Washington Weekly: On Deck in April

The Senate confirmed various Biden administration nominees, including Marty Walsh to serve as Secretary of Labor. The House did not schedule any votes this week.

Both the Senate and House will be out of session until April 12.

Next Mega-Spending Plans. 

The White House is close to finishing its plan for another round of large spending proposals that will require congressional approval. The President’s staff has reportedly crafted two large packages with a total cost of about $4 trillion. One would focus on infrastructure, green energy and climate change, while the other would cover education, workforce development, child care and social services. Spending money is the easy part. The more difficult decision of whether or how to pay for it all is still being decided. We expect Congress to pass a large infrastructure bill this year, with the cost of this spending likely to be partially offset by some tax increases. We are less optimistic about the prospects for a broader domestic spending bill (led by education). It takes time to craft policy proposals and secure the needed votes to move such large legislative freight. Debate and negotiation on controversial tax measures to pay for infrastructure spending will take up a lot of the legislative calendar over the summer and the fall, thus delaying the consideration of other measures. Democrats also will want to put some distance between any large tax increase bill and the midterm election, and they may think a pivot to education next year could be advantageous.

Any Chance for Gun Control? 

Probably not but maybe. Senate Majority Leader Chuck Schumer (D-NY) has indicated the chamber will vote on House-passed legislation to expand background searches on a wider range of gun purchases, but the bill will require 60 votes for passage due to the filibuster, and at least one Democrat is opposed to it. If the bill is revised to more narrowly focus on background checks for commercial sales of guns, it has a decent chance of passing. The current bill’s broader scope (it covers personal sales of guns among family members) is unlikely to get the 60 votes needed for passage. Other Senate Democrats would like to have votes on provisions to ban assault-style weapons and restrict high-capacity ammunition magazines, but those votes, if held, also face an uphill battle. The debate over further gun control seems to intensify after every mass shooting but then withers after the two parties can’t find enough common ground on the underlying issues. US civilians in 2018 (the latest we could find published data) owned an estimated 393 million guns, which is more than double the number of people who voted in the 2020 general election. The strong opinions on both sides of this issue are simply too divergent for any meaningful deal to materialize in the near future.

Prescription Drug Reforms. 

Congressional Democrats are dusting off their prescription drug pricing reform proposals from last year and considering them for inclusion in the impending infrastructure/tax plan. Normally, a bill of this policy magnitude would be considered separately, but Democrats are interested in using the cost savings that these proposals would provide as a way to help pay for infrastructure. The most impactful proposal would give the federal government broad authority to negotiate drug prices not only for Medicare but also for the secondary market. Efforts to reform the pharmaceutical industry at a time when it is playing such a prominent role in vaccinating Americans may be a challenge. Moreover, it’s not clear whether these reforms could be considered under the Senate’s rules around budget reconciliation. Despite the uncertainties, House and Senate Democrats will continue to work over the next month to position these bills for potential inclusion.

China Investment Restrictions. 

The SEC this week issued a rule to implement the Holding Foreign Companies Accountable Act, which was signed into law late last year. The law, which reflected longstanding concerns about the failure of Chinese companies to comply with US auditing requirements (specifically, US regulators’ access to Chinese companies’ audit papers), would require the SEC to delist companies that fail to comply over a three-year period. The SEC’s actions this week address aspects of the law that require companies identified by the SEC to provide documentation and disclosure regarding their ownership or control by a foreign government. The Commission still needs to chart a pathway on more consequential issues like how to identify companies and how to delist them after three years of non-compliance. These issues will be part of a crowded regulatory agenda for Gary Gensler (President Biden’s nominee to head the agency) once he is confirmed by the Senate in the coming weeks.

Tax Bill Foundations. 

Before a comprehensive tax bill is officially unveiled, Congress will hold hearings and issue reports highlighting key provisions likely to end up in a final package. Both the House and Senate have begun that process. In the upcoming weeks, we expect Senate Finance Committee Chairman Ron Wyden (D-OR) to release a white paper on international tax issues. Additionally, the Treasury Department is expected this spring to release a “Green Book” with dozens of tax proposals likely to be seriously considered by Congress. All of these events are steps toward the actual writing of a tax bill and will be worth following. The process will start slow this spring but pick up in the summer as momentum builds for a tax bill to pay for infrastructure investment.

Tax Enforcement. 

Last year, we wrote that the IRS workforce has fallen over the past decade and that tax enforcement by the IRS would become a priority for Democrats if they gained control of the White House and Congress. Many Democratic lawmakers are concerned that declining IRS budgets have caused a drop in audit rates, particularly on high income earners. A recent report highlighting lax tax enforcement on the highest earners will increase the push in Congress for stronger enforcement of the tax code. If Democrats are able to pass a tax bill this year, there will likely be measures included to beef up tax enforcement, increase the IRS’s overall budget and focus on more staffing. While it may take years to fully staff up, we should expect more audits under the Biden administration and with the focus of those audits on higher earners.

Climate Activity. 

Next week, Treasury Secretary Janet Yellen will convene her first meeting as head of a council of regulators focused on systemic risk. The financial stability implications of climate change will be at the top of the agenda, which reflects the Biden administration’s prioritization of this issue. In recent weeks, several financial regulators have announced the creation of climate-oriented groups within their organizations. The Federal Reserve and the banking regulators are in the early stages of integrating the analysis of climate risk into their supervisory processes. Most tangibly, the SEC last week requested comment on how it should update its requirements with respect to corporate disclosure of climate risks. Corporate disclosure of climate and broader environmental, social and governance matters will be a top priority for the Commission, and the recent consultation could pave the way for the issuance of a formal proposal later this year.

On Deck in April. 

The House and Senate will be on recess over the next two weeks. This means most of the media coverage from Washington over the next two weeks will focus on the Biden administration and its activities (particularly problems on the southwest border) rather than on committee hearings and votes in the Congress. When Congress returns in April, we expect the Senate to take up various US-China policy issues. While these mostly bipartisan measures are important, we think the more consequential actions (namely sanctions, tariffs and actions with allies) will be taken by the Biden administration, which is still determining its approach on many of these issues. Votes in the Senate are also expected on gun control (see above) and an election reform bill passed by the House. More broadly, congressional Democrats will also put some “meat on the bone” of their infrastructure and tax plans next month. During a visit to Pittsburgh next week to discuss infrastructure, President Biden likely will lay out some ideas that will feature prominently in an eventual congressional plan..

Presidential Approval. 

For the past four years, much was made of the steadiness of former President Trump’s approval ratings. While most presidents start their presidencies with a temporary “honeymoon” period of high approval ratings, this was never the case for Trump whose approval and disapproval ratings rarely fluctuated throughout his entire term. In President Biden’s first two months, his approval rate has also remained steady -- around 55% -- and his disapproval around 40%. It’s too early to tell if Biden’s ratings will act more like those of his direct predecessor or, consistent with historical norms, show greater elasticity. These numbers are important because they have served as an important indicator for midterm elections. There have been five midterm elections since 2000, and the President’s approval rating was underwater in the four most recent contests. In those elections, the President’s party lost an average of 37 seats in the House and five seats in the Senate. However, in 2002 when President Bush’s approval rating was higher than his level of disapproval, Republicans gained eight seats in the House and two in the Senate. Presidential approval isn’t a guaranteed predictor of midterm elections, but it’s one of the better indicators and therefore worth watching.