Washington Weekly: Health Care and the Next Mega-Spending Bill

U.S. Office of Public Policy, 23 April 2021

This Week:

The Senate passed legislation to create a senior position at the Justice Department to address hate crimes related to COVID-19. The House approved legislation making Washington, DC the 51st state and prohibiting religious discrimination in immigration policy decisions.

Next Week:

The Senate will vote on various Biden administration nominees. The House has not scheduled any votes. Both chambers will gather, though with restrictions, to hear President Biden address the nation on Wednesday, April 28.

The Leads

Infrastructure Bill. 

There was more talk this week about the potential for a bipartisan agreement on infrastructure, but we think this chatter soon will fizzle out. Senate Republicans this week outlined a proposal that would cover $568 billion of spending on more traditional infrastructure improvements, but that falls significantly short of what Senate Democrats and the Biden administration want. Even if a bipartisan agreement emerged on a narrow infrastructure package like this proposal, Democrats would try to follow up this bill with another that would cover spending that they couldn’t get in the first package. Democrats would need to advance this second bill through the budget reconciliation process, which only requires a simple majority of 51 votes in the Senate. This sequencing of a bipartisan infrastructure bill followed by Democrats’ passage of a more partisan package could offer attractive political optics for both sides. However, it isn’t very practical. The longer process would delay the passage of final infrastructure/tax legislation until closer to the end of the year. This likely would delay the effective dates of tax provisions to 2022 or later. It also would push the next big Biden spending bill into next year, which is an election year. For these reasons, we believe Democrats will act earlier on a comprehensive infrastructure/tax bill that will be voted on and passed on a party-line basis by the end of July.

Police Reforms Close? 

If not now, then when? It seems like it would be a perfect time for the Senate to act on either the House legislation on police reforms or its own bill. There were bipartisan talks this week about advancing a slightly revised measure in the Senate, but, as we said last week, the decision rests with Senate Majority Leader Chuck Schumer (D-NY). The House bill likely would fall short of the 60 votes needed in the Senate for passage, while a bipartisan bill would get the 60 votes but disappoint some Democrats who want a stronger measure. The most contentious issue is the level of legal liability protection that police (and other government officials) are afforded with respect to actions performed on the job.

Cap Gains Tax Rate. 

It was a little surprising to see the extent of the market’s adverse reaction to rumors that the Biden administration plans to propose an increase in the tax rate (from the current level of 20% to the marginal tax rate on income) on capital gains for high-income individuals given that the President has outlined this proposal many times before. While we have no doubt this is indeed the President’s position on how capital gains should be taxed going forward, we have doubts that Congress will act on aligning the tax to ordinary income rates. We believe a handful of House and Senate Democrats will have misgivings about this high of a rate increase and instead rally behind an increase to a compromise rate of 28%. We believe this compromise rate is the more likely path any legislation will follow, whether it’s tied to the infrastructure bill or the next spending bill planned for the end of the year. A natural follow-up question is what the effective date for such a change would be. While this has not been decided yet, we think it most likely would be made effective at the time it passes into law (though it also could be made effective earlier, such as the time of its proposal in Congress). Shane Lieberman is keeping interested readers updated on this proposal, and you can contact him to be included (shane.liebrman@ubs.com).

Other Issues

Retirement Policy. 

A bipartisan retirement policy package is currently under negotiation by House Ways and Means Committee Chairman Richard Neal (D-MA) and the panel’s top Republican, Congressman Kevin Brady (R-TX). We expect them to release a draft proposal in the coming weeks. Key provisions likely will include an increase in the Required Minimum Distribution (RMD) age to 75, an increase in the qualified charitable distribution from $100,000 to $130,000 and incentives for employers to help younger Americans save for retirement (e.g. a retirement match for student loan payments). These are not new ideas, and similar proposals are being discussed in the Senate. We think the House could pass its bill this summer. If that happens, the Senate could pass the bill late this year. While a polarized political environment could derail this retirement bill, we believe this bipartisan effort is on the right track to be enacted before the end of the year.

Tax Audits are Coming. 

A few weeks ago, we commented that there will be a focus on increased IRS enforcement by congressional Democrats as a means of helping pay for the pending infrastructure package. That cause got a boost this week from the IRS after the agency announced that the “tax gap” -- the difference between what is owed in federal taxes and what is actually collected -- may be as high as $1 trillion per year. Though the tax gap may be rising, it has always existed. There are many factors that contribute to it, including under-reporting of income, the rise of digital and fewer audits. Democrats’ plans to close the tax gap sound well intentioned, but their effectiveness is uncertain. Policymakers have long thought about ways to address the tax gap without meaningful success. Regardless of how successful this effort will be, we can be sure that there will be a significant increase of audits of tax returns in the years ahead (beginning this year) as the IRS receives greater funding for enforcement.

Cannabis Banking. 

The House passed by a wide margin legislation (called the Secure and Fair Enforcement Banking Act – the “SAFE Banking Act”) that would allow banks and other financial institutions to serve covered cannabis businesses. With 36 states having legalized cannabis in some form, there is growing interest on both sides of the aisle for a fix in this area. Bipartisan support is paramount in the Senate where most legislation needs 60 votes to end a filibuster. With seven Republicans having signed on to the Senate companion bill to the SAFE Banking Act, there is reason to think that the bipartisan support would carry over from the lower to the upper chamber. However, the path forward for the bill will not be easy given that many Democrats would like to pass a broader package of cannabis-related reforms. Senate Majority Leader Chuck Schumer (D-NY) indicated this week that he is working on a bill to decriminalize cannabis at the federal level. Senate Banking Committee Chairman Sherrod Brown (D-OH) has expressed an interest in combining cannabis banking legislation with broader reforms in areas like criminal sentencing. A broader package will be harder to pass in the Senate because it is likely to lose the Republican votes needed to overcome a filibuster. So, while the SAFE Banking Act likely would pass the Senate as a standalone measure, it is far from assured that it will get that shot.

ESG Disclosures. 

The House Financial Services Committee this week passed several bills on corporate disclosure of environmental, social and governance (ESG) matters. One bill sets a broad framework on ESG disclosure, another would increase corporate disclosure of political activities and a third would increase disclosure on board diversity. The first two passed on a party line basis while the third passed unanimously. These measures are likely to pass the House in the coming months, but they will face a more complicated future in the Senate. Republicans have been increasingly vocal in their criticism of the Biden administration’s and Democrats’ efforts on climate change and ESG issues, accusing them of trying to politicize lending and investment decisions. Importantly, the SEC can take action on ESG disclosure without new legislation from Congress. The SEC already has an outstanding request for comment on changes to corporate disclosure on climate risk. The Senate approved the nomination of Gary Gensler to head the SEC last week, and this likely will be an early priority for him. The SEC is likely to issue a formal proposal on climate risk disclosure in the coming months.

Health Care and the Next Mega-Spending Bill. 

Democrats on Capitol Hill and the Biden administration are already in discussion about the next big spending bill that will follow the potential enactment of an infrastructure bill. That bill will focus on education, child care and broader social services. There has been increasing talk about it also becoming a carrier of major health care legislation. In particular, most Democrats are rallying behind a goal of strengthening the Affordable Care Act (“Obamacare”) through an expansion of subsidies provided under the 2010 law. The COVID relief bill passed in March contains a two-year expansion of federal subsidies under Obamacare to cover more middle-income individuals and families, which could be made permanent under the new bill. Another provision that Democrats are considering is an expansion of Medicare to cover more services for seniors, including vision, hearing care and dental benefits. As we mentioned a few weeks ago in this publication, Democrats could pass a prescription drug pricing reform bill in the same bill as a means to pay for the other expanded health care benefits. This next big spending bill is in a very early stage of development, but we expect it to carry significant health care legislation when it is ready for prime time.


Congressional Reapportionment. 

As it does every ten years, the federal government conducted a census to determine a full and accurate count of the nation’s population. The updated census also determines the number of seats each state has in the Congress, with some states losing or gaining seats depending on changes in their population. A big step in this process is expected to happen next week when the US Census Bureau releases updated population figures for each state. This information will be enough to determine which states will gain or lose seats for the next ten years, a process formally known as congressional reapportionment. We have a general idea of which states are likely to gain seats (AZ, CO, FL, MT, NC, OR, TX) and which could lose seats (AL, CA, IL, MI, MN, NY, OH, PA, RI, WV), but there are still questions about exactly how many seats will be gained or lost in certain states. Individual states then will begin their redistricting processes, which will change the geographical makeup of many of the country’s 435 congressional districts for the 2022 mid-term elections and beyond. These changes may not get much national attention, but they will be very important in determining which party will have control of the House following the 2022 mid-term elections.