Washington Weekly: Pay-fors
U.S. Office of Public Policy, 25 June 2021
The Senate confirmed various Biden administration nominees but could not muster the needed votes to debate and vote on a comprehensive voting rights bill (see below). The House passed a bill to address age discrimination in the workplace, a bill to include contraception coverage for female veterans and a bill that would expand a data collection rule for financial institutions to include LGBTQ-owned businesses. The House also passed three Senate-passed measures to reverse regulatory actions enacted by the Trump administration.
The Senate will be out of session for the next two weeks. The House will consider a $547 billion surface transportation bill (not to be confused with the infrastructure bill noted below) and a bill to strengthen the independence of federal inspector generals.
Bipartisan Infrastructure Bill.
Momentum continues to build for the passage of a $1.2 trillion bipartisan infrastructure bill. President Biden and a group of 21 Senators from both parties this week reached an agreement in principle on such a package. The bipartisan agreement does not contain broad tax increases on corporations and wealthier individuals. However, Democrats also will try to advance a second infrastructure bill focused on social spending that likely will include many of these tax increases. Despite the tentative agreement on a significant amount of infrastructure spending, this measure is not yet final and could still crash. In particular, we expect lawmakers to raise concerns about some of the revenue items (pay-fors) to pay for this increased infrastructure investment (see below). Lawmakers and the administration will flesh out the details of the plan in the next week to try to finalize this bipartisan agreement.
We have been asked recently by some readers what we mean when we use the term “pay-fors” in the context of the infrastructure debate. Pay-fors generally refer to the revenue measures needed to pay for new spending. Congress’ difficulty in identifying legitimate pay-fors to offset new infrastructure spending (so it doesn’t increase the budget deficit) has been the primary obstacle in finding a bipartisan agreement over the years, and the current debate is no different. In fact, despite the positive talk this week about a bipartisan infrastructure bill, there are still limited details regarding pay-fors. When there is a stalemate over pay-fors in spending bills, Congress often resorts to more dubious measures. For example, the biggest pay-for in the draft bipartisan bill is an increase in the authority for the IRS to address the “tax gap” through more audits. No one knows for certain how much this measure will raise in terms of additional tax revenue, with different analysts providing estimates between $100 billion and $800 billion. While Congress would like to assume a higher number to better offset the new spending, Republicans may insist on guardrails around the IRS enforcement and stipulate that new spending only be approved as tax revenues are collected to support it. The details regarding pay-fors, which often are complex and politically fraught, will have to be agreed to if this bipartisan bill is to move forward.
We have periodically discussed the future of the state and local tax deduction (SALT), which was capped at $10,000 in the 2017 tax law. This cap has particularly hit taxpayers in high-tax states like New York, New Jersey, California and Illinois, among others. We remain skeptical that the cap will be eliminated in tax legislation that Democrats plan to advance this fall. While some Democrats would like to eliminate the cap, others are opposed given that it would cost several hundred billion dollars and primarily benefit higher earners. We believe Democrats will instead find a middle ground. Senate Budget Committee Chairman Bernie Sanders (I-VT) this week released a budget plan that includes $120 billion for SALT relief. The proposed changes to SALT are not specified in his budget plan, but $120 billion could pay for eliminating the cap for two years or increasing the cap to $15,000 for individuals and $30,000 for married couples. This budget plan is a good indicator that the SALT relief that Democrats will pursue will be relatively modest.
Supreme Housing Ruling.
Following up on a decision last year that invalidated a key statutory limitation on the President’s ability to dismiss the head of the Consumer Financial Protection Bureau, the Supreme Court rendered a decision this week that gave President Biden greater latitude to remove the head of the Federal Housing Finance Agency (FHFA). Shortly after the decision, the Biden administration removed FHFA Director Mark Calabria (who had been appointed by President Trump in 2019 and had a term that lasted into 2024) and installed an acting director. The FHFA is the regulator of Fannie Mae and Freddie Mac, the government sponsored entities (GSEs) that have long dominated the mortgage market and have been under effective government control since the financial crisis of 2008. During his tenure, Director Calabria tried to take steps to eventually remove Fannie Mae and Freddie Mac from conservatorship as private companies. While those plans were already taken off course by the Biden administration and the pandemic, the Supreme Court ruling is the last nail in the coffin. The Biden administration will be focused on increasing affordable housing and expanding access to mortgage credit, not ending conservatorship, meaning government control of the two mortgage giants will continue for years.
The Center for Disease Control (CDC) this week extended a federal moratorium on evictions that was set to expire in a few days until the end of July. The action followed calls for an extension from Congress, including a letter to President Biden and the CDC head from several dozen Democratic members of Congress. While Congress had provided $46 billion of renter support in a COVID relief bill in December, state and local governments are still working on disbursing those funds. A bipartisan group of Senators also introduced legislation this week to address the broader problem of evictions in the US. President Biden’s infrastructure plan calls for over $200 billion of spending on affordable housing. Many homeowners also are in forbearance programs, some of which are set to end in the coming months. In that context, the CFPB is expected to soon finalize a rule that likely will extend the moratorium on foreclosures until January. Expect more calls from lawmakers for support to struggling renters and homeowners, including another extension of the eviction moratorium.
Debt Ceiling Extension.
It has been a couple of years since Congress has fought over an extension of the debt ceiling in a way that has rattled financial markets. With government borrowing set to hit this ceiling on July 31 (Treasury will take measures to avert default into the fall), we expect to see a return of this acrimonious debate. If Democrats use budget reconciliation in the fall to pass a big spending bill, as expected, they will likely tuck a debt ceiling extension in that bill. This would be the easiest way to pass an extension, assuming the underlying spending bill is approved. If no spending bill can advance via budget reconciliation, passing a debt ceiling extension as a standalone measure would be much more difficult in the divided Senate. Republicans will want to condition the extension on assurances that the rising budget deficit will be addressed somehow, which the Biden administration and Democratic leaders on Capitol Hill will resist. This issue will get more attention in the upcoming weeks and could very well be a headline issue in Washington in the late summer and early fall.
2022 Election Political Themes on Display.
Two policy issues that will certainly be a big part of the 2022 mid-term elections – voting rights and undocumented immigration along the southwest border – were in play this week. Senate Republicans blocked an effort to vote on a comprehensive voting rights bill that passed the House earlier this year. The parties are divided on the degree to which voting rules should be set by individual states or the federal government. The Senate may vote on the measure again, but it will not advance. Vice President Kamala Harris, who was tasked by President Biden to lead the effort to better manage the large influx of undocumented immigrants along the southwest border, will visit the border today. The border challenge along with a significant increase in crime in many big US cities (an issue about which President Biden spoke this week) pose potential problems for Democrats. Perceived Republican vulnerability on voting rights and perceived Democratic vulnerability on law enforcement issues are very likely to be key themes in the mid-term elections.
A Final Word
A Final Word
Ranked Choice Voting.
Ranked choice voting (RCV) hasn’t been used in many elections but its appeal may be growing among voters. RCV is a system whereby voters rank the candidates on the ballot rather than simply voting for one. Ranking is done in a preferential order and lasts until one candidate wins a majority (if no candidate has a majority, then the candidate with the fewest votes is eliminated and his/her votes are redistributed based on the ranking with this process repeating until another candidate has a majority). Notably, RCV was used in Maine’s federal elections last year, including the marquee Senate race that re-elected Senator Susan Collins (R-ME). This week, RCV faces its biggest test yet with the Democratic mayoral primary election in New York City. In that race, Eric Adams has a 9% lead over the second-place vote getter, but no winner has been determined or will be announced this week. In order for the ranked votes to be implemented, all of the votes must be officially counted before they can be recalculated based on voters’ ranked preferences. New York City’s experience with RCV will be a key test case for its application in other areas. Your next visit to the ballot box may require you to rank candidates rather than choosing just one.