Washington Weekly: From Four Last Week to One
U.S. Office of Public Policy, 10 December 2021
Both the House and Senate passed legislation to facilitate an increase in the debt ceiling (see below). The House also passed the fiscal year 2022 defense authorization bill (see below), while the Senate voted to repeal President Biden’s vaccine mandate on private businesses with over 100 employees (see below).
Both the House and Senate will pass a debt ceiling increase. The Senate will also pass the defense authorization bill and continue to work on its version of the Build Back Better (BBB) Act (see below).
From Four Last Week to One.
After passing a short-term extension of government funding last week, Congress reduced its year-end priorities from four to three. With positive movement this week, Congress is on track to pass two more of those items next week, a fiscal year 2022 defense authorization bill and an extension of the debt ceiling. Once those final actions occur, the Senate’s consideration of the BBB Act (through the budget reconciliation process) will be the lone remaining priority for the rest of the year.
- Defense Authorization Bill. A revised bill negotiated by a group of House and Senate bipartisan leaders emerged this week and quickly passed the House on Tuesday. The bill is expected to pass the Senate next week. The bill increases defense spending by 5% and provides a 2.7% increase in basic military pay. It also creates a commission to study the US military’s involvement in Afghanistan over the last two decades and its controversial withdrawal this year. Notably, the final bill does not include a proposed requirement for women to register for the draft and a requirement for companies to report ransomware attacks to the federal government. With Senate passage, Congress will have a 60-year streak of approving this important bill.
- Debt Ceiling Resolution in Sight. After multiple weeks of negotiation, Senate Majority Leader Chuck Schumer (D-NY) and Senate Minority Leader Mitch McConnell (R-KY) came to a complicated agreement on how to increase the debt limit. The solution was to combine one-time Senate rule changes to allow for a simple majority vote on the debt ceiling with legislation needed to avert cuts to Medicare. The combined bill was passed by the House and Senate this week, thus paving the way for the Senate to pass an actual increase in the debt ceiling next week. While 14 Republicans joined with Senate Democrats on advancing the process measure, the actual debt ceiling increase will just rely on Senate Democrats (potentially with a tie-breaking vote from Vice President Kamala Harris). Treasury Secretary Janet Yellen had warned Congress to increase the debt ceiling by December 15. The final measure will specify an amount in which the federal debt can be increased (one that will allow total government debt to exceed $30 trillion). Republicans will seize upon that number in political ads attacking Democrats as the “owners” of the expanding federal debt through their ambitious spending bills.
Democrats’ Build Back Better Act.
Senate Democrats also continued efforts to develop their version of the BBB Act. Democrats are working on scaling back the bill’s current level of spending ($1.75 trillion) to address concerns raised by Senator Joe Manchin (D-WV). Other non-budget provisions may need to be jettisoned to meet Senate requirements under budget reconciliation. Overall, we expect most of the changes to alter the scope and size of the bill’s spending rather than its tax provisions. Democrats don’t yet have the 50 votes that are needed to pass the bill, and developing that consensus remains a formidable task. While it’s still possible that Democrats will be able to pass the BBB Act this month, it’s becoming increasingly likely that this effort will be pushed to January. We mention a few provisions that are in jeopardy as the Senate pares the bill back.
- Paid Family Leave. The House-passed bill provides nearly all US workers with up to four weeks of paid family and medical leave, with the amount determined by a worker’s past earnings and annual income. This provision will need to become much more targeted (if not eliminated).
- Electric Vehicle Tax Credit. The House-passed bill provides a $4,500 increase to the current $7,500 tax credit for the purchase of electric vehicles so long as they are made using domestic union labor (an additional $500 credit is provided for vehicles with domestically produced batteries). These provisions will be changed.
- State and Local Tax Deduction (SALT). The House-passed bill expanded the SALT cap from $10,000 to $80,000. As has been well documented in the media, this expanded cap is viewed as too generous in the Senate and will be scaled back. This has been a tough issue to resolve, and we believe a final provision will ultimately target most of the SALT relief to middle-income taxpayers.
- Immigration. The House-passed bill provides provisional work grants for undocumented individuals (allowing them to stay in the US for five years with an option to extend for another five years thereafter) and extends long-term work permits and protections for immigrants considered “essential” workers. These and other immigration provisions likely will need to be removed from the Senate bill.
- Medicare Benefit Expansion. The House bill expands Medicare coverage for hearing-related medical services. Other plans to expand benefits for dental and vision coverage were nixed in the House bill. We believe the expanded hearing coverage under Medicare is also in peril in the Senate bill.
White House Vaccine Mandate.
In a bipartisan vote, the Senate voted to reject President Biden’s vaccine mandate on businesses with over 100 employees. Two Democrats sided with all Republicans to pass the measure. The victory is short-lived, however. House Speaker Nancy Pelosi (D-CA) has indicated she won’t schedule a vote on the bill and it is unlikely that a few Democrats would defy her by joining with Republicans in forcing a vote on the measure. Even if that happened and the measure passed the House, President Biden would veto it. The President’s vaccine mandate will instead be determined by the courts. The mandate, which is scheduled to go into effect on January 4, remains in limbo after a federal appeals court temporarily blocked it late last month. We don’t know what the court ultimately will decide, but this mandate is a major component of President Biden’s response to the evolving pandemic and a rejection of it would be a big deal.
The House Financial Services Committee this week held a hearing on digital assets featuring executives of various cryptocurrency firms. Depending on their structure, digital assets, which are underpinned by digital ledger technology, can be securities, currencies, or commodities, with regulatory jurisdiction split (often unclearly) between different federal and state authorities. Digital assets include cryptocurrencies held on decentralized crypto networks and stablecoins, which are issued by private entities but backed by other assets (including fiat currencies like the dollar). SEC Chair Gary Gensler has expressed concerns about the lack of investor protection on crypto trading platforms and has called on these platforms to register with the SEC. Industry executives were critical of the SEC’s approach, with some calling for the creation of a new federal regulator. Republicans shared the industry’s concerns about impeding innovation, while Democrats generally took a more skeptical stance. A group of regulators last month issued a report that called for stablecoin issuers to be regulated as banks. Congress faces a steep learning curve and emerging partisan divisions on these issues, meaning that regulators will need to grapple with new digital asset products using their existing authorities.
At the end of last year, approximately $223 trillion of financial instruments, ranging from swaps to consumer loans, were priced using a benchmark rate called the London Interbank Offer Rate (LIBOR), which is based upon submissions from banks on how they would price loans over different time periods to other banks on an unsecured basis. Because regulators want a reference rate based upon actual transactions, the ubiquitous LIBOR is going away. Regulators have directed banks to not use LIBOR on new contracts by the end of the year and cease using it for existing contracts in mid-2023. This will be a challenging transition for a large number of legacy contracts, which will impact businesses and consumers alike. In response, the House this week overwhelmingly passed a bill that would provide greater legal certainty on this transition. With this strong show of support in the House, lawmakers are hopeful that the bill can become law in the coming months.
The Last Word
The Last Word
The 2022 elections are less than a year away and most of the attention has understandably been focused on which party will emerge with a majority in Congress. However, there are also 36 gubernatorial contests next November. We were reminded of this as news came out of Georgia that Stacey Abrams would run again for governor next year against either incumbent Brian Kemp (who defeated her three years ago) or former US Senator David Perdue. This will likely be the most-watched gubernatorial race in the nation. This race is a reminder that who is sitting in the governor’s mansion can have as much, if not more, impact on a state than which party controls Washington. The majority of governors up for reelection in 2022 were last elected in 2018, a heavily Democratic year. As such, there will be a number of Democratic governors up for election from competitive states. If the 2022 vote has a similar shift as the elections last month in New Jersey and Virginia (a 10-point swing to Republicans compared to 2020), there are eight states with Democratic governors (KS, ME, MI, MN, NV, OR, PA and WI) who are potentially vulnerable next year. When all is said and done, the current balance of 28 Republican governors and 22 Democratic governors could be significantly altered.