This and Next Week
The House approved legislation to fund government agencies through December 11. The Senate will pass this same bill next Tuesday, averting a government shutdown at the start of the fiscal year, which begins on October 1 (see below).
Supreme Court Vacancy
The death of Supreme Court Justice Ruth Bader Ginsburg and the resulting vacancy on the Supreme Court give voters yet another issue to ponder as they assess their choices in this year’s elections. The timing of this vacancy ensures that the intense partisan battle in the Senate over President Trump’s nominee (who will be announced tomorrow) will be front-and-center for voters and the media from now through election day. We emphasize a few of the key dynamics surrounding this debate below.
The Senate Process
Once President Trump announces his nominee tomorrow, Senate Judiciary Committee members (11 Republicans, 9 Democrats) will conduct background checks and due diligence on the nominee. The committee also will schedule public hearings to give the nominee a chance to outline her credentials and committee members an opportunity to ask her questions. Clearly, these hearings, which likely will last close to a week, will be very contentious. A vote from committee members would occur after the hearings, presumably the following week. If the committee vote is favorable, the full Senate likely would hold a vote on the nomination the next week. The hearings and vote in committee (and potentially a full Senate vote) will take place in mid-to-late October, though no schedule has been set yet. Republicans have the majority in both committee and the full chamber and are expected to be able to pass this nomination as long as they feel the nominee’s credentials, background and performance at the committee hearings are solid.
A Note on the Nominee
President Trump’s short list of nominees includes judges who currently serve on the circuit court and have already been vetted and approved by the Senate Judiciary Committee and confirmed by the full Senate. The Senate approved the nominations of the two front-runners, Amy Coney Barrett and Barbara Lagoa, to circuit judge appointments over the last three years. Judge Barrett received three Democratic votes, while Judge Lagoa received 27. If either is the nominee, Republicans will cite this recent history as a reason to accelerate the nomination process, while Democrats will counter that the vetting for a position on the Supreme Court is a higher bar. This nomination likely won’t be the fastest Supreme Court nomination approval in modern times, but it will be among the speediest. See the chart for approval times for past judges.
Impact on Presidential Election
We wish we knew for certain. It’s easy to conclude that the bases of both parties are extremely passionate about this development – either positively or negatively. But, they are already engaged in this election in a significant way. Much of the impact of this development may rest with the nominee herself. If she is credible and likeable throughout the process, she may help push the votes of the small number of undecided suburban voters (primarily women who lean toward Biden) toward Trump. If she isn’t effective during the process, those voters will continue to lean to Biden. In a broader sense, Trump needed something to shake up the election dynamics, take the focus off of COVID-19 and make the race a choice between him and Biden. This development may serve that purpose, but it’s too early to know.
The Supreme Court is scheduled to hear oral arguments on new cases in November. If a new justice has been confirmed to the court by that time, she will participate in these sessions. If she is confirmed after these oral arguments, we have been told that it would be customary for her to recuse herself from those cases. One big case to watch is California v Texas, which relates to the future of the Affordable Care Act (“Obamacare”). Plaintiffs in the case will argue for the law’s complete elimination. If that position prevails, some significant plumbing of the US healthcare system would be disrupted, and millions of Americans will lose their health care if no other action is taken to prevent it. The 3.8% net investment income tax that applies to higher-income earners and is used to subsidize the cost of healthcare for others could be eliminated. One election impact would be renewed Democratic charges (used effectively in recent elections) that Republicans are against the law’s popular standard that insurance companies can’t deny coverage to any individual with “pre-existing illnesses.”
Stimulus 4: The Next Stimulus Bill
The effort to pass another COVID-19 relief and stimulus bill took a further step backward this week as the partisan acrimony over the Supreme Court vacancy settled in. This acrimony will only grow over the next month as President Trump’s nomination is considered. There are a few members from both parties working together to identify how a compromise might be crafted, but they are in the clear minority. There is also a group of more moderate House Democrats that are pushing Speaker Nancy Pelosi (D-CA) to accept a bill in the range of $2.2 trillion, which may attract a handful of Republicans and demonstrate Democrats’ desire to pass a bill. It is more likely that serious negotiations around a compromise bill will instead occur after the elections, with the election outcomes determining whether the bill is more modest (as Republicans prefer) or more ambitious (as Democrats prefer). Until then, we shouldn’t expect a final bill anytime soon.
Small Business Lending (PPP) as a Separate Bill
House Republicans are attempting to advance an important part of their proposed stimulus bill as a standalone measure for the full House to vote on. The bill would allow lenders to continue to make loans to small businesses through the popular Paycheck Protection Program (PPP), which is currently expired and has $130 billion of unused funds. The bill would require support from all 198 Republicans plus 20 Democrats (or 19 Democrats plus the one Libertarian member) to force a vote under House rules, which will not be easy in this hyper-partisan environment. Reforms and new funding for the PPP have bipartisan support, but many Democrats may be reluctant to cherry-pick individual provisions from a more comprehensive bill.
Financial Transaction Tax
The economic fallout of the pandemic has left states scrambling to plug their growing budget deficits. New Jersey is no exception and recently considered a financial transaction tax (FTT) as a way to raise revenues. This proposal has been tabled but likely will be revisited in the coming weeks given ongoing budget challenges. A FTT has never received much traction at the federal level, but the consideration of a FTT at the state level has gotten the attention of federal lawmakers and has given new life to the debate in Washington. A national FTT may sidestep concern about the constitutionality of a state-law FTT, which was a major reason why the plan was sidetracked temporarily in New Jersey. However, concerns about the impact on retirement and college savers would still be relevant. It is noteworthy that Democratic Presidential nominee Joe Biden has so far not embraced a FTT. While we still believe a national FTT is unlikely to be enacted, all investors should keep an eye on the debate.
We have received a few questions about Joe Biden’s proposal to alter the tax benefit for retirement savings. Biden’s proposal would eliminate the pre-tax benefit of retirement accounts in favor of a tax credit. Biden believes this would equalize the incentive to save for retirement for all Americans. Under the current system, more affluent Americans receive a larger tax benefit to saving for retirement as they are more likely to make maximum contributions and utilize more of the incentive. As Republicans in Congress advanced the 2017 tax law, they too examined limiting the pre-tax benefit to retirements savings. They eventually relented and never proposed such a change to retirement savings due to the pockets of opposition it generated among investor groups. In a similar manner, we believe this proposal from Biden may be prove too controversial of a change to make anytime soon.
Government Funding and Potential Shutdown
The House has passed and the Senate is on the verge of passing legislation to extend government funding beyond October 1, the start of the new fiscal year. This averts a government shutdown for now but is otherwise more of a punting of the obligation to fund government for a few months rather than a remarkable development. The two chambers will have to again extend government funding by December 11 for the remainder of the fiscal year, when the tiresome threat of a government shutdown will rear its ugly head again.
The Final Word
Reminder for Next Week
The first Trump-Biden debate will occur on Tuesday, September 29, at Case Western Reserve University in Cleveland, Ohio. Start time is 9 pm ET, and the debate will cover six topics across 90 minutes