and/or the way in which she is questioned by committee members about her faith.
Trump’s Taxes and Future Tax Legislation.
The news report of President Trump’s past tax payments, accurate or not, caught the attention of many Democratic lawmakers in Washington. At a high level, the development doesn’t change our outlook on tax policy if Democrats sweep the election next month. We still expect higher taxes on high-income individuals, small businesses filing under the individual tax code, corporations, capital gains and estates, among others. However, the Trump story this week puts a sharper focus on certain business tax deductions potentially utilized by Trump to reduce his taxes, including net operating losses (NOLs) and tax provisions relating to real estate, such as depreciation and like kind exchanges. Vice President Biden has already called for an elimination of like kind exchanges. We are more skeptical of major changes to the tax treatment of depreciation allowances, which are generally accepted as a normal part of business. NOLs, which allow profits in one year to be offset by losses in another year, have enjoyed bipartisan support for years but will be in play for possible reform. Earlier this year, some Democrats expressed opposition to the expansion of NOLs in a stimulus package, and the report on President Trump will bring additional scrutiny. If Democrats are in charge next year and advance a tax bill, the Trump report will be used to justify various reforms.
The Final Word
Presidential Debate Watchers.
The first debate between President Trump and former Vice President Joe Biden that took place on Tuesday was highly anticipated by voters. The first debate in 2016 between Trump and Democratic presidential nominee Hillary Clinton was viewed by a record 84 million people. It was anticipated that this week’s debate could set a new record for viewers, but it didn’t come close. An estimated 73 million people watched Tuesday’s debate, likely making it the third most viewed presidential debate of all time. The debate sometimes seemed like a 90-minute bar brawl, and the experience of watching this debate may turn off some viewers from tuning in to the next two debates. This would hurt Trump more than Biden since he needs something – anything – to change the dynamics of this race and reverse Biden’s lead as the clock continues to tick downward.