Washington Weekly: Biden Budget for 2022

The Senate confirmed various Biden administration nominees and is expected to approve later today a bipartisan bill to bolster US competitiveness in science and technology. The House was out of session this week but worked in committee on various issues.

Both Senate and House will be on recess to celebrate Memorial Day. The Senate will return to Washington on June 7 and the House will return on June 14.

Bipartisan Infrastructure Bill?

While Senate Democrats and Republicans shared and considered competing offers this week, we don’t think they are close enough to reach a deal. The two sides have very different views on the size and scope of an infrastructure bill as well as how it should be paid for. We therefore believe that efforts to craft a bipartisan bill will conclude very soon and without success (despite another bipartisan meeting next week). House and Senate Democrats will then proceed to a bill more in line with President Biden’s infrastructure proposal of $2.2 trillion and pay for it in part by raising corporate and individual taxes. This exercise has already begun, and the contours of a bill will come together over the coming weeks. The support of all 50 Senate Democrats will be needed to pass this bill. Given that some Democrats will object to aspects of the Biden tax plan, the bill will need to be scaled back. While it won’t be easy, we believe that House and Senate Democrats will make every effort to pass their infrastructure/tax bill by the end of July.

Infrastructure Lite.

While the primary focus in Washington is on developing a path forward for a comprehensive infrastructure bill, there is a separate but more modest bill ($303 billion) moving forward in a Senate committee. This bill addresses “surface transportation” infrastructure such as highways, roads and bridges. It needs to pass by September 30 to avert a lapse in funding. As with the bigger infrastructure package, there is disagreement on how to pay for the smaller bill. However, it’s much easier to find agreement on how to pay for a $303 billion bill than a $2.2 trillion bill. Ultimately, the smaller bill likely will be subsumed into the broader package. While this smaller bill may be confusing to the public and to some lawmakers, the need to reauthorize surface transportation funding by September 30 could be helpful in advancing the larger package.

Biden Budget for 2022.

The submission of a budget proposal for the upcoming fiscal year is an annual exercise required by law. Consistent with that requirement, President Biden today proposed a $6 trillion budget covering spending for federal agencies and activities for fiscal year 2022, which begins on October 1. While Congress will write its own budget, today’s proposal has significance since it reflects the President's budget priorities for the federal government. Not surprisingly, President Biden's budget priorities include health care, education, IRS enforcement and a wide array of domestic spending initiatives. The budget calls for a significant increase in federal spending to address various societal needs. The budget will become a political issue as the parties jockey over the proper size and function of government and the acceptability of deficit spending. These are big issues with huge political ramifications that will play out in the 2022 mid-term and 2024 elections.

Cap Gains Tax Increase Effective Date.

Included in the Biden budget is his longstanding proposal to raise the capital gains tax rate to ordinary income levels. The higher rates would be retroactively applied – to April 28. This retroactive effective date is clearly designed to raise more revenue than would be raised by a prospective effective date and prevent investors from rushing to realize gains at a lower tax rate. However, Congress will write its own version of any increase in capital gains taxes and its effective dates. While it is possible Congress could adopt the Biden plan as outlined in the budget, we believe the final rate will be lower (closer to 28%) and its effective date will not be April. The effective date, however, is expected to be retroactive but more in line with the timing of the introduction of a bill by Congress next month. These details are all very fluid and the subject of ongoing discussions among Democratic lawmakers and the White House.

State Revenue and Federal Aid.

Should states that are reporting surpluses in their annual budgets be required to return federal funds they have received but not used yet in one or more of the COVID relief bills that have passed Congress in the last 15 months? This has become a conversation point among lawmakers over the last two weeks as they seek revenue sources to pay for the infrastructure bill and other spending measures. Republican lawmakers want to repurpose these and other unused funds from the $1.9 trillion COVID relief bill passed in March to offset the cost of infrastructure spending. President Biden and Democratic lawmakers have so far resisted this plan. We don’t believe these pay-fors will be accepted, but they will be a prominent part of the public debate over offsetting federal spending in the months ahead.

Stakeholder Capitalism Critique.

In 2019, a major business trade group expressed support for a stakeholder vision of capitalism that said that a corporation’s purpose was to benefit a variety of stakeholders and not just shareholders. Since that watershed moment, the pandemic and other events of the last year have prompted only increased engagement from corporate leaders on broader societal issues. Republicans have been increasingly critical of stakeholder capitalism and what they see as increased corporate activism on social and political issues. That critique was on full display this week at House and Senate hearings featuring the heads of the six largest US banks. Republicans argued stakeholder capitalism relegates shareholders and distorts business activities. They criticized corporate decisions for everything from not providing banking services to certain industries (like fossil fuels) to speaking out about voting laws. At the same time, bank executives were buffeted by calls from Democrats to do more to address societal problems, from inequality to climate change. Corporate leaders are caught in the middle of this political crossfire and will face continued challenges navigating these conflicting calls from the two parties for a long time.

No Red and Blue Banks Act.

As the bank CEOs were grilled on the subjects noted above, Senator John Kennedy (R-LA) introduced legislation this week dubbed the “No Red and Blue Banks Act” that would prohibit the General Services Administration from awarding a federal contract to a federally-insured depository institution that intentionally avoids doing business with certain companies based on social policy considerations. Given the importance of the fossil fuel industry to Louisiana, it is not surprising that Senator Kennedy would advocate such a measure. He and a handful of other Senate Republicans have for some time cautioned banks from avoiding business with so-called “disfavored” companies in the fossil fuel sector. The bill is symbolic and will not advance in the Democratic-controlled Senate. Yet, the bill is an important reminder to CEOs that political pressure from Congress to embrace a certain business model or products can come from all directions.

ESG Retirement Investments.

Toward the end of the Trump administration, the Department of Labor (DOL) finalized a rule that mandates that retirement plan fiduciaries consider only financial factors when considering investments. The rule, which became effective earlier this year before President Biden took office, subjects environmental, social and corporate governance (ESG) investments by retirement plans to greater scrutiny. With growing interest in ESG investments, retirement plans and investors have expressed concern about the impact of the rule. In response, Senate Democrats recently introduced legislation that would overturn the Trump administration rule and would facilitate the consideration of ESG investment by retirement plans. A recent Biden administration executive order on the financial risks of climate change also puts the rule in its crosshairs. Given Republican opposition to legislative action, the Biden administration likely will use a lengthy rulemaking process to provide a clearer and more favorable path for ESG investments in retirements plans.

Supreme Court Watch.

Rumors are flying in Washington that Supreme Court Justice Stephen Breyer will soon announce his retirement. Judge Breyer, 82 years old, was nominated by President Bill Clinton in 1994. Finding and seeking Senate approval for a replacement would become a Biden administration priority immediately. As a candidate last year, President Biden vowed to nominate an African-American woman to the bench, and we would expect him to choose accordingly. This switch on the high court would not affect its philosophical makeup much. Judges nominated by Republican presidents would still outnumber those nominated by Democratic presidents by a six to three margin. A Biden nominee would have to get the support of every single Democratic senator if no Republicans support her. The President would need a couple of weeks to settle on a nominee, while the nomination process in the Senate would take a couple of months based upon recent experience. The nomination and debate, while likely historic, could consume the Senate and slow other legislative priorities of President Biden.