Washington Weekly: Infrastructure Still on Two Tracks This Month

The Senate confirmed various Biden administration nominees and blocked a procedural motion to begin debate on the still-unfinished bipartisan infrastructure bill (see below). It also passed a House-passed bill to expand funding for the Crime Victims Fund, which President Biden signed into law yesterday. The House passed a bill to restore the Federal Trade Commission’s authority for consumer protection and to seek restitution for antitrust violations, a bill to improve access to immigration visas for certain Afghan allies and a bill to require the Environmental Protection Agency to regulate and mitigate pollution from certain toxic chemicals in air, water and consumer products.

The Senate will vote on various Biden administration nominees and continue its work on an infrastructure package, including a likely second procedural vote. The House will consider a “minibus” package consisting of seven of the twelve Fiscal Year 2022 appropriations bills.

Infrastructure Still on Two Tracks This Month. 

The Senate on Wednesday was unable to clear a procedural motion to proceed toward consideration of a $1.2 trillion bipartisan infrastructure bill because the details of this measure are still being negotiated.  While the bipartisan negotiations have been difficult and time-consuming, we think a final agreement will be reached soon.  Due to the objections of Republicans Senators, the bipartisan bill will no longer include a controversial provision to give the IRS more resources to raise tax revenues by conducting more audits.  Its elimination has left lawmakers scrambling for alternative sources of funding and complicated negotiations this week.  We expect Democrats instead to use this provision to help fund the partisan social spending bill discussed below.  Despite the slow progress, we still believe the Senate will pass the bipartisan infrastructure bill over the next two weeks before proceeding to the budget resolution.        

The $3.5 Trillion Budget Resolution. 

This resolution, which will tee up a vote on a broader social spending package in the fall, will be ready for consideration once the Senate passes the bipartisan infrastructure bill.  While the schedule is fluid, we expect the Senate to vote on the budget resolution during the first or second week of August (depending on how long it takes to pass the bipartisan package).  In the unlikely event that the bipartisan bill were to fail, we would expect Senate Democrats to absorb the roughly $1.2 trillion of physical infrastructure spending in that bill into the budget resolution.  The budget resolution is a necessary prerequisite for Senate Democrats to pass a large package of spending and tax increases with only a majority vote under a process called reconciliation (since most other legislation faces  a procedural hurdle of 60 votes).  Democrats hope to introduce the reconciliation bill that will include all of the tax and spending details in September and pass it in the House and Senate the following month. 

Capital Gains Tax.

In a public interview last week, Treasury Secretary Janet Yellen indicated that the Biden administration is seeking to raise the capital gains tax on individuals earning over $400,000 annually. Given that the Biden administration had previously proposed increasing capital gains taxes on individuals making over $1 million per year, this may have been a slip of the tongue though the White House made no statement to clarify or correct the Secretary’s comments. Keep in mind that President Biden’s main campaign pledge on taxes was that he opposes tax increases on those with incomes less than $400,000. As Democrats in Congress work on a tax bill and find that they need more revenue for spending priorities, they may seek to lower the proposed $1 million threshold. Investors should be aware that the tax bill may have an increase in taxes on capital gains that captures more people than the current proposal.

Cap on Retirement Accounts?

Reports recently surfaced about a well-known investor who has a $5 billion Roth individual retirement account, the growth of which was apparently fueled by holdings of private investments. This situation has prompted some Democrats to renew calls for legislation to prevent what they view as exploitation of tax-free retirement vehicles. Senate Finance Committee Chairman Ron Wyden (D-OR) introduced legislation five years ago to limit account balances to a maximum of $5 million, while the Obama administration floated budget proposals that would have capped retirement accounts at $3.4 million. Overall, lawmakers have resisted caps on retirement accounts as they do not want to punish those who are committed retirement savers. While we don’t think Congress will pass a legislative cap, some congressional Democrats will be pushing for it and it cannot be ruled out.

Equity Market Bills.

The House Financial Services Committee next week will have a lengthy mark-up of bills on a wide range of topics (from tenant protections to capital markets). The committee has held a series of hearings to examine the market volatility earlier this year around GameStop and other stocks, and many of the bills being considered are in response to that. While exact language continues to be worked out, the legislative proposals could include greater disclosure of equity derivatives and short selling as well as studies by the SEC of the gamification of retail trading platforms and of payment for order flow practices. A more far-reaching proposal to ban payment for order flow is unlikely to come up because of concerns about its negative consequences. Under the leadership of Chairman Gary Gensler, the SEC already has begun a review of equity market structure that will focus on these and other issues. While the legislative activity in the Financial Services Committee could provide some direction for the SEC, these bills are unlikely to become law and the SEC already has sufficient legal authority to act. The Commission first will conduct an extensive and thorough review and likely will tread carefully in advancing reforms given the potential of some proposals to raise costs for retail investors or otherwise disrupt the market.

Debt Ceiling Extension.

Congressional leaders and the Biden administration are having conversations behind closed doors on how to increase the debt ceiling so that the Treasury can continue to honor our country’s debt obligations. Like most other policy issues, it is a partisan challenge. Democrats, who are in the majority in the House and Senate, have the obligation to pass this extension. Perhaps the most straightforward path is adding an extension to the tax and spending bill they hope to pass in the fall. Passing an extension on a stand-alone basis likely would be more complicated. Democrats would need Republican support to do that, but they would resist Republican efforts to condition their support for a debt limit increase on deficit reduction measures. Suffice it to say that financial markets may not react well to such a dynamic. There will be more attention paid to this issue over the next month or so, but we don’t see this as major market risk so long as Democrats’ efforts to pass their large tax and spending bill remain on track.

Increased Crime.

We have received some questions this week about what Congress might do in response to the higher levels of violent crime in many major US cities. Probably not much. Congress seems divided over whether to or how to assist local law enforcement efforts. Some members are still working to resolve their differences over a police reform bill that came to the forefront in the aftermath of George Floyd’s death. That compromise likely will limit certain law enforcement capacities, not expand them. Proposals to address gun control or increased funding for local law enforcement don’t have sufficient bipartisan support. President Biden and many in Congress will continue to call out the lawbreakers, but there is no plan from Washington to directly address this problem anytime in the near future. States and localities are primarily on their own at this point.

The Future of the Speakership.

Earlier this week, Congressman Brendan Boyle (D-PA) introduced a bill in the House that would mandate that the Speaker of the House must be an elected House member. As it stands currently, the Constitution simply says that the House of Representatives shall choose its Speaker and other officers without any clarity on whether they should be sitting House members. In theory, this has been interpreted as meaning that practically anyone could be Speaker, as long as that person has mustered a majority of votes in the House. In practice, however, every House Speaker in history has been a House member. On occasion, House members have voted for non-members to serve. Stacey Abrams was recommended by a Democratic House member recently, while Colin Powell was recommended by a Republican member many years before. Congressman Boyle’s bill is a direct response to former President Trump’s statements of interest in potentially being Speaker if Republicans win the majority in next year’s mid-term elections. As with many things in Washington, this bill is about messaging and politics rather than substance, but it underscores the fact that the former president is still affecting policy debates in Washington.