Washington Weekly: Infrastructure Bill

The Senate confirmed various Biden administration nominees, including Gary Gensler to serve as chairman of the Securities and Exchange Commission. The House approved equal pay legislation and a measure to provide protections to certain health care and social service workers from violence in the workplace.

The Senate will vote on legislation to combat hate crimes against Asian-Americans and on various Biden administration nominees. The House will vote on legislation making Washington, DC the 51st state (see below) and on prohibiting religious discrimination in immigration policy decisions.

Infrastructure Bill. 

The House and Senate will be focused on infrastructure over the next two months as groups of lawmakers try to build bipartisan consensus. However, we don’t see a viable path for a bipartisan bill given the differences between the two parties. Democrats generally want a comprehensive bill that pushes the boundaries on what has traditionally been considered infrastructure, while most Republicans prefer a more targeted (and less expensive) approach. Democrats also plan to use President Biden’s proposed tax increases on businesses as a starting point to help pay for the infrastructure costs, which is a nonstarter for Republicans. As on so many issues, the two parties are stuck in their respective positions with no real desire or political incentive to accommodate the other side. We will hear both sides talk of bipartisanship over the next few weeks, but it won’t be serious.

The Parallel Tax Bill. 

Given that Democrats only have very slim margins of control in the Senate and House, each Democratic lawmaker has significant leverage to alter the details of any legislation. Senator Joe Manchin (D-WV) used this leverage earlier this year to impact the COVID relief bill, and he is doing so again on the developing tax bill. Senator Manchin has indicated that he supports raising the corporate tax rate to 25% (from the current rate of 21%) instead of the 28% rate proposed by the Biden administration. While his statement has changed the dynamics of discussions among Democrats on this issue, we don’t yet consider his proposed 25% rate as determinative. This is because a higher corporate tax rate increase raises significant revenue and it may be more politically palatable than other types of tax increases. As such, the corporate rate could still land at 28% or somewhere just lower. Senator Manchin’s positioning on the corporate tax rate is indicative of the types of demands that we expect to see over the next few months from some other Democrats. The process on tax provisions will be very fluid and things will only be fully settled when President Biden signs a bill into law.

Funding the Government. 

Congress is now beginning the process of setting government funding levels for the next fiscal year (2022), which starts on October 1. This funding constitutes the government’s so-called “discretionary” budget, which covers most of the programs and operations of federal agencies and departments for the year. It does not include funding for federal entitlement programs and payments on the national debt. While President Biden has not submitted a detailed budget yet for this time period, he has sent Congress an outline covering $1.5 trillion. This amount provides an increase of 8.5% over last year’s spending levels. While most federal departments would receive a spending amount of more than 10% from last year’s level, the Department of Defense would have a smaller increase of 2%. Congress will need to pass the funding bill on a bipartisan basis by September 30 or risk a government shutdown. Interestingly, the size of next year’s government funding bill will be smaller than the size of the $1.9 trillion COVID relief bill passed by Congress in March.

Police Reforms. 

Legislation to make various reforms to policing is back in the spotlight. The House will soon pass a comprehensive police reform bill that will target federal law enforcement practices and encourage state and local governments to enact changes at the local level through grant awards and other incentives. The bill would ban racial profiling and the use of chokeholds by law enforcement. It also would update the statute for prosecuting police misconduct, create a national database to track police misconduct, and increase funding for police training. Perhaps the most impactful, and controversial, part of the bill is its limit on “qualified immunity,” which has shielded certain government officials (including police officers) from being sued over actions performed on the job. Reforms in this area would make it easier for individuals to sue police officers for mistreatment. The overall reform measure could attract significant bipartisan support and stand a good chance of passing the Senate (where 60 votes will be needed) if agreement is reached on the qualified immunity section. Senators’ appetite for compromise will determine whether the Senate acts or not.

Statehood for Washington, DC. 

The House plans to vote next week on a measure to make Washington, DC the 51st state in the US. The resolution would retain a much smaller federal city in order to satisfy the constitutional requirement that a federal district still exist. The federal district would only encompass the federal buildings and land in the center of the city, while the remainder of the city would become a new state. Making DC the 51st state has long been a priority of congressional Democratic leaders and President Biden. Under the proposal, the new state would be called “Washington, Douglass Commonwealth” after William Frederick Douglass, who lived in the capital city for over 20 years. In addition to having one representative in the House, the new state also would elect two senators, which would significantly impact the political makeup of the Senate. The amendment is more of a symbolic messaging effort to demonstrate Democrats’ support for residents of Washington, DC. It would not attract the 60 votes necessary to advance in the Senate this year unless the filibuster rules are changed. Such changes are unlikely to happen this year, but will continue to be entertained in a Senate that remains deeply divided along partisan and philosophical grounds.

LIBOR Transition. 

Approximately $223 trillion of financial instruments, ranging from swaps to consumer loans, are priced using a benchmark rate called the London Interbank Offer Rate (LIBOR), which is based upon submissions from banks on how they price loans over different time periods to other banks on an unsecured basis. In part because authorities 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 to cease using it for existing contracts in mid-2023. This could be a challenging transition for a large number of legacy contracts that could impact businesses and consumers alike. The House Financial Services Committee this week held a subcommittee hearing, which featured testimony from a cross-section of financial regulatory agencies, to examine the issue. New York already has signed into law a bill that would provide greater legal certainty on this transition. Congress is looking at federal legislation modeled on the New York law given that many existing contracts aren’t covered under New York law. This is a complex but important issue where Congress could chart a bipartisan path this year.

Mobile Voting? 

Earlier this month, Apple CEO Tim Cook indicated that he would like to work toward a future where Americans would be able to vote in elections from their phone, noting that if a phone is secure enough for banking then it should be secure enough for casting a ballot. In addition to generating a wide range of reactions, the statement likely will focus more attention on what the future of voting might look like. During the 2020 election, a very small subset of voters in Colorado, Utah and West Virginia who were unable to vote in person or by mail, actually used a mobile app called Voatz to cast their ballots. However, most election security experts actually have been urging states to rely more upon paper ballots to enhance election security and therefore were not keen on Cook’s suggestion. It remains to be seen how, and if, methods of alternative voting will evolve, but don’t expect to be able to cast your ballot from your phone in the next election.

Slim Margins. 

The Kentucky state legislature recently passed a bill that changed how the Kentucky governor would fill a US Senate vacancy. Prior to this bill, the governor was able to choose anyone legally eligible to serve, regardless of political party, to fill a vacancy. The new law requires the governor to appoint someone of the same political party as that of the prior Senator. This is particularly notable as both Kentucky Senators (McConnell and Paul) are Republicans, while the governor is a Democrat. While this partisan split is not unique to Kentucky, this effort underscores the delicacy of the current 50-50 Senate arrangement. It also emphasizes the importance of every single Senator where a death or a job-ending scandal could have the effect of flipping the Senate to Republican control virtually overnight. While vacancies in the Senate are not nearly as common as the House, a dozen vacancies have occurred in the Senate since 2000 due to health issues, scandals or death. With 15 of the 50 Democratic Senators representing states with Republican governors, a vacancy in any of those seats could lead to Republicans taking control of the Senate and a completely different policy agenda.